A court has refused to approve a $35 million penalty for Westpac

• A court has refused to approve a negotiated penalty against Westpac.

• The case involves Westpac not properly assessing the ability of home loan borrowers to make repayments.

• The corporate regulator and Westpac had agreed the bank would pay a $35 million civil penalty.

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A $35 million negotiated penalty against Westpac, which admitted breaking responsible lending laws, has been knocked back by the Federal Court.

The bank had negotiated the civil penalty with corporate regulator ASIC after it admitted using Household Expenditure Measure, an estimate of basic living expenses, to calculate the living costs of borrowers rather than using actual spending patterns.

This meant loans were approved for people who may not have enough income to afford repayments without hardship.

About 50,000 home loans were approved not using actual expense information that was higher than the Household Expenditure Measure.

However, Justice Nye Perram says neither Wespac nor ASIC were able to identify which home loan contracts were in breach of the law.

And he pointed out that there was "no agreed fact before me" that any of the loans was unsuitable.

"I will not declare conduct which is not unlawful to be unlawful," he said.

The negotiated civil penalty of $35 million would have been the largest civil penalty awarded under the National Credit Act.

The National Credit Act provides consumer protection to ensure that credit providers make reasonable inquiries about a borrower's financial situation, verify the information that they obtain and assess whether a loan will be suitable.

Last week the Federal Court of Australia ordered Westpac to pay a pecuniary penalty of $3.3 million for its involvement in setting the bank bill swap rate in 2010.

Justice Beach said Westpac's misconduct was "serious and unacceptable".