Westpac has been hit with the first class action against one of the big four Australian banks since the banking royal commission's final report earlier this month.
The claim filed by law firm Maurice Blackburn in the Federal Court alleges Westpac breached responsible lending laws by providing unaffordable loans, leading to "substantial losses" for many customers.
Lead plaintiff Michelle Tate told a media conference in Brisbane on Thursday she and her husband Ian were ruined after the bank lent them more than A$1.8 million ($1.88m) across five properties, despite the family of five having just one income.
Ms Tate said Westpac trusted a loan broker who provided information about her family's financial position, and did not independently verify the situation. She said her family would now lose all of their properties save for a block of land.
"Dealing with Westpac has devastated us," Ms Tate said.
"Everything we were trying to achieve is lost. Instead of striving for financial independence, we are back living pay cheque to pay cheque, tax return to tax return. We have gone backwards after years of hard work and struggle. It is worse than being back to square one."
Maurice Blackburn expects thousands of customers given unsuitable loans after January 1, 2011 will sign up for the class action, which has been "undergoing careful preparation for months" and is being backed by global litigation funder Harbour.
The law firm will allege Westpac failed to properly check if customers would be able to meet their repayments or wrongly assessed their capacity to repay through the use of the controversial HEM benchmark.
The HEM, or Household Expenditure Measure, is a tool used by banks to determine whether customers can afford to pay off a loan, but in nearly all cases is not a true reflection of someone's actual financial situation.
It will also be alleged that Westpac failed to properly assess if customers would cope after interest-only periods on their loans ended.
The Tate family appeared on the ABC's 7.30 program last year. They said the bank grossly underestimated their expenditure.
They bought their first home in 2008 but decided to invest in a further three in 2013 and 2014 while Mrs Tate was a full-time mum, all funded through Westpac loans they locked in as interest only and secured against their first property.
Unaware the interest only period would eventually end, they've were faced with A$1.6m in debt they couldn't afford.
The couple said they had been forced to borrow from relatives to get by and sold their home to build a new property, but Westpac woulnd't release the funds because the home was securing the investment properties they couldn't cover anyway.
"We're losing it all," Ms Tate told the program.
Westpac has been approached for comment.
"Westpac is required to comply with strict obligations which are specifically designed to protect consumers from irresponsible lending and the risk of financial hardship," Maurice Blackburn Principal lawyer Ben Slade said in a statement.
"This case will seek to prove that Westpac failed to comply with these obligations and that this failure caused substantial losses for many consumers."