Westpac has agreed to pay a $35 million penalty after admitting to providing home loans to customers who could not afford them.
The penalty is part of a settlement reached on Tuesday with the Australian Securities and Investments Commission.
Australia's second-biggest lender admitted to either failing to collect the necessary customer data or incorrectly calculating customers' ability to repay loans in relation to about 100,000 home loans from 2011 to 2015, the Australian Securities and Investments Commission said on Tuesday.
"This is a very positive outcome and sends a strong regulatory message to industry that non-compliance with the responsible lending obligations will not be tolerated," ASIC chairman James Shipton said in a statement.
The fine comes as the financial services royal commission airs allegations of widespread misconduct, including charging customers fees for no service, irresponsible lending and deception of regulators.
The commission has also generated criticism of regulators including ASIC.
Last month, the head of the country's sovereign fund accused the regulator of being "not awake at the wheel".
ASIC chairman James Shipton says the outcome will send a strong message that non-compliance on responsible lending obligations will not be tolerated. Source: AAP
In the statement, ASIC said Australia's oldest bank had breached consumer lending law when its automated loan approval system failed to consider people's declared living expenses when deciding if they could repay a home loan.
Of 260,000 loans loans approved over a three-and-a-half-year period, Westpac ignored living expenses for 50,000 and miscalculated another 50,000 borrowers' ability to repay their debts.
The bank should not have approved about 10,500 loans, it added, or four per cent of the total.
Westpac said it accepted ASIC's allegations.
The inappropriately approved loans had performed similarly to other loans but it was monitoring them, it said in a statement.
"Westpac takes its responsible lending obligations very seriously and this action does not relate to our current lending practices," Westpac consumer bank chief executive George Frazis said in the statement.
Earlier this year, Westpac was found to have the riskiest mortgage book of the four banks dominating about 80 per cent of the Australian market, according to analysts.
Documents obtained by the royal commission showed an internal Westpac report had found nine out of 10 controls to ensure borrowers gave accurate financial information were "ineffective".
Westpac shares were down one per cent in afternoon trading, while the broader market was down 0.4 per cent.
