UBS has warned that the proportion of home loan applications containing inaccuracies has increased, despite the introduction of tighter credit conditions in response to the banking royal commission.
According to new research conducted by investment bank UBS – which involved an anonymous survey of 903 Australians who secured a home loan over the past 12 months – the proportion of home loan applications containing false or misleading information increased when compared to the previous year, despite tighter credit policies employed by lenders off the back of the banking royal commission.
UBS reported that the number of mortgage holders that acknowledged that their application was not “completely factual and accurate” rose to 37 per cent, up from 32 per cent in 2018.
The most common inaccuracies reported by borrowers were overstated incomes (20 per cent), understated debts (23 per cent), understated living costs (34 per cent), and misstated categories (23 per cent).
UBS claimed that the increase in inaccuracies found in home loan applications may be attributable to a rise in the number of ‘honest’ borrowers rejected by financial institutions, and an increased propensity among some borrowers to ‘embellish’ their application in light of stricter lending criteria.
According to the research, the respondents most likely to acknowledge that their home loan application contained inaccuracies were:
• those who bought more than one property over the past 12 months (63 per cent);
• those who own two or more investment properties (49 per cent);
• borrowers who had their mortgage rejected (53 per cent);
• those who had their mortgages rejected twice or more (76 per cent);
• investor interest-only mortgagors (56 per cent); and
• borrowers that required a guarantor (53 per cent).
Moreover, UBS found that respondents who admitted to inaccuracies in their home loan application were more likely to fall into arrears, with 22 per cent missing a mortgage payment over the past year compared to 6 per cent of respondents that did not acknowledge inaccuracies in their application.
UBS claimed that the research has called into question the effectiveness of existing verification practices employed by lenders.
“While asking increasingly detailed questions appears prudent, it does not appear to be effective as many factually inaccurate mortgages are still working their way through the process,” UBS noted.
The investment bank stated that regulators and lenders may need to consider alternative verification methods, which may involve a greater emphasis on data analytics in light of the roll out of the comprehensive credit reporting (CCR) and open banking regimes.
UBS added that in the meantime, regulators could impose limits on lending to borrowers with high debt-to-income ratios.
The research has come amid continued uncertainty surrounding compliance with responsible lending obligations under the National Consumer Credit Protection (NCCP) Act.
The Australian Securities and Investments Commission (ASIC) is currently in the process of reviewing its responsible lending guidance (RG 209).
The regulator has concluded two phases of consultation with industry stakeholders, which included public hearings held in Sydney and Melbourne and is expected to publish its new guidance before the end of the calendar year.
ASIC is also embroiled in a Federal Court dispute with Westpac regarding alleged breaches of the National Consumer Credit Protection Act, relating to Westpac’s application of the Household Expenditure Measure (HEM) in its assessment of home loan applications.
In September 2018, Westpac admitted to breaches of responsible lending obligations when issuing home loans to customers and agreed to pay a $35 million civil penalty to resolve Federal Court proceedings under the National Credit Act.
However, the Federal Court was tentative in its approach to the matter.
Justice Nye Perram had sought a friend of the court to consider whether the Westpac case even constituted a breach of the NCCP (reportedly stating that “there is no fact before [him] that any unsuitable loans were made”).
Following his review of the case, Justice Perram judged that a lender “may do what it wants in the assessment process”, noting that other provisions of the NCCP impose penalties if lenders make unsuitable loans as a result of that process.
ASIC has since announced that it would appeal Justice Perram’s decision to the Full Federal Court of Australia to address “uncertainty” caused by the verdict.