Federal Court considers obligations in the loan approval process under the NCCPA

Australian Securities and Investments Commission v Westpac Banking Corporation [2019] FCA 1244 

The Australian Securities and Investments Commission (ASIC) alleged that Westpac Banking Corporation (Westpac) breached the National Consumer Credit Protection Act 2009 (Cth) in respect to various home loans across the period 12 December 2011 to March 2015.

The Alleged Breaches

The alleged breaches related to Westpac’s computer operated loan approval system, called the ‘automated decision system’ (ADS). The breaches fell into two categories.

The first breach involved an allegation that in approving its home loans, Westpac failed to have regard to any of the living expenses declared by consumers on their loan application forms.

Justice Perram accepted that the Act requires a credit provider to ask the consumer about their financial situation (s 130(1)(b)), and in turn, to ask itself the questions specified by the Act (s 131(2)(a)) (the ‘Statutory Questions’).  However Justice Perram did not accept that Westpac had to use the consumers declared living expenses in performing this obligation.

The second breach involved an allegation that Westpac breached the Act in the manner in which it answered the Statutory Questions in respect of loans that had an initial interest only period before payment of principal was required. In answering the Statutory Questions for these loans, ASIC alleged that Westpac proceeded on the basis that no initial interest only period applied, and amortised the principal across the life of the loan. In the alternative AISC argued that Westpac failed to have regard to the correct amount of interest that the consumer would ultimately be required to pay in total.

Justice Perram rejected both of these arguments. The Court held that Westpac’s legal obligation was to ask and answer the Statutory Questions under s 131(2)(a) of the Act.  The fact that it did so as if the loan did not involve an initial interest only period does not mean that it did not ask and answer those questions.

ASIC’s first argument: credit provider must take account of the consumer’s financial information obtained by it under s 130(1)(b) in performing an assessment under s 129

Justice Perram was unable to discern why as a matter of principle the consumer’s declared living expenses must be considered relevant in answering the Statutory Questions.  His Honour held that s 129 does not require declared living expenses be taken into account in performing an assessment of unsuitability.

Justice Perram also observed that the credit provider is obliged by s 129 to carry out an assessment of the suitability of the loan for the consumer.  His Honour held the credit provider is prohibited from entering into a credit contract unless it has performed such an assessment (noting that to do so in contravention may give rise to a civil penalty).  The Court held that ASIC’s argument sought to impose additional obligations into the Act by regulating how the credit provider undertakes this process, which is not required having regard to the prohibitions contained in ss 131 and 133 of the Act (which, for example, require certain contracts to be assessed as unsuitable).

The Court held ASIC’s argument went too far and would have the effect of creating implied rules that were unnecessary in light of ss 131 and 133 of the Act.

ASIC’s second argument: Across the whole of its home loan book for the period 12 December 2011 to March 2015, Westpac failed to take account of the borrowers’ declared living expenses and therefore failed in each case to consider each borrower’s financial situation.

Justice Perram held that Westpac did not fail to take into account a consumer’s declared living expenses in this period. Westpac took such expenses into account by applying the ‘70% Ratio Rule’ as part of its process of assessment under its ADS, in conjunction with the other rules.  Justice Perram stated that ASIC’s position on this issue was forensically strained and rejected its submissions.

ASIC’s third argument: Westpac’s failure to take account of consumers’ declared living expenses in purporting to carry out an assessment under s 29 meant that it had not carried out any assessment at all as required by law

Justice Perram held that this question did not arise for determination, as Westpac was not obliged to take into account all declared living expenses, as set out above.  If it had been so obliged, the question would be whether it had failed to carry out the assessment called for by s 129 of the Act. ASIC contended that an ‘assessment’ is a legal construct which could be invalid.

Justice Perram rejected this argument.  The Court held that the term ‘assessment’ was not a legal construct, having regard to the text of ss 128 and 129, noting the absence of any civil penalty in s 129 of the Act.

Loans with an initial interest only period

ASIC contended that Westpac was legally required to assess the serviceability of the loan on the basis of repayments which would be due once the interest only period had expired, or alternatively by reference to the additional cost of interest incurred on an interest only loan. ASIC’s submission was that Westpac had failed to assess the suitability of the particular loan being sought by the consumer.

Justice Perram observed that the burden of ASIC’s submission was that the repayments due at the end of the initial interest only period is a mandatory matter which must be taken into account in answering the statutory questions, while the consumer’s financial position is not a mandatory consideration for the purpose of answering such questions. Justice Perram concluded that one cannot reason therefore that the repayments due at the end of the interest only period are mandatory through the fact that they make up part of the consumer’s financial position.

Does the decision clarify responsible lending obligations ?

This decision does provide guidance to lenders as to the extent of their obligations when providing loans to consumers pursuant to the Act. It would seem that a rigorous examination of a borrower’s expenses is not necessary, however lenders must not make unsuitable loans. Justice Perram has held that whilst accepting that the Act requires a credit provider to ask the consumer about their financial situation, this does not mean the credit provider must use the consumer’s declared living expenses in doing so.  This decision has brought some balance into the debate over declared expenses and how they should be incorporated into the credit approval process.  This should provide guidance for credit providers about the method of discharging their responsible lending obligations through their internal approval process.

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