Banks set to turn screws

Report likely to push tighter lending standards

IT WILL probably be even harder to get a home loan after the banking royal commission hands down its interim report.

A tightening of lending standards since the inquiry began is likely to become more pronounced, with royal commissioner Kenneth Hayne QC (pictured) expected to focus on ensuring banks are lending money responsibly.

Banking analysts expect the availability of credit will be further restricted after Mr Hayne’s interim report, which may be released as early as tomorrow. Banks will have to do Close Change more to verify customers’ income and actual living expenses, rather than relying on the widespread use of benchmark expenditure measures.

Citi banking analysts say the interim report is expected to mark a mea culpa for the industry, tipping Mr Hayne will deliver a “blistering” review of existing practices.

“The banks have had systems, processes and norms which have allowed them to lend too much,” a recent Citi research note says. “This is visible across the system, with issues in mortgage broking all the way through to expense verification.”

The Citi analysts expect Mr Hayne will conclude lenders have not made sufficient inquiries about customers’ financial situations, nor taken necessary steps to verify the information they provide.

They suggest Mr Hayne will recommend a move away from the use of the benchmark household expenditure measure, backing up regulator efforts to reduce reliance on HEM.

In a recent report, UBS banking analysts wrote that most banks were yet to fully verify customers’ living expenses and many customers were still not providing pay slips and tax returns.

“As a result we believe there is likely to be much work required for the banks to comply with the royal commission’s likely more rigorous interpretation of responsible lending and improve mortgage underwriting standards,” the report says.

Consumer advocates believe the tighter lending standards are a positive outcome.

“Consumers probably aren’t aware that it’s probably in their interests that it’s being tightened up,” Financial Rights Legal Centre principal solicitor Alexandra Kelly said.

“For individual consumers here and there, they might be a little bit annoyed that a loan they would otherwise have got a few months ago or a year ago they no longer can get.

“I think ultimately turning the tap off or restricting its flow is really important.”