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Credit licensees: responsible lending obligations are no joke

06 September 2018
kelly dickson
Read Time 3 mins reading time

Westpac has admitted to breaching its responsible lending obligations. It has agreed to accept a $35 million civil penalty to resolve its Federal Court proceedings under the National Consumer Credit Protection Act 2009 (Cth) (Act) brought by Australian Securities and Investment Commission (ASIC).

Westpac conceded it did not comply with its responsible lending obligations under the National Consumer Credit Protection Act (NCCP) as it used an automated decision system which:

  • did not take into account the applicant’s declared living expenses when making a credit assessment – instead, it used a pre-formulated benchmark;
  • did not use the right calculations for applicants who are owner occupiers with an interest-only period – Westpac failed to factor in the higher repayments at the end of the interest-only period when assessing an applicant’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.

This automated decision system approved approximately 260,000 home loans. Of these approved home loans, approximately 50,000 applications failed to take into account declared living expenses and another 50,000 applications did not use the right formula to factor in the higher repayments at the end of the interest-only period. Of these incorrectly approved home loans, Westpac conceded  it should not have automatically approved 10,500 loans.

If approved by the Federal Court, this will be the largest civil penalty awarded under the NCCP.

ASIC Chair James Shipton said, “This is a very positive outcome and sends a strong regulatory message to industry that non-compliance with the responsible lending obligations will not be tolerated. Responsible lending in the home lending market is absolutely vital to consumers, banks and our economy.”

How does this impact you? 

The responsible lending laws presume consumers are in a position of vulnerability. This means credit providers and credit assistance providers must do all that is necessary to assess that a particular product for a consumer is “not unsuitable” and the courts are generally on the side of the consumer. These laws aim to protect consumers by ensuring they are not signed up to unsuitable products that could lead to adverse outcomes for them.

If you currently use a pre-formulated automatic system to do your assessments, we recommend:

  • reviewing your workflow
  • doing random sample checks on an ongoing basis
  • checking the parameters of your automatic system to ensure that it is able to assess suitability adequately.

If you have any questions about your responsible lending obligations or any aspect of your credit licence, please do not hesitate to contact our team.

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Credit licensees: responsible lending obligations are no joke

06 September 2018
kelly dickson

Westpac has admitted to breaching its responsible lending obligations. It has agreed to accept a $35 million civil penalty to resolve its Federal Court proceedings under the National Consumer Credit Protection Act 2009 (Cth) (Act) brought by Australian Securities and Investment Commission (ASIC).

Westpac conceded it did not comply with its responsible lending obligations under the National Consumer Credit Protection Act (NCCP) as it used an automated decision system which:

  • did not take into account the applicant’s declared living expenses when making a credit assessment – instead, it used a pre-formulated benchmark;
  • did not use the right calculations for applicants who are owner occupiers with an interest-only period – Westpac failed to factor in the higher repayments at the end of the interest-only period when assessing an applicant’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.

This automated decision system approved approximately 260,000 home loans. Of these approved home loans, approximately 50,000 applications failed to take into account declared living expenses and another 50,000 applications did not use the right formula to factor in the higher repayments at the end of the interest-only period. Of these incorrectly approved home loans, Westpac conceded  it should not have automatically approved 10,500 loans.

If approved by the Federal Court, this will be the largest civil penalty awarded under the NCCP.

ASIC Chair James Shipton said, “This is a very positive outcome and sends a strong regulatory message to industry that non-compliance with the responsible lending obligations will not be tolerated. Responsible lending in the home lending market is absolutely vital to consumers, banks and our economy.”

How does this impact you? 

The responsible lending laws presume consumers are in a position of vulnerability. This means credit providers and credit assistance providers must do all that is necessary to assess that a particular product for a consumer is “not unsuitable” and the courts are generally on the side of the consumer. These laws aim to protect consumers by ensuring they are not signed up to unsuitable products that could lead to adverse outcomes for them.

If you currently use a pre-formulated automatic system to do your assessments, we recommend:

  • reviewing your workflow
  • doing random sample checks on an ongoing basis
  • checking the parameters of your automatic system to ensure that it is able to assess suitability adequately.

If you have any questions about your responsible lending obligations or any aspect of your credit licence, please do not hesitate to contact our team.