Banks to have more flexibility in assessing loan applications
Westpac Banking Corp has won a significant victory in the Federal Court on its interpretation of responsible lending duties.
The court backed Westpac’s arguments that the national credit act provides banks with discretion on how to use information when assessing whether loans are suitable for customers, and that customers can be expected to reduce historical levels of spending to meet repayment obligations.
The case is being watched by all banks because it examined Westpac’s automated loan assessment system. Big lenders all use computer algorithms to assess suitability for loans, so they can create “scaled” processes to serve millions of customers.
ASIC argued Westpac’s system was based on improper inputs, including an index of household spending. ASIC described the household expenditure measure (HEM) benchmark used by Westpac as “frugal”, arguing it underestimated the true level of borrowers’ expenses and hence allowed the bank to lend more than was appropriate.
By relying on the benchmark, ASIC argued Westpac could not reliably assess whether its customers could service their loans, and so it was basing approvals on “an imaginary capacity” to repay them. But Westpac argued it was entitled to use the HEM as part of a formula that created a “serviceability rule” for the automated system.
The bank said the law did not prescribe that banks use a simplistic formula of income minus expenses to determine eligibility and argued it was applying a “21st-century system” that was “complex, multifactorial [and] sophisticated”.
“The case concerned a large data set in which Westpac’s algorithm did not demonstrably fail to achieve the result for which it was said to have been designed,” said Justice Jacqueline Gleeson, who decided in favour of Westpac along with Justice Michael Lee.
