During the second round of hearings for the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, a confidential report written by PwC on Westpac Banking Corporation’s use of data in residential mortgage serviceability assessments was released.
The targeted review was undertaken at the request of the Australian Prudential Regulatory Authority (APRA) to understand the major banks’ controls to “ensure completeness and accuracy of borrower financial information used in assessing serviceability of residential mortgages”.
The Westpac report, which was released during the royal commission, reviewed a sample of 420 loans against “the standard on assurance engagements, ASAE 3150 Assurance Engagements on Controls, [PwC’s] audit methodology and APRA’s requirements”.
It covered Australian residential mortgages originated by Westpac, St George Bank, Bank of Melbourne and BankSA, and RAMS businesses and covered the period from 30 September 2015 to 30 September 2016.
While the report emphasised that the agreed control objectives of the review held lenders to a higher standard than the standard of reasonableness as envisaged by the relevant laws and regulations, it nonetheless noted that residential mortgages originated through direct first-party channels “face the challenge of large branch networks reliant on controls an ADI has in place to ensure consistency in operation of those controls”.
These controls are largely: thorough conversations with a borrower have taken place; all relevant circumstances and information of the mortgage borrower has been discussed and captured as well as documentation gathered to support the assertions made by the borrower; and conclusions reached by the ADI.
Notably, the report found that there were “limited controls” in place to ensure that borrower-declared living expenses were complete and accurate, controls to identify and verify debts were “inadequate to ensure debts and their associated repayments captured were complete and accurate”, and there were “limited controls in place to ensure accuracy of data input and verification procedures to minimise data input errors into the serviceability assessment”, among other points.
It concluded: “[W]hile the group has implemented a wide range of controls related to verifying certain categories of borrower information (particularly in relation to income), further consideration should be given to strengthening controls in certain areas, such as declared expenses and other debts.”
Off the back of the report’s public release, Westpac “affirmed” the performance of its mortgage portfolio.
The bank said that it had reassessed the 38 loans that PwC believed would fail the standard using both the information on the credit files (which was available to PwC) and other information
available to the bank at the time (which was not part of the PwC review).
“On this basis, all the loans would have been approved, apart from one loan (this loan is currently ahead of its repayments),” the bank said.
Further, it highlighted that only four of the loans in the 420-strong sample are currently greater than 30 days past due, and said that only one is greater than 90 days past due.
“This is well below the portfolio average for delinquencies,” the bank added.
Finally, Westpac said that all of the loans in the sample were originated over 18 months ago and “are now well matured”.
“Of the original 420 loans, 90 have already been repaid/refinanced,” the statement added.
The banking group said that it has taken the findings of the PwC report “seriously” and has used it to guide its “ongoing continuous improvement work on its policies and application processes for mortgage origination”.
Westpac’s chief financial officer, Peter King, said: “Westpac’s mortgage book continues to perform well as outlined in our most recent Pillar 3 disclosures for 31 December 2017.
“Our mortgage delinquencies and losses remain low both relative to historical and industry averages.”
At 31 December 2017, Westpac’s mortgage 90+ day delinquencies in Australia were 0.67 per cent.
The banking group said that it would provide an update on its mortgage portfolio quality at its interim 2018 results, expected to be announced on 7 May 2018.
[Related: Westpac credit advice ‘so far off the mark’]
Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.