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 APRA to understand the major banks’ controls to “ensure completeness and accuracy of borrower financial information used in assessing serviceability of residential mortgages”.
The report, which reviewed a sample of 420 loans, 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”.
However, Westpac CFO Peter King defended the major bank’s mortgage process this week as the group announced a $4.7 billion half-year profit, up by 6 per cent.
“We have had questions on the spreadsheet attached to the APRA targeted review. The data set was incomplete, so conclusions from it will likely be incorrect,” Mr King told analysts on Monday.
“Let me just tell you about the file first. One of the challenges is the scope of work that PwC was asked to do. They only took account of information on the credit file, which is very important because they did not look at all the information that was available to the banker when they made the decision. So, when I say that the file was incomplete, it did not have all the information that was available.
“There was a loan where the banker had received a previous application very close to it. They verified the income here, it wasn’t on the new loan application, so PwC failed it.
“In a lot of cases, the loan that was being refinanced was also included in the file. That’s how you got such high DTI numbers on the file, because it was a double count.
“The challenge with this is context. We took it seriously. We had a look at the 38 loans. In all but one case they didn’t stack up.”
The PwC report was released during the Hayne royal commission and its data was consequently crunched by UBS analyst Jonathan Mott, who found that in 29 per cent of the loans, Westpac had not completed minimum income verification such as checking a borrower’s payslips.
However, according to Mr King, the PwC report points to broader issues around what data is actually available to lenders.
“In terms of the control environment, the standard was complete and accurate. So, if I give you an example of some of the challenges there, there is no positive credit bureau in Australia, so you cannot ever get whole and accurate information on whole of customer debt — it’s coming, but not for a while,” Mr King said.
“If you look at marital status, if you look at dependents, again, there is no central source. So, PwC said you can never get it. There is a difference between the theoretical concept of complete and accurate and what’s possible in the current infrastructure.
“So, we did take this seriously, we did look at it and we are comfortable with the standards.”
One area of concern for Westpac has been its high exposure to interest-only and investor loans. Over the half, the group managed to reduce interest-only loans from 50 per cent of its book to 40 per cent, driven by customer switching and lower IO flows.
Westpac grew its mortgage book by 2 per cent over the half-year, with owner-occupied mortgages growing by 3.2 per cent and investor lending up by 1.4 per cent.
While APRA has now removed the 10 per cent speed limit on investor lending, the market is awaiting further announcements about new debt-to-income (DTI) curbs.
“On DTI, this will be an evolutionary process,” Mr King said. “As all the banks report their information, we will then have to go through a process where it is standardised. The methodology is still to be worked though. We will set out appetite and run to it. APRA hasn’t come out with hard limits because everyone does it differently. We will work that through in the second half.”
The Westpac CFO noted that the bank had recently submitted its DTI data to APRA for the March quarter, which shows around 20 per cent of quarterly flows had a DTI above six times.