Loan ‘overrides’ worry APRA

The Australian 12:00am April 9, 2018

Michael Roddan

The banking regulator has told the financial services royal commission it is concerned about the way loans are approved for borrowers who don’t meet serviceability criteria.

In its response to the first round of hearings for Kenneth Hayne’s royal commission, the Australian Prudential Regulation Authority said there was no consistent approach across the sector for measuring how many loans were sold to borrowers who didn’t comply with normal restrictions that would see them barred from getting a loan.

The loans, sometimes referred to as “overrides”, include cases where customers’ income and expenses do not meet the lender’s serviceability requirements.

Banks might normally assess a customer on their income and not bonuses, but they have the ability to override this decision and give a loan to a customer outside normal policy parameters.

Lawyers for the prudential regulator, Robert Dick, James Watson and Emma Beechey, told the royal commission that APRA had been concerned “for some time” about the way banks “monitor and measure overrides”.

“Weaknesses in managing overrides can limit the ability to control and monitor the quality of lending, as well as the capacity of boards and senior executives to gain comfort that the standards they have approved are being consistently applied in practice,” the submission said.

APRA said “a number of improvements in this area are in progress”.

The number of home loans that are approved despite not meeting serviceability requirements recently soared to its highest point since before the global financial crisis a decade ago — above 5 per cent. Although quarterly data can be volatile, it was the highest level since March 2008.

The quality of lending is under increased scrutiny, with APRA chairman Wayne Byres last week revealing the results of a study that found executive bonuses encouraged too much risky behaviour and failed to punish bankers who slipped up. Mr Byres has been critical of the erosion of lending standards in the $1.6 trillion home loan market at a time of ultra-low interest rates and surging house prices.

Just two weeks into hearings at the banking royal commission, senior counsel assisting the royal commission, Rowena Orr QC, has grilled the banks on mortgage fraud, bribery, false documentation, failure to verify customer income, not assessing expenses, failure of internal controls to remediate breaches and failures to report misconduct to the corporate regulator.

Commonwealth Bank-owned mortgage broker Aussie Home Loans came under fire after executives revealed it lacked a system to detect loan fraud, while ANZ executive William Ranken revealed his bank did not check information provided by brokers about customers’ living expenses.

NAB was beset by allegations that white envelopes stuffed with money were passed across tellers’ counters to bribe bankers into giving out fraudulent home loans in a scam involving six branches in western Sydney.

UBS analyst Jon Mott estimates Australian banks are sitting on $500 billion worth of “liar loans” where borrowers gave banks and other lenders false information to get a mortgage. “Liar loans” came to prominence in the US during the global financial crisis, which was exacerbated by mortgages that had been sold with inaccurate documentation.