A judge who said borrowers could cut down on wagyu beef and “the finest shiraz” to make their home loan payments is out of touch with reality, consumer advocates say.

The Consumer Action Law Centre and the Financial Rights Legal Centre (FRLC) said the remarks, made by federal court judge Nye Perram, showed the law needed to be changed to force banks to properly consider the financial circumstances of borrowers.

On Tuesday, Perram dismissed legal action the corporate regulator brought against Westpac in which it accused the bank of lending irresponsibly more than 250,000 times by using a controversial benchmark to decide whether to make home loans instead of working out whether each customer could afford to repay the money.

Use of the benchmark, called the household expenditure measure or Hem, to make lending decisions was heavily criticised during last year’s banking royal commission on the grounds it underestimates living expenses.

But the federal court ruling allows Westpac, and other lenders, to continue to use the measure.

Asic filed its lawsuit against Westpac in 2017 as part of a crackdown on the lax lending standards of Australian banks, who were at the time pumping money into the country’s housing boom.

It said Westpac had failed to meet responsible lending standards between 2011 and 2014 by using the Hem instead of living expenses declared by customers.

But in his judgment Perram said Westpac “did have regard to these declared living expenses”.

The judge also said while the law required lenders to ask borrowers about their financial situation, he did not accept this had the “consequence that the credit provider must use the consumer’s declared living expenses in doing so”.

He played down the importance of the Hem, saying by the end of the trial “it had become clear that the evidence concerning the Hem benchmark was relevant only to one minor issue”.

And the customer’s actual expenses were only relevant if they “simply cannot be forgone or reduced beyond a certain point”, he said.

“I may eat Wagyu beef every day, washed down with the finest shiraz but, if I really want my new home, I can make do on much more modest fare.”

Calc chief executive Gerard Brody said: “To suggest that borrowers ditch wagyu steaks and shiraz for cheaper food really is out of touch with the realities faced by most Australians.”

“The rules and procedures applied by Westpac could equally have approved borrowers who have significant medical expenses, or additional education and recreational expenses for a child with a disability.

“People who work long hours may eat out and/or have high child care costs as a necessary corollary of being able to keep the job they need to be able to afford their mortgage in the first place.”

FRLC chief executive Karen Cox said the decision was “incredibly disappointing”.

“The decision suggests that banks do not have to have regard to people’s actual expenses when they lend – which in turn will allow lenders to continue to extend unsustainable loans which set people up to fail.”

Asic will now have to pay the costs of a case both sides thought was settled last year.

In September Westpac agreed to pay Asic $35m, which would have been the largest civil penalty levied under credit laws, and admit to failing to use declared expenses and failing to take into account the higher repayments due after interest-free periods expired on some loans.

But, in a highly unusual move, Perram refused to approve the deal .

Asic commissioner Sean Hughes said the regulator, which has 28 days to lodge an appeal, was “reviewing the judgment carefully”.

He said Asic took action against Westpac as a test case.

“As a regulator, it is our role to test the law,” he said.

“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.”

Westpac has been approached for comment.