One of Australia’s biggest banks, Westpac, has been hit with a class action on behalf of borrowers.
Westpac has been accused of irresponsible lending in home loans it has issued since 2011 in legal action filed in the Federal Court on Thursday morning.
This is the first class action to be launched in the wake of the royal commission into misconduct in the banking sector.
The lead plaintiffs in the case are Ian and Michelle Tate, who were issued five loans worth $1.8 million.
Last year, the ABC’s 7.30 program revealed the Tates’ loans had been calculated using the Household Expenditure Measure (HEM), rather than assessing their actual expenses.
It meant they were granted loans they could not afford to repay.
“Dealing with Westpac has devastated us,” Ms Tate said.
“Everything we were trying to achieve is lost. Instead of striving for financial independence, we are back living pay cheque to pay cheque, tax return to tax return.
We have gone backwards after years of hard work and struggle. It is worse than being back to square one.”
Maurice Blackburn principal lawyer Ben Slade said the firm expected thousands of loans nationwide could be affected.
“Our current estimate shows there will be thousands of people and thousands of loans affected,” he said.
Lawyers said the action sought compensation for claimants who had “suffered, and are suffering, at the hands of the company”.
“We are anticipating a lot of people are caught up in this and can participate in the claim,” Mr Slade said.
Westpac ‘failed’ obligations
The case against Westpac takes aim at the bank’s use of the HEM when approving loans.
The HEM is a conservative estimate for essential costs such as food and electricity, as well as limited discretionary spending.
The banking royal commission heard some banks relied solely on the HEM, rather than interviewing individual applicants about their actual expenses, as they are required to under the National Consumer Credit Protection Act.
Lawyers for Maurice Blackburn will argue Westpac breached its responsible lending obligations by using the measure and failing to verify the living expenses customers had declared.
They will also argue the bank breached its obligations on another front, by not properly assessing a customer’s capacity to pay their loans once their interest-only period ended.
They will allege some customers were unable to make the higher repayments when interest-only repayments increased to cover both interest and the principal of the loan.
Mr Slade said the bank had not complied with lending obligations that were designed to protect consumers from financial hardship.
“This case will seek to prove that Westpac failed to comply with these obligations and that this failure caused substantial losses for many consumers,” he said.
“Westpac’s response to Commissioner [Kenneth] Hayne’s findings in the financial services royal commission, and to the ongoing proceedings brought by ASIC in relation to Westpac’s responsible lending obligations, does not reveal any acceptance by Westpac of its obligations to compensate those who have suffered, and are suffering, at the hands of the company.”
The class action is backed by global litigation funder Harbour.
“We are launching this class action because this kind of conduct can really damage individuals, families and tear at the fabric of society,” Mr Slade said.
“We have filed a class action to stand up for those affected by this irresponsible lending and to bring some pressure to bear on a banking sector that is notoriously unrepentant for flouting the law.”
Westpac admits 10,500 loans automatically approved
The civil action was foreshadowed when Westpac admitted it had breached irresponsible lending laws late last year.
The bank had negotiated a $35 million settlement with corporate watchdog ASIC over the breach after it admitted it issued 10,500 mortgages that should not have been automatically approved.
But the settlement was sensationally rejected by the Federal Court, despite Westpac admitting it broke responsible lending laws.
Commentary at the time noted the admission left the company exposed to legal action from borrowers who defaulted on loans they should never have been issued.
Westpac said it had changed its systems in 2015 and had confidence in the credit quality of the loans in question.
The bank disclosed that it had approved more than 250,000 loans using the automated system from December 2011 to March 2015.
“Of these, Westpac acknowledges that approximately 10,500 loans should have been referred to a credit officer for a manual assessment prior to any approval,” Westpac said.
“Approximately 5400 of these loans are still active and represent 0.4 per cent of the mortgage portfolio.”
Westpac also said the loans had continued to perform “similar to, or better, than the rest of the group’s home loan portfolio”.
“Nevertheless, Westpac has committed to proactively monitor the active loans and to provide tailored hardship assistance if necessary,” the bank said.
The ABC has approached Westpac for comment.