* Court dismisses responsible lending case against Westpac
* Courts at odds with Royal Commission - academic
* Ruling comes as regulators push for tougher lending rules (Adds quotes from academic, background)
By Paulina Duran and Byron Kaye
SYDNEY, Aug 13 (Reuters) - An Australian court on Tuesday dismissed allegations that Westpac Banking Corp WBC.AX had approved mortgages without adequate credit checks, dealing a blow to the regulator's efforts to toughen lending standards.
The Federal Court ruled against the corporate watchdog, the Australian Securities and Investments Commission (ASIC), deciding that Westpac had obeyed the law when approving 262,000 home loans using an automated system to estimate expenses.
The case was being watched as a test of the government's push for stricter oversight of the financial sector, after a public inquiry last year found widespread wrongdoing and lacklustre enforcement by feeble regulators. suggests that legislation may be needed if regulators, newly empowered with greater resources and an explicit mandate to take firm legal action against misconduct, are thwarted by recalcitrant courts.
"I'm not sure the courts are, in this instance, in tune with what public expectations might be," said Thomas Clarke, a professor at the University of Technology, Sydney business school.
Judge Nye Perram told ASIC to pay the No. 2 lender's court costs after deciding it had done nothing wrong by using the automated system rather than manually checking each applicant's living expenses.
The law did not explicitly require banks to check expenses, he said, and he was "unable to discern why, as a matter of principle, the consumer's declared living expenses must be considered".
"I may eat Wagyu beef every day washed down with the finest shiraz but, if I really want my new home, I can make do on much more modest fare," he wrote in the judgment.
Australia's four biggest banks use index measures to calculate living expenses and Westpac says more prescriptive lending rules would harm Australia's already sluggish economy. bank said ASIC's lawsuit was an "important test case" and welcomed the "clarity that today's decision provides for the interpretation of responsible lending obligations".
ROYAL COMMISSION
The ruling comes after a government-mandated inquiry known as a Royal Commission last year heard banks had underestimated borrowers' spending and in some cases approved loans to people who could not repay them.
The former judge presiding over that inquiry, Kenneth Hayne, said then that laws should be changed if courts showed a "deficiency in the law's requirements to make reasonable inquiries about, and verify, the consumer's financial situation".
Regulators have since said they want banks to do individual credit checks on borrowers to assess loan affordability, instead of relying on indices that estimate a person's minimum living expenses based on average Australian incomes. does show you how slowly legal and regulatory change takes place. The Royal Commission can fire a number of huge incendiaries into existing practices and legal practices, but the courts carry on as if it's business as usual," Professor Clarke said.
The judgment comes after the parties had already agreed to a A$35 million ($23.6 million) civil penalty over the allegations, which was rejected by the court. ASIC spokesman was not available for comment. ($1 = 1.4804 Australian dollars)