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"Computer says yes" — regardless of whether you can really afford to borrow the money.
That is how one of Australia's biggest banks handed out home loans over a period of years, if the corporate watchdog's landmark case against Westpac is an accurate guide.
Westpac is being sued under responsible lending laws for using an automated process to decide whether peoples' home loan applications got across the line.
Most people who have applied for a home loan would have filled out an application form on which they listed their income and regular outgoings — in banking jargon, "declared living expenses".
The Westpac customers whose loans are the subject of the court case also did this.
These "declared living expenses" were meant to be used by the bank to decide people had enough money to service the loan.
But they weren't, according to the Australian Securities and Investments Commission (ASIC).
Instead, the bank substituted a "benchmark" assessment of what people would need to live on to pay for absolute basics such as food, kids' clothing, utilities and transport with some money left over for discretionary items.
So never mind what peoples' actual cost of living was, and what they told the bank about their actual outgoings.
If the customer met the "benchmark", "computer said yes", automatically.
A 'test' case
The benchmark was based on a household expenditure survey and was calculated slightly differently depending on where people lived.
It is obvious the kind of problems this could lead to.
According to ASIC, Westpac lent people money when a proper assessment would have shown that they did not have enough money to pay the loan and meet their regular outgoings.
If Westpac did take into account peoples' "declared living expenses" when assessing whether they could service the loan, the bank approved loans even when the money people had left to live on fell short of its benchmark.
The case will also examine loans where, according to ASIC, the bank failed to properly calculate how big the repayments would be when the loans shifted from an initial interest only period to interest and principal.
Although only seven loans are involved, it is clearly a test case, and it could open up a flood of litigation if it succeeds.
Other lenders aren't immune
Westpac is defending the case.
It issued a media statement denying it breached responsible lending laws with the banking industry's standard line:
"It is not in the bank's or the customers' interests to put people into loans that they cannot afford to repay."
Westpac says the loans identified by ASIC are all meeting or ahead on repayments.
Although Westpac is ASIC's target, it is far from the only lender to face such allegations.
Yet year after year, consumer lawyers and credit counsellors deal with large numbers of people in debt stress who were given loans they struggle to repay, which should never have been approved.
Activists such as Denise Brailey of the Banking and Finance Consumers' Association have stacks of documents showing unaffordable loans after the customers' incomes were massaged or "declared living expenses" ignored.
Economists Lindsay David and Philip Soos of LF Economics have argued for years that it is simply not possible for house prices to soar as they have done in the face of income stagnation without systemic "loan fraud" by banks.
And the prudential regulator, APRA, is on the record as being shocked by what it found three years ago when it "drilled down" into how banks assessed peoples' ability to service loans.
Intervention by the regulators often lead to improvements for a while.
But it's hard not to conclude that lending standards are periodically trashed in the banks' competitive battle to maximise lending volumes.
Topics: banking, law-crime-and-justice, business-economics-and-finance, consumer-finance, consumer-protection, australia
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