- The reluctance of Australian banks to assess the spending habits of every mortgage applicant isn't irresponsible, the Federal Court of Australia has found in a landmark case.
- The presiding judge found that there's no point in doing so because Australians with a penchant for caviar, wagyu beef and fine wine could give all those things up if their mortgage repayments required it.
- The finding will come as sweet relief to lenders, which have been under pressure since the banking royal commission to restrict their approval process.
In a court decision that will shock no one, a judge has found Australians love property more than just about anything -- including caviar, wagyu beef and a fine shiraz.
Justice Nye Perram handed down his verdict in Federal Court on Tuesday, ruling in a dispute between one of Australia's biggest banks Westpac and the Australian and Securities and Investments Commission (ASIC).
The dispute saw ASIC take issue with the measure used by Westpac to estimate a customer's expenses in more than 260,0000 loan applications, arguing the bank's approach was not accurate enough.
But in a much-anticipated verdict, Perram ruled that Westpac hadn't lent irresponsibly, throwing out ASIC's concerns that banks were under-estimating living expenses by using the controversial measure, known as the Household Expenditure Measure.
Perram ruled that Australians -- if granted a mortgage -- were able to cut back on their spending. In his estimation, then, rejecting an application based on a customer's discretionary spending was nonsensical.
"Knowing the amount I actually expend on food tells one nothing about what the conceptual minimum is. But it is this conceptual minimum which drives the question of whether I can afford to make the payments on the loan," Perram said.
"I may eat Waygu beef every day washed down with the finest shiraz but, if I really want my new home, I can make do on much more modest fare," he added, sinking into the meat of the argument.
"The fact that the consumer spends $100 per month on caviar throws no light on whether a given loan will put the consumer into circumstances of substantial hardship. Nor for that matter does knowing that the consumer spends $500 per week on basic food items."
Notably, Perram -- perhaps informed by the infamous furore created by former KPMG partner and columnist Bernard Salt -- steered clear of any mention of avocados.
Westpac had previously tried to settle with ASIC for $35 million but Perram found in November last year that ASIC's case was too weak for that settlement to stand. Now it will get to walk away entirely scot-free.
The landmark decision could help ease pressure on the banks following a lending crackdown, with the ruling seemingly opening the door for lenders to use relaxed standards using the HEM.
"This judgement brings back some balance into the discussion around how banks assess a customer’s capacity to repay a loan," Mark Jones, CEO of peer-to-peer lender SocietyOne, told Business Insider Australia via email.
"Expecting banks to uncover every expense a customer doesn’t pro-actively disclose would be extremely slow and costly. Benchmarks like the Household Expenditure Measure help determine outliers which can be highlighted for special attention," he said.
ASIC said it uses court rulings to inform how it does its job.
"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," ASIC Commissioner Sean Hughes said.
"ASIC is reviewing the judgment carefully."
More importantly, potential Australian homebuyers might now be finally able to enjoy their dinner. For the meantime, anyway.