The financial regulator has lost its case alleging Westpac broke lending laws in the way it assessed almost 262,000 home loan applications.
A Federal Court judge on Tuesday dismissed the Australian Securities and Investments Commission's case against Westpac, after last year refusing to sign off on an agreed record $35 million fine.
The regulator alleged Westpac breached responsible lending laws when assessing the suitability of home loans for customers between December 2011 and March 2015.
The loans were assessed using Westpac's computer-operated loan approval system.
Justice Nye Perram rejected both ways ASIC alleged Westpac breached the national credit act.
ASIC alleged the bank breached the act 261,987 times, with every Westpac-branded home loan it made over the period, by failing to have regard to any of the living expenses declared by consumers on their loan application forms.
Justice Perram found Westpac did have regard to the declared expenses, but said even if that were not so, the 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.
The judge did not accept ASIC's contention that all of a consumer's financial circumstances must be taken into account by a lender.
Justice Perram said everyone has to eat so there must be a minimum that can conceivably be spent, but that was an entirely different concept to the declared expenses of what a 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 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 judge also found ASIC's case failed on a subset of 154,351 loans that had an initial interest-only period before payment of principal was required.
He noted ASIC did not allege Westpac answered the two questions incorrectly in the case of any of the 261,987 loans, or extended loans to any consumers who it ought to have found would be unable to meet their financial obligations or would face substantial hardship.
"This then is a case about the operation of responsible lending laws without any allegation of irresponsible lending," he said.
The decision has ramifications for all lenders, as the case centred on what they must do to meet their responsible lending obligations.
The judge did not resolve the issue of the use of an expenses benchmark in assessing applicants' suitability for a loan, as it was not relevant in the end.
The banking royal commission's final report noted that if the court 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