Australia's Westpac sued for making loans customers could not repay

SYDNEY (Reuters) - Australia's Westpac Banking Corp was sued on Thursday by customers who said the bank had lent them money they could not afford to repay, the second such case the firm has faced in the past year.

The case comes with Australia's financial services sector under great pressure to reform after a public inquiry uncovered widespread misconduct, including charging customers fees for no service, irresponsible lending and deception of regulators.

Westpac had already agreed to pay a A$35 million ($25 million) fine for wrongly approving thousands of mortgages in a similar case filed by Australia's corporate regulator last year.

Under Australian law, banks must check that loans are suitable for borrowers.

"This case will seek to prove that Westpac failed to comply with these obligations and that this failure caused substantial losses for many consumers," said Ben Slade, a lawyer at Maurice Blackburn, the firm that filed the class-action lawsuit.

Funding for the case will come from Britain-based Harbour Litigation Funding and covers borrowers who took loans from the bank after 2011.

Westpac, the country's oldest bank and the largest by assets, said it takes its responsible lending obligations very seriously and will be defending the case.

A powerful inquiry into Australia's finance sector excoriated the nation's lenders and said that poor treatment of customers was driven by greed, although it has not recommended major structural changes to the industry.

In its case against the regulator, Westpac accepted that it had breached consumer lending law when its automated loan approval system failed to consider borrowers' living expenses when deciding if they could repay a home loan.

Of 260,000 loans approved over a three-and-a-half-year period from 2011 to 2015, Westpac ignored living expenses for 50,000 and miscalculated another 50,000 borrowers' ability to repay their debts.

($1 = 1.3961 Australian dollars)

(Reporting by Tom Westbrook in Sydney; Editing by Matthew Lewis and Stephen Coates)