Westpac to pay a record $35 million over failed risk assessments on thousands of home loans

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  • Westpac has admitted it breached responsible lending standards for home loans issued between December 2011 and March 2015.
  • The bank has agreed to pay a $35 million penalty to ASIC – the largest such penalty ever awarded under the National Credit Act.
  • ASIC found Westpac breached lending standards in relation to declared living expenses and transition terms on interest-only loans.

Westpac has conceded that it breached responsible lending standards following an investigation by the corporate regulator.

ASIC says the bank’s automated systems for home loan approvals failed to adequately assess risk on thousands of home loans.

The problems centred on an investigation into 100,000 home loans issued between December 2011 and March 2015, on two levels: the assessment of living expenses by mortgage applicants, and the likely costs of transitioning from interest-only to principal & interest repayments.

ASIC says Westpac should not have automatically approved around 10,500 home loans, and that 100,000 loans were issued under faulty lending standards.

The potential squeeze on households from the shock of a significant increase in mortgage costs because of loans transitioning to principal & interest has been a key concern among market analysts and economists in Australia this year.

Here’s the first part of the statement from ASIC:

Westpac has admitted breaching its responsible lending obligations when providing home loans and agreed to submit to a $35 million civil penalty to resolve Federal Court proceedings under the National Consumer Credit Protection Act 2009 (Cth) (the National Credit Act).

A three-week trial for this matter was due to commence in the Federal Court this week.

The parties have jointly approached the Federal Court seeking orders that Westpac contravened the responsible lending provisions of the National Credit Act because its automated decision system:

— did not have regard to 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

“If approved by the Federal Court, this will represent the largest civil penalty awarded under the National Credit Act,” ASIC said.

A short time ago, Westpac shares were down by 1.1% in afternoon trade at $28.35.

ASIC’s legal action concerned loans made by Westpac between December 2011 and March 2015.

During that time the bank issued 260,000 home loans, of which around 100,000 were approved using faulty lending standards.

“For approximately 50,000 home loans, Westpac received, and did not use, consumers’ actual expense information that was higher than the Household Expenditure Measure,” ASIC said.

For another 50,000 loans, “Westpac used the incorrect method when assessing a consumer’s capacity to repay a home loan at the end of the interest-only period”.

The resulting total of around 100,000 loans were automatically approved. However, “Westpac should not have automatically approved approximately 10,500 loans”, ASIC said.

The chief executive of Westpac’s consumer bank, George Frazis, said the wrongly approved loans would have an immaterial effect on the bank’s bottom line.

“Westpac takes its responsible lending obligations very seriously and this action does not relate to our current lending practices. We upgraded our credit assessment in 2015 and continue to thoroughly assess home loan applications,” Frazis said.

“From a credit quality perspective, loans approved under these circumstances have continued to perform similar to, or better, than the rest of the Group’s home loan portfolio.”

“Nevertheless, Westpac has committed to proactively monitor the active loans and to provide tailored hardship assistance if necessary.”

Frazis added that Westpac’s trading update for the June quarter showed home loans more than 90 days in arrears comprised only 0.72% of Westpac’s loan book.

ASIC’s investigation follows published findings from bank regulator APRA earlier this year, which carried out a ‘Targeted Review’ of the big four banks.

APRA chairman Wayne Byres described Westpac as a “significant outlier”, due to higher levels of interest-only lending and a larger proportion of riskier loans with high loan-to-value ratios.

Today’s findings against Westpac have come amid an ongoing tightening in lending standards within the Australian mortgage market.

Loan growth to housing investors has slowed significantly, and income and expense claims on mortgage applications are now coming under much closer scrutiny.

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