There has been an 85 per cent, or $9 billion, increase in loans approved by lenders that fall outside their own tough new lending criteria, with the major banks the biggest offenders, according to analysis by the prudential regulator.
The value of loans approved outside serviceability criteria, which is a benchmark of the borrowers' capacity to repay within the loan term, has topped $19 billion for the year ending June, the Australian Prudential Regulation Authority analysis shows.
According to the analysis, major lenders, which include the big four banks, nearly doubled the proportion of loans approved outside serviceability to about 6 per cent. By contrast, credit unions and building societies more than halved the percentage of loans outside serviceability standards.
According to APRA, lenders can exercise discretion because of exceptional circumstances or complex financial products to approve a loan outside serviceability criteria.
Lenders are under pressure from prudential regulators to bullet-proof their analysis of borrowers' capacity to comfortably service their property loans for the full term based on total income and expenses.
APRA is believed to attribute the rise to the pressure it has exerted on lenders to to improve their reporting, rather than any change in lending standards.
The tightening was in response to record household debt being fuelled by the recent boom in property prices, particularly in Melbourne and Sydney, which has since slowed because or rising rates and tougher lending conditions.
It contributed to a halving in the volume of interest-only loans, which defer repayment of loan principal, and a sharp fall in the number of low documentation, or sub prime loans, which are typically applied for by self-employed or small business owners that do not have access to documents required to obtain a traditional mortgage.
Lenders are also offering more lucrative discounts for owner occupiers and investors that have bigger deposits, typically 20 per cent or more, low debt and regular income.
Numbers are worrying
APRA's analysis does not identify the lending practices of individual banks, or include shadow banks, non-authorised deposit taking institutions, which have been quick to meet borrower demand for products removed or more strictly monitored by the majors.
The analysis is based on the total of new residential loans to households approved for the last 12 months compared to the same period last year.
Martin North, principal of Digital Finance Analytics, said the numbers are worrying. "The fact is the banks are breaching their own rules," Mr North said.
"In a time of more stringent lending standards banks have not learned the true lesson, which is we need to get back to a much or sensible debt to income ratio. Banks and consumers have been on a debt binge. They need to get back to tighter standards. The risks in the system are off the scale."
Lenders continue to roll-out changes to their criteria as they adjust to rapidly changing market conditions.
For example, Suncorp Bank are set to introduce a range of changes to its lending requirements and processes, including requiring all credit critical information for a loan to be available prior to the application submission.
It is also demand four months statements on customers' living expenses from their primary transaction accounts, credit cards and store cards.
Lenders are also responding to findings from the banking royal commission, Sedgwick Report into banking, Australian Security Investments Commission and Productivity Commission reviews.
APRA's lending policy guidelines range from ensuring interest rate buffers are comfortably above 2 percentage points over the loan product rate, discounts on uncertain and variable loans of at least 20 per cent, improving collection of borrowers' actual expenses and strengthening controls to verify borrowers' existing debt commitments.This article was first published by https://www.afr.com/
Author: Duncan Hughes