The Federal Court has dismissed ASIC's case against Westpac, alleging it breached responsible lending practices for home loans.
ASIC alleged that between December 2011 and March 2015, the bank failed to properly assess whether borrowers could meet repayment obligations before entering into home loan contracts.
Westpac's automated system used a benchmark called the Household Expenditure Measure or HEM to assess consumer expenses failed to account for actual expenses incurred, ASIC said, and therefore breached its obligations.
In assessing home loans with an interest-only period, ASIC also alleged that Westpac did not take in to account higher repayments at the end of the interest-only period when it should have done so.
Justice Nye Perram handed down the decision on August 13, stating that a lender "may do what it wants in the assessment process" and other provisions of the National Consumer Credit Protection Act 2009 impose penalties if lenders make unsuitable loans as a result of that process.
Under the Act, lenders must assess whether loans are unsuitable for consumers.
Westpac did take account of consumers' declared living expenses because another rule in Westpac's system compared declared living expenses to income (but leaving out other expenses including the repayments under proposed loan) was a measure of suitability, Perram said.
Commissioner Sean Hughes commented ASIC took on the case against Westpac because it needed judicial clarification on a legal obligation on lenders. ASIC refers to this case as a 'test case', he said.
"As a regulator, it is our role to test the law and its ambit. The obligation to assess loan applications builds on the requirement for banks to make inquiries about a borrower's financial circumstances and capacity to service a loan and to verify the information that borrowers give banks."
Hughes added that ASIC is reviewing the judgment carefully.