ASIC chairman Greg Medcraft has highlighted the need for banks to behave ethically when it comes to responsible mortgage lending, especially as he says the Sydney and Melbourne housing markets appear "bubbly".
The Australian Securities and Investments Commission last month launched Federal Court proceedings against Westpac over allegations the bank did not properly assess whether borrowers could make their mortgage repayments.
ASIC is investigating another 10 lenders over similar suspected breaches of responsible lending laws.
Mr Medcraft said he was concerned that affordability had become stretched as Sydney and Melbourne house prices surged beyond the international long-term historic multiple of four times income.
"When people get a mortgage or a loan, they believe the bankers assess their ability to pay and it reassures them, even though they may have reservations about their true ability to pay," Mr Medcraft said on Monday.
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"It shouldn't just be relying on the person to take on the debt: they have a real obligation - not just a legal obligation but almost an ethical obligation - not to put people in over their heads."
Westpac has said it will defend the allegations.
Speaking at ASIC's annual forum in Sydney, Mr Medcraft said the corporate watchdog had shown it was prepared to take on institutions regardless of their size.
Despite the warnings, Mr Medcraft said rampant house price growth did not necessarily mean the market was sure to crash.
"Providing the economy and employment holds up, the mortgage market holds up - it might go flat, but it won't crash," Mr Medcraft said.
"And our economy is pretty resilient."
