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A high price for breaching lending obligations

Westpac may pay the largest civil penalty ever imposed under the National Credit Act.

According to the Australian Securities and Investment Commission (ASIC), Westpac admitted to breaching its responsible lending obligations for home loans and has agreed to pay $35 million to resolve the Federal Court proceedings.

The breaches occurred as a result of home loan processes undertaken between December 2011 and March 2015. During this period, over 260,000 home loans were approved by an automated decision-making system.

“This outcome and ASIC’s actions in relation to responsible lending reinforce that all lenders must obtain information from individual borrowers about their financial situation to ensure that they can properly assess the ability of the customer to repay the loan,” said ASIC Chairman, James Shipton. “Lenders must then verify the information to ensure that it is true, and then assess whether the loan is unsuitable for the borrower. Taken together, these responsible lending obligations are a cornerstone protection for both borrowers and lenders.”

ASIC said that for 50,000 of those 260,000 approvals, the automated decision-making system did not use the consumers' actual expense information, and for approximately the same number, the incorrect method to assess the capacity to repay a home loan was used.

The regulator continued that of the 50,000 where the incorrect approach was taken to assess consumers, 10,500 should not have been automatically approved.

The breach of the National Credit Act was the result of their ‘automated decision system’ which:

  • did not have to take into account consumers’ declared living expenses when assessing their capacity to repay home loans, and instead used a benchmark (the Household Expenditure Measure); and

  • for home loans to owner-occupiers with an interest-only period, failed to use the higher repayments at the end of the interest-only period when assessing a consumer’s capacity to repay the loan. For example, for a loan of $500,000 at 5.24% with a term of 30 years and a 10-year interest-only period, the assumed repayment using the incorrect method is $2,758 per month, whereas the actual repayment after the expiry of the interest-only period using the correct method is $3,366 per month.

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