By Sneha Kumar and Byron Kaye

(Reuters) -Australia's corporate regulator said the mortgage broking unit of No.2 lender Westpac had used falsified payslips from non-existent employers to approve home loans in a lawsuit filed on Wednesday.

The Australian Securities and Investments Commission (ASIC) said RAMS Financial Group, a Westpac subsidiary until the bank shuttered the business last year, engaged in widespread unlicensed conduct from June 2019 to April 2023.

The regulator made the allegations in a statement of facts agreed by Westpac, filed in a federal civil lawsuit, and published on Wednesday.

The agreed statement said that in some cases it was unclear where the false documents originated but in others "RAMS franchisees or their employees ... knowingly submitted loan applications supported by false documentation or information or were complicit in doing so".

The actions created "the opportunity for loans to be provided to customers who otherwise may not have qualified for those loans, and thereby increasing commissions earned by RAMS franchisees", ASIC Deputy Chair Sarah Court said in a statement.

RAMS has admitted to dealing with unlicensed mortgage operators, failing to properly supervise its representatives, and other shortcomings, ASIC added.

Westpac said in a statement that RAMS had agreed to finalise the matter in court and "will continue to work cooperatively with ASIC to resolve the proceedings as quickly as possible".

A 2019 Royal Commission aired widespread allegations of financial firms failing to take adequate due diligence before approving loans, resulting in tougher regulation.

ASIC said it was seeking unspecified financial penalties from RAMS. Westpac said it expects its existing provisions to be enough to cover the cost of the lawsuit.

Westpac shut down RAMS to new home loans in 2024, while continuing to retain the ongoing loans. The closure prompted RAMS franchisees to file a class action lawsuit against Westpac, claiming it improperly terminated viable businesses and was ultimately responsible for the loan processing errors.

A franchisee spokesperson said the franchisees weren't consulted during the ASIC investigation and "the regulator's findings about RAMS' 'systemic organisational governance failure' and inadequate supervision reflect Westpac attempting to shift institutional failures onto franchisees".

The date of the first hearing in ASIC vs Westpac is yet to be scheduled.

(Reporting by Sneha Kumar in Bengaluru and Byron Kaye in Sydney ; Editing by Mohammed Safi Shamsi and Michael Perry)