Case note: responsible lending and automated decision making

On 10 September 2018 ASIC and Westpac submitted a settlement for approval by the Federal Court of ASIC’s action alleging that Westpac’s automated decision-making system as part of its process for deciding whether or not to offer a Home Loan to a consumer breached its responsible lending obligations. Justice Perram has reserved his decision. Background.

The parties have proposed that Westpac will pay a $35 million civil penalty to settle the case, subject to the Federal Court’s approval.

Court rejects settlement (November 2018).

The action related to home loans by Westpac in the period between 12 December 2011 and March 2015.

Some of the Home Loans were Interest Only Loans in which there was an initial Interest Only Period during the term of the loan when the consumer was only required to make payments of interest and fees and was not required to make repayments of principal.

Westpac’s Automated Decision System included over 200 “rules” which included decline rules and refer rules.

One of the rules used in the Automated Decision System during the Relevant Period was the Serviceability Calculation Rule.

That rule calculated a Required Minimum Monthly Surplus figure for the consumer. Westpac did not use Declared Living Expenses in the calculation of the Required Minimum Monthly Surplus. This figure was calculated by adding a figure derived from the HEM benchmark to a “buffer” figure.

In addition Interest only loans calculated the consumer’s required monthly loan repayments using the interest only payments over the full term of the loan even though the amount of the loan repayment by that method was lower than the actual loan repayments required to be made by the consumer after the expiry of the Interest Only Period

In the Statement of Agreed Facts, Westpac admitted it should not have automatically approved 10,877 home loans in that period and that applications for those loans should have been referred for manual assessment by a Westpac credit officer to determine whether the loan was unsuitable.

In the Statement of Agreed Facts Westpac accepts that:

  • Westpac should have had regard to Declared Living Expenses in the Serviceability Calculation Rule in the Automated Decision System by using the higher of Declared Living Expenses and the HEM Benchmark within the Serviceability Calculation Rule;
  • Westpac in its Automated Decision System in relation to Owner Occupier Interest Only Loans should have used the Residual Term Method instead of the Full Term Method and the higher of Declared Living Expenses and the HEM Benchmark within the Serviceability Calculation Rule.

The case shows that rules and assumptions used in developing technology need to be tested for compliance as well as business efficiency.

In 2015 Westpac updated its assessment processes and Westpac now assesses Home Loan applications using the Residual Term Method for Interest Only Loans and the higher of the applicable HEM and the consumer’s Declared Living Expenses for all Home Loans.

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