The financial regulator has lost a landmark lending case against Westpac, with the judge saying borrowers can forgo Wagyu beef and the finest shiraz for more modest fare to meet loan repayments.
In a decision that has implications for the way all lenders assess loan applications, the Federal Court on Tuesday dismissed the Australian Securities and Investments Commission's test case.
Justice Nye Perram rejected ASIC's allegations that Westpac breached its responsible lending obligations in the way it assessed home loans over a three-year period.
He found the living expenses declared by customers on applications do not show their capacity to meet their repayments under a loan, without additional information.
Consumers may choose to forgo some of the living expenses - be it a gym membership or spending $500 a month on wine - in order to meet the repayments.
Justice Perram gave the example of food, saying everyone has to eat but the minimum of what can conceivably be spent was entirely different to what the consumer actually spent.
"I may eat Wagyu beef everyday washed down with the finest shiraz but, if I really want my new home, I can make do on much more modest fare," he said.
The fact that someone takes an annual first class holiday to the US is not relevant to assessing whether the repayments will put them into circumstances of substantial hardship, Justice Perram said.
"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."
The case went to trial after Justice Perram refused to sign off on an agreed record $35 million fine last year.
ASIC alleged Westpac breached responsible lending laws when assessing the suitability of 261,987 home loans for customers between December 2011 and March 2015, using its computer-operated loan approval system.
ASIC alleged Westpac relied solely on an expenses benchmark and did not use the customers' declared living expenses.
Justice Perram found Westpac did have regard to the declared expenses, but said even if that were not so, the national credit act did not operate as ASIC alleged.
He said the act required a credit provider to ask a consumer about their financial situation, before asking itself whether the consumer will be unable to comply with their financial obligations or could only do so with substantial hardship.
He did not accept that meant the credit provider must use the customer's declared living expenses, saying the act was silent on how a lender answers the two questions.
Justice Perram also noted it was a case about the operation of responsible lending laws without any allegation of irresponsible lending.
ASIC Commissioner Sean Hughes said the regulator took on the case because of the need for judicial clarification of a cornerstone legal obligation on lenders.
"The obligation to assess applications builds on the obligation on 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," Mr Hughes said.
The banking royal commission's final report noted that if the test case revealed some deficiency in the law's requirements to make reasonable inquiries about, and verify, a consumer's financial situation, there should be legislation to fill in that gap.
Australian Associated Press