March 21, 2018 / 7:09 AM / 6 months ago

UPDATE 1-Australian inquiry turns up heat on Westpac's car-finance unit

* Westpac appears at Royal Commission for first time

* Auto-finance sector under scrutiny at powerful inquiry

* Westpac relied on car yard managers to approve auto loans

* Customer says she was threatened when couldn't meet repayments

* Westpac pays bigger commissions to dealers charging higher rates (Adds "flex commission" comments)

By Jonathan Barrett and Paulina Duran

SYDNEY, March 21 (Reuters) - Westpac Banking Corp's auto-finance business approved applications that contained no expense information, and relied heavily on the advice of car-yard managers when processing loans, an inquiry into Australia's financial sector heard on Wednesday.

In Australia, 90 percent of car sales are arranged through finance organised by dealerships and lenders, according to the inquiry, with new finance commitments for vehicles last year totalling A$35.7 billion ($27.5 billion).

The sector, dominated by Westpac, Macquarie Group and a range of specialist lenders such as Toyota Financial Services, has been singled out by the inquiry, which can recommend criminal or civil prosecutions and legislative changes.

The Royal Commission turned its attention to Westpac for the first time on Wednesday, using the experience of customer Nalini Thiruvangadam to show how some customers were mis-sold car loans they could never hope to repay.

In emotional testimony, Thiruvangadam said she signed documents at a car yard in 2012 that compelled her to pay almost A$260 a fortnight for what she later found out was a "demo car that jerked a lot".

Thiruvangadam, who was earning A$350 per fortnight at the time plus government benefits, said she fell behind on rent payments and other bills and was subjected to threats by a Westpac-owned subsidiary of having her car towed should she not pay out the loan in full.

Westpac general manager, specialist finance, Phillip Godkin said under questioning on Wednesday that the bank had not taken reasonable steps to verify the customer's finances, which included accepting an application with no expenses details, and that "we shouldn't have made this loan".

Godkin said Westpac relied on car-yard business managers to verify a customer's financial position.

Westpac compensated Thiruvangadam in 2017.

Albert Dinelli, counsel assisting the commission, said Thiruvangadam's experience was a case study of issues arising when some customers transact with auto-finance lenders.

The examination of lending practices at the country's second-biggest bank by market size follows scrutiny of rivals Commonwealth Bank of Australia, Australia and New Zealand Banking Group and National Australia Bank during the opening week-and-a-half of hearings.

The Royal Commision has found widespread evidence of financial product mis-selling, poorly-arranged incentive payments, and fraud.

On Wednesday, the inquiry also heard Westpac was paying so-called "flex commissions" to dealerships, which earn larger commissions when they sign customers to higher interest loans.

The flex amount is the difference between the base rate set by the lender and the rate the dealer sells to the consumer.

Customers are not told about the payments even though they increase the cost of their loans, Godkin said.

Such commissions will be prohibited from November under new laws, after the corporate regulator found that consumers were paying excessive rates on car loans.

Last year, Australia's corporate regulator sued Westpac for allegedly breaching so-called responsible lending laws by selling interest-only mortgages to people who could not afford to repay them.

Westpac is defending the claims in court, which will hold hearings in September.

$1 = 1.2999 Australian dollars Reporting by Jonathan Barrett and Paulina Duran in SYDNEY; Editing by Stephen Coates

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