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Banks continue to tighten lending standards

In the latest move by a bank to tighten lending standards, ANZ has notified mortgage brokers that it will introduce enhanced home loan verification requirements, with effect from this week.

According to a report in The Adviser, brokers will be required to obtain three months’ bank statements showing salary credits in order to verify income, in addition to pay slips.

For casual, temporary and contract employees, six months of continuous employment will be required, supported by six months of bank statemnets showing salary credits.

ANZ says brokers must ask whether any income is from overtime, commissions and bonuses. Such payments must be reported separately and will be discounted (in line with current policy) when assessing income.

ANZ will perform additional income checks. It has told brokers that if its assessors cannot satisfy themselves of the reasons for irregular income using the documents provided, they will contact the broker and request further information.

Brokers will have to investigate and discrepancies between bank statements and other documents and customer-stated income or expenses.

All banks are tightening their credit assessment processes, under pressure from the regulator and the Royal Commission. Since March, Westpac has expanded the number of expense categories in its home loan application from six to 13 and made some categories mandatory. Any category given a value of zero must be accompanied by an explanation A separate set of expense categories termed commitments (fixed outgoings) is also collected.

In response to this change, the Royal Commission found: “Westpac policy requires that staff scrutinise all transaction accounts provided by the customer for inconsistencies with these declared amounts.

“But in most cases Westpac does not require customers to provide regular transaction statements for non-Westpac accounts, and the verification, as distinct from the inquiry, of the customers expenses remains largely with the customer.”

According to UBS, banks will have to start undertaking detailed verification of household expenses. UBS reckons that most households spend more than what the Household Expenditure Measure data suggests and, as a result, the amount of credit on offer will be reduced.

The Government’s insistence that the big banks start using the comprehensive credit reporting system will also have a significant impact. CCR will add credit card limit details and banks will have to add an assessment of the consumer’s ability to repay their credit limit over three years, when they assess a home loan application.

UBS says that when banks add that calculation it will reduce home loan borrowing capacity by three or four times the credit limit.

APRA wrote to the banks in April, saying it was looking a change to lending standards, where banks create maximum debt-to-income limits. It wants lenders to set limits on the amount of lending at high debt-to-income levels. Any household with debt six times income, or more, would be in that category.

UBS cites HILDA data, which suggests that currently one-third of households have a DTI of 6 times or more. APRA wants no more than 10 per cent to be 6 times.

“At the moment banks don’t know about all the household’s debt but CCR will tell them,” UBS says, adding that the adoption of DTI limits will put further pressure on lending standards.

UBS says lending has got tighter over the past couple of years but the change has a long way to go. It predicts that a borrower’s debt capacity will come down by 30 to 40 per cent, on average, over the next few years.