It's a lot of money, $35 million. In fact, it's a record penalty for breaching responsible lending laws in the relatively new National Consumer Credit Protection Act.

When you throw in ASIC's legal fees, which Westpac has kindly agreed to cover, and its own lawyer bills, the total cost to the bank of 10,500 dodgy mortgage approvals is likely to be in the range of $40 million to $50 million.

That kind of money could buy you this superyacht.

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But don't feel too sorry for the bank or its shareholders (which probably include you and me through our super funds).

The near certainty is that Westpac still made decent profits off these loans that should not have been approved, or at least not been approved without a much more rigorous assessment of whether the borrower could afford to repay them.

People in the know have told the ABC that the big banks make something like an 80-basis-point clear profit of their home loans every year — that's 0.8 percentage points.

So, out of the typical 4 per cent or so that most people are currently paying on their mortgages — after deposit interest payments, wholesale funding, staff, buildings, IT and other costs — 0.8 per cent is clear profit for the bank.

It sounds tiny, but the big banks' mortgage books are massive, so it adds up. Westpac made about $8 billion profit last year and there's no reason to think that will suddenly drop off this year.

Westpac's profits from 10,500 questionable loans

Let's look specifically at the roughly 10,500 home loans that Westpac has admitted should not have been approved using its automated process.

These loans were issued between December 2011 and March 2015.

Assuming that these mortgages averaged the typical loan amount of about $300,000 — and there's a lot of reasons to think they would have averaged much more than this — that is $3.15 billion of debt.

If the banks makes 0.8 per cent per annum off these loans, that is more than $25 million a year in net profit.

A bit under half of these loans have already been paid off — most likely because the borrower refinanced them with either Westpac or another bank.

But Westpac says 5,400 of the loans are still active — these mortgages would be generating something in the order of $13 million profit for the bank this year.

Because the dodgy approvals occurred over a period of three years, it's unlikely the bank has ever made $25 million per annum from them, but we know the number would have been between $13 million to $25 million from 2015 to the present.

Let's split the difference and call it $19 million a year, on average, since 2015.

That means Westpac would have made $57 million clear profit from these loans over the past three years alone, more than enough to pay its penalty and costs.

And that's not including the profits it made between 2012 and 2014, or the profits it will keep making on some of these loans for the next quarter of a century.

Basically, it's the equivalent of speeding to get to a job that would pay you $500 and incurring a $200 ticket in the process. Sure, you'd rather not get the ticket, but you're still better off financially by breaking the law.

Westpac says it doesn't break its profit figures down to the level of individual loans, so it can't give an exact figure on how much money it has made from those mortgages.

But it did note yesterday that the loans are generally performing well, so they should be just as profitable as the rest of its mortgage book.

Westpac could have faced penalties up to $210 billion

The other point to make is that Westpac potentially breached responsible lending laws at least 50,000, and possibly 100,000 times, through its automated approval process.

There were 50,000 occasions where the bank used the Household Expenditure Measure (HEM) — a very low estimate of basic living costs that doesn't reflect what most people actually spend — to calculate whether people could afford their loan, even though their declared living expenses were higher.

Section 130(b) of the National Consumer Credit Protection Act requires lenders to "make reasonable inquiries about the consumer's financial situation" — it is pretty hard to argue you have complied with that by substituting in low-ball expenses benchmark for their spending.

The maximum civil penalty per breach is 2,000 penalty units. A penalty unit is currently set at $210.

Since this analysis was first published, economist Philip Soos pointed out that corporations are subject to maximum penalties five times as high, as per s167(3)(b) of the NCCP Act.

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That means Westpac could have been subject to a maximum penalty of $105 billion if ASIC had taken the matter to court and a judge found that the bank had not complied with s130(b).

That would be a highly unlikely outcome, but it does show the settlement Westpac agreed to was just 1/3,000th of the maximum penalty it could have faced.

On top of that, Westpac was pulled up over another 50,000 potential breaches related to the assessment of interest-only loans.

These loans have lower repayments up front, during the interest-only period, which then jump potentially by as much as 35-40 per cent, when that ends and principal and interest repayments become due.

On a $500,000 loan with a 10-year interest-only period, the difference between the repayments calculated by Westpac and the actual principal and interest repayments was about $600 a month — a potentially nasty surprise for borrowers told they could afford the mortgage.

If these were also found to be responsible lending breaches by a court, then Westpac's penalty could have totalled an eye-watering $210 billion.

So, all things considered, $35 million plus costs looks like a remarkable bargain for the bank.