The testimony, given to a powerful inquiry into the country's financial sector, came as Australia's "big four" lenders all admitted to misconduct in their submissions to a third round of public hearings that focuses on loans to small businesses.
Other transgressions included fraudulent loans and double-charging interest, the inquiry heard, a further hit to the sector's reputation after previous rounds of hearings uncovered widespread abuses in Australia's financial planning industry.
Carolyn Flanagan, a pensioner who also has difficulty hearing, testified that Westpac did not advise her to get independent legal and financial advice when her daughter took her into a branch in 2010 and asked for her to be made guarantor for a loan to buy a pool services business.
"They just point to where I should sign. Sometimes he goes up the page, sometimes he goes down," Flanagan said via videolink because she was too sick to travel to Melbourne for the hearing.
When the business failed, Westpac ordered Flanagan to sell her house to recoup its loan. Flanagan eventually kept her house with the help of a public lawyer.
Westpac's head of commercial banking, Alastair Welsh, told the inquiry the bank followed its formal processes with Flanagan but agreed the bank manager who approved her arrangement should have taken special care considering her disabilities.
"You'd expect that any person would be very thoughtful about that and make sure that she did understand what she was doing," Welsh said in the witness box.
In other submissions to the inquiry by the banks, Australia and New Zealand Banking Group said it was aware that 47 fraudulent business loans had been extended last year, said Michael Hodge, senior counsel assisting the inquiry.
Commonwealth Bank of Australia admitted to systematically double-charging interest to some business customers over many years and failed to tell the regulator about the problem in a timely manner, he also said.
National Australia Bank had also admitted to overcharging customers due to incorrect calculations of interest rates and double-charging fees, he added.
Media representatives for the banks told Reuters that it would not be appropriate to comment out of respect for the proceedings.
Kenneth Hayne, the former judge presiding over the Royal Commission, also said on Monday he had been swamped with more than 5,500 submissions detailing misconduct by banks, 11 percent of which were related to small and medium-sized businesses.
Less than halfway into a year-long investigation, the commission has prompted the banks to impose stricter lending conditions on borrowers, triggering fears the economy will be the victim of a new era of subdued credit growth as a result.
Several senior executives at AMP and CBA have lost their jobs as boards across the industry attempt to rebuild public trust. The Australian government has also pledged to boost the powers of the corporate watchdog, double maximum prison terms and massively increase financial penalties for corporate crime.
Shares in the big four banks and AMP have lost a combined A$37 billion ($28 billion) in market value since the hearings began in February. AMP has been the biggest loser by percentage, tumbling 24 percent, followed by CBA which has fallen 12 percent.
(Reporting by Paulina Duran and Byron Kaye; Editing by Edwina Gibbs)
By Paulina Duran and Byron Kaye