Westpac has approved mortgages that borrowers are unable to afford because the bank failed to properly factor in home loan customers' actual living expenses, the corporate regulator alleges.
The Australian Securities and Investments Commission on Wednesday launched civil action in the Federal Court, alleging the country's second-largest mortgage lender breached responsible lending practices.
In the first action of its kind, ASIC claims the bank failed to properly assess whether its customers could make minimum repayments on home loans approved between December 2011 and March 2015.
Westpac allegedly used a statistical benchmark to assess loan repayments instead of the actual expenses declared by prospective borrowers and approved loans where a proper assessment would have shown a monthly deficit.
The regulator also alleges that Westpac failed to factor in the higher repayments at the end of interest-only term loans when assessing a borrower's ability to make the repayments.
ASIC's pleading points to seven specific examples – believed to be part of a larger sample of loans – where it says Westpac failed to consider its customer's declared living expenses when assessing applications, instead relying on ABS Household Expenditure Survey benchmark figures.
It alleges the applicants' expenses were higher than the HEM figures relied upon by the bank, leaving monthly shortfalls. One customer who applied for a $750,000 loan told the bank their monthly expenses were $5490 but Westpac instead relied on the HEM figure of $2170, leaving a $3320 deficit when assessing the loan.
Westpac has pledged to defend the legal action, which it said did not concern the bank's current lending policies and practices. In a statement it said all of the loans singled out by ASIC were meeting or ahead in repayments.
The head of Westpac's consumer bank, George Frazis, said the bank takes responsible lending obligations seriously and had full confidence in its processes.
"It is not in the bank's or customers' interests to put people into loans that they cannot afford to repay," he said. "It goes hand-in-hand that we have robust credit approval processes while helping customers purchase their home.
"Our credit policies are informed by our deep experience and understanding of the mortgage market. They include a consideration of customers' specific circumstances, including income and expenditure, previous repayments history and the overall customer relationship."
Mr Frazis said Westpac used benchmarks including the Household Expenditure Measure but disputed claims it relied solely on the HEM benchmark and did not have regard to customers' declared expenses in its unsuitability assessment.
"Importantly, interest-only mortgages were assessed in the same way as a standard principal and interest loan, and did not increase how much a customer could borrow," Mr Frazis said.
Under the National Credit Act, banks are required to make reasonable inquiries about a borrower's financial situation to determine whether they can service a loan.
Hearings will begin later this month in the Federal Court of Australia in Sydney.