Westpac Banking Corp (ASX:WBC) hit with $35 million penalty for responsible lending breaches

The Westpac Banking Corp (ASX:WBC) share price has dropped lower after the bank was hit with a $35 million penalty for responsible lending breaches.

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On Tuesday the Westpac Banking Corp (ASX: WBC) share price followed the market lower and fell almost 1% to $28.31 after providing an update on legal proceedings with the Australian Securities and Investments Commission (ASIC) in relation to breaches of certain responsible lending obligations.

According to the release, Westpac has agreed to a settlement with ASIC and will pay a $35 million penalty for contravening the National Consumer Credit Protection Act. The settlement is subject to court approval.

What did Westpac do?

The bank has accepted that between December 2011 and March 2015 approximately 10,500 loans should not have been approved through Westpac's automated decisioning process and should have been referred to a credit officer for manual assessment.

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

The bank changed its systems in 2015 but has confidence in the credit quality of the loans in question. It has not made admissions that any of its loans were unsuitable for customers at the time of their origination and the relevant loans are performing as expected and in line with the broader loan book.

Importantly, ASIC has not alleged that any customers suffered specific loss or damage as a result of these admissions, and there are no admissions that any loans were unsuitable for customers.

Chief Executive of Westpac's Consumer Bank, George Frazis said:

"Westpac takes its responsible lending obligations very seriously and this action does not relate to our current lending practices. We upgraded our credit assessment in 2015 and continue to thoroughly assess home loan applications. From a credit quality perspective, loans approved under these circumstances have 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."

What now?

This will be the largest civil penalty awarded under the National Credit Act if the Federal Court approves it. But $35 million isn't going to have too much of an impact on Westpac's financial performance, meaning it is largely business as usual in my opinion.

In light of this, I still believe Westpac is the best option in the banking sector ahead of Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB).

Motley Fool contributor James Mickleboro owns shares of Westpac Banking. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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