In an extraordinary move, the Federal Court has refused to approve a $35 million penalty for Westpac, despite the bank admitting it broke responsible lending laws.

The penalty was a negotiated settlement between Westpac and the Australian Securities and Investments Commission (ASIC).

Westpac admitted its automated loan approval system used the Household Expenditure Measure (HEM) – a relatively low estimate of basic living expenses – to calculate potential borrowers’ living costs.

The bank used the HEM instead of actually evaluating the customers’ declared living expenses, and admitted this practice breached the National Consumer Credit Protection Act.

This meant affected customers were approved for home loans they potentially could not afford to repay without financial hardship.

ASIC alleged the bank approved about 50,000 home loans based on a HEM benchmark, even though the customers’ declared living expenses were higher.

ASIC launched the case in March last year, using seven case studies to demonstrate the bank’s use of the lower HEM benchmark rather than a customer’s higher declared living expenses.

The ASIC action also alleged that Westpac did not properly assess whether interest-only borrowers could continue to afford their mortgage without financial hardship when the interest-only period ended and principal and interest payments had to be made.

The switch-over to principal and interest can add as much as 40 per cent to the monthly repayments on a mortgage.

Westpac admitted using incorrect interest-only loan repayment calculations on a further 50,000 loans.

Justice Nye Perram will provide detailed reasons for his decision shortly.

-ABC