A Queensland couple is considering legal action against Westpac, arguing the bank failed to lend responsibly and that it ultimately cost them their family home.

Key points: Couple's expenses underestimated in loan application

Couple's expenses underestimated in loan application Bank used HEM measure to benchmark expenses

Bank used HEM measure to benchmark expenses HEM architect says other tools should also be used

HEM architect says other tools should also be used Couple's lawyers investigating conduct for possible breach of responsible lending laws

Ian and Michelle Tate were planning for their future when they took out three loans for four investment properties in 2008, 2013 and 2014.

Westpac loaned them $1.6 million, secured against their family home.

Money was tight as the Tates tried to keep up their repayments and when they saw media coverage of the banking royal commission they decided to look into their loan documents.

They discovered their loan applications grossly underestimated their monthly household expenses and that the interest-only periods were set to expire.

"I guess the brokers got their money, the banks were happy, they've got what they want, and at the end of the day here we are renting," Mr Tate said.

"At the time, it seemed pretty easy [to get the loans]. They were just sort of handing money out."

The documents for their most recent loans showed monthly expenses of $3,000 per month for the family of five, with no money spent on education, childcare fees, insurance, and mobile and internet plans.

"There's no way that we would have zero dollars for all these expenses on these items," Ms Tate said.

The Tates decided to move so they sold their family home, but Westpac would not release the proceeds of the sale because of their investment loans. So now they're renting.

Their loan applications were based on the Household Expenditure Measure (HEM), which is a conservative estimate for essential costs such as food and electricity, as well as limited discretionary spending.

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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.

The Tates said Westpac never asked any detailed questions about their expenses.

They're now facing a dramatic increase in mortgage repayments, with their interest-only period on two loans about to end.

They are in the process of selling their investment properties, but all have dipped in value.

Law firm Maurice Blackburn is investigating the Tates' claim against Westpac for breaches of responsible lending laws.

"We think this is an example of wrong doing by the Westpac bank, in the issuance of mortgage credit to the Tates and we think this exemplifies some of the problems in the industry with irresponsible lending," Josh Mennen from Maurice Blackburn said.

"We claim that Westpac breached the responsible lending laws when they issued the Tates with a number of mortgages and a total of around $1.6 million in credit in circumstances where they were earning a very modest living and they had almost no surplus income when you take into consideration their true expenses."

Westpac would not comment on the specifics of the Tates' case, but said it was "committed to fixing mistakes" if it made them.

"We take responsible lending obligations very seriously and we're working to ensure there is a good outcome for the customer," a spokeswoman said.

The Tates said they realised they placed too much trust in the bank to assess whether they could afford the loans.

HEM architect alarmed at reports banks rely on benchmark

One of the architects of the HEM expressed alarm at the behaviour of some banks, who did not appear to be using the measure properly.

Guyonne Kalb from the University of Melbourne has a PhD in econometrics and devised the HEM in 2008 as a tool for banks.

It is available to the banks via subscription and uses data from the Australian Bureau of Statistics to give a baseline of expenses depending on the size and characteristics of a household.

"If you give out loans you should do proper checks. I find it concerning that people would get loans they could not repay," Ms Kalb said.

"You would want to have all the safeguards there to make sure someone can actually afford the loan that they get.

"The Household Expenditure Measure is just one tool in the whole process of approving a loan and I think it should be used in the way it was designed to be used, which is to give the banks an idea of a typical low-budget expenditure that takes into account the characteristics of the household that applied for the loan.

"If it's not used in that way, I think that is concerning."

Mr Mennen said Maurice Blackburn had received an increasing number of inquiries relating to loans with understated living expenses.

"The problem is the HEM benchmarking tool is based on absolute basic expenditure, and in reality people just don't have such low expenses, they have significantly higher expenses," he said.

"Once the loan is issued, people can't pay it back as they thought they may have been able to, and they fall into financial hardship and that actually threatens the viability of the property market itself."

The Australian Securities and Investments Commission (ASIC) began a court case against Westpac last year, alleging the bank relied too heavily on the HEM to assess borrowers.

But Westpac told the ABC it had "robust processes in place" to ensure it lent responsibly.

"We are continually working to enhance these processes for the benefit of customers," a spokeswoman said.

"We recently updated our Group Credit Policies to enhance the way we capture customer living expenses, commitments, and verify documentation, with the number of our expense assessment categories increased from six to 13.

"We recognise sometimes it can be difficult for customers to provide a complete picture of their expenses and the enhancement of our expense categories means our staff and brokers have the opportunity to prompt customers to remind them about particular expenses they may have forgotten.

"For example, pet insurance, gym membership fees or media streaming service costs."