Class action filed against Westpac could affect thousands of Australian home loans

One of Australia's biggest banks, Westpac, has been hit with a class action on behalf of borrowers and could be facing tens of millions of dollars in compensation claims.

Westpac has been accused of irresponsible lending in home loans it has issued since 2011 in legal action filed in the Federal Court this 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.

Speaking in Brisbane, Ms Tate broke down as she described "the burden" of trying to service the loans.

"It's just too hard to bear now, it's just devastating. We've lost everything … we've sold our family home. We've sold all the investment properties," she said.

"We're here today as part of the action to get our story out and hopefully hear from other people in the same situation.

She said her family was back living "pay cheque to pay cheque, tax return to tax return".

Maurice Blackburn principal lawyer Ben Slade said the firm expected a significant number of loans nationwide could be affected.

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.

Mr Slade said the Tates were claiming compensation "in excess of $400,000" and if thousands of Westpac customers joined the action, the firm expected the total claim value to be in the tens of millions.

Westpac 'failed' obligations: Maurice Blackburn

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.

"Clearly most people will consider whether they have capacity to repay, but the obligation is on the bank and the reason why the obligation is on Westpac is because we have seen years and years and years of people being ruined by avaricious lending practices of banks.

"The Government passed a law to stop it from happening and yet it appears from the Hayne royal commission that Westpac, in at least a number of circumstances, failed to comply with the legislation."

He said Westpac's response to Commissioner Kenneth Hayne's commission findings did 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 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 admitted 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 5,400 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.