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The recent furore about Justice Perram’s remarks that “borrowers ditch wagyu steaks and shiraz for cheaper food” to meet loan repayments not only fundamentally misunderstands what he was saying — misrepresenting the substance of the case — it also ignores that the judgment holds the line on a significant point about personal responsibility and autonomy.
The case involved ASIC alleging that Westpac had breached responsible lending standards in every single loan it issued between 12 December 2011 and March 2015; some 261,987 times. Specifically, ASIC claimed Westpac had to consider the declared living expenses of loan applicants, and that Westpac had not done so.
Importantly, the judge found this was incorrect on the facts — Westpac did consider the declared living expenses of applicants — but also incorrect at law. Westpac did not need to consider whether the loan met some vague concept of ‘affordability’ with respect to the applicant, only whether the applicant would be unable to meet the repayments, or ‘could only comply with substantial hardship’.
As any recent home purchaser can attest, seemingly small luxuries like take away dinners add up to substantial expenses over time.
It would be possible to take this too far — there is a reasonable minimum below which it would be unreasonable to expect households to tighten their belt — fortunately, this too is recognised in the objective Household Expenditure Measure (HEM) standards.
The bank can’t assume you’ll live like an impoverished university student stretching a packet of noodles out into two meals.
But there is no good reason to impose a legal obligation on banks to delve into the personal habits of applicants to see what expenses could be reasonably trimmed and by how much.
We know from this case that Westpac alone made more than 250,000 loans in three and a half years. Do they have to make these assessments every time or is it just marginal cases that get this paternalistic treatment? Given the likely racial, gender and age make-up of borrowers on the margins, won’t this end up appearing horribly bigoted?
Specifically, imagine the outrage if Westpac had denied a middle-class Indigenous family a loan until they proved they could live up to Westpac’s budget.
It’s far from clear it’s a good idea for the government to prevent a willing borrower, and a willing lender, from entering into what they believe is a mutually beneficial transaction.
Requiring a lender to second guess a borrower’s decision about their financial circumstances and capacity — when the lender can never know the borrowers’ position as well as the borrower does —must result in a less economically efficient outcome more often than not.
The last thing we want is for banks to be dictating to borrowers how much they can spend, and on what. Nor do we need another paternalistic apparatus cooked up by government designed to protect the minority of the population who are incapable of making rational decisions about their living situation.
ASIC v Westpac