As recently as last May, Westpac and Commonwealth Bank had flawed processes for ensuring prospective home loan customers were telling the truth about their incomes, expenses and debts. Fresh details of problems in the banking giants' verification systems were revealed among a trove of documents uploaded by the banking royal commission into financial misconduct late last week.
As part of the mass document dump, the commission released 2017 "targeted reviews" into the banks' systems for verifying financial information provided by customers in home loan applications.
The reviews, which were kept from the public until the royal commission, were ordered by the Australian Prudential Regulation Authority in late 2016, and their release comes amid debate about "liar loans," or those based on incorrect information about the customer's financial position.
The "targeted reviews" covering CBA and Westpac highlighted a range of problems in the "controls" the two banking giants used to verify what customers declared about their income, expenses and debts in loan applications.
In response, both banks last year pledged to improve their checks on customer information, which has already led to banks demanding more information from prospective mortgage customers.
Westpac’s review, carried out by PwC and handed to the bank in May 2017, gave an "ineffective" rating to seven out of ten "control objectives" set by APRA.
“There were limited controls in place to ensure that borrower-declared living expenses were complete and accurate,” PwC said in a summary of its findings.
For example, the review found Westpac's method of verifying expenses was "ineffective" because its policies did not require the verification of living expenses, and there were "no controls identified to ensure that expenses declared were completely and accurately stated".
The PwC review for Westpac also said there were problems in how the bank checked if prospective borrowers were giving the bank the full picture about their existing debts.
"Controls to identify and verify debts were inadequate to ensure debts and their associated repayments captured were complete and accurate," PwC said.
It said "no controls were in place to verify the mortgage borrower's declared number of dependants and marital status" which can be an important step in checking a customer's living expenses.
The findings were based on a review of 420 loans across Westpac and its brands, including St George and RAMS, that were issued in the year to September 2016.
The review of CBA's verification processes also had "qualifications" about seven of the 10 "control objectives" that had been set by APRA when it ordered the review.
The CBA review, which was also produced by PwC and provided to the bank in May last year, identified similar gaps in the bank's processes for verifying customers' declared incomes, expenses and other debts.
For example, it said CBA customers were not required to verify the information about their financial position that mortgage brokers or bank staff had entered into their loan application. CBA agreed to address this particular issue by June 2018.
PwC also said there was no CBA-wide policy for the bank to assess the accuracy of customers' living expenses, and this was leading to a large number of loan applications that used an index as a proxy for the customers' living expenses.
A September 2017 letter to APRA from CBA's incoming chief executive Matt Comyn outlined various changes the bank was making to address concerns raised in the "targeted review."
National Australia Bank's "targeted review," published by the royal commission earlier last month, found the bank's framework for checking a customer's financial position was "appropriately designed," except for its checking of consumer's other debts. ANZ's review has not been uploaded by the royal commission.
As part of its efforts to curb risks in the $1.6 trillion mortgage market, APRA has repeatedly raised concerns about banks not being cautious enough when assessing how much income home loan customers need to live on.
APRA chair Wayne Byres also warned last year that another "blind spot" for the banks was their awareness of other debts - such as money owed on credit cards - when customers applied for a loan.This article was first published by: https://www.smh.com.au
Author: Clancy Yeates Clancy Yeates writes on business specialising in financial services. Clancy is based in our Sydney newsroom.