Brokers and banks might be being lied to by clients on the credit applications, according to a new study from Experian.
They revealed that 1 in 5 Australian borrowers embellished or omitted salient details on their loan approval forms, particularly in the personal loan and credit card spaces. A further 60% said that they didn’t understand how loans were assessed.
“We conducted this on Australian borrowers to understand their thoughts on the current loan approval process, and to get their honest view on what’s going through their mind when they’re applying for a loan, in terms of sharing the completely accurate picture of their financial position,” said Mat Demetriou, general manager of decision analytics ANZ at Experian.
“We uncovered some interesting findings, the headline of which is that one fifth of Australians admit to telling white lies on their credit application. I think the reason for that is that there is a feeling that if they disclosed the complete pictures, it might hinder their chances of approval.”
“The common white lies that were confessed were around understating living costs, another around existing debts and investments and overstating incomes. They were interesting findings, but at the same time, probably not overly surprising.”
“We did see a lot of this come out off the back of the Royal Commission a couple of years ago. Clearly, we’re seeing a few of these things continue despite the banks being more arduous and scrupulous around addressing and assessing consumer affordability.
The study comes as politicians are debating responsible lending obligations (RLO), the rules that govern how banks approve customers for credit. Given that 20% of applicants might be misleading banks, it could factor into decision making regarding responsible lending.
“It’s a two way street,” said Demetriou. “The banks were perhaps a little bit lax in their processes around accurately qualifying this information, but at the same time, there is an onus on the consumer to present a true picture to the lender.”
“There’s longer term issues if that doesn’t happen: it’s problematic for the lender if customers go into hardship, but it’s also very troublesome for the consumer if that occurs.”
“One of the issues right now in a buoyant credit market where the home loan market is frothy and there’s a lot of FOMO going around, and if you’re a young family trying to get your first property who finds themselves getting knocked back at auctions consistently, you can become a bit desperate.”
“That FOMO ends up with you stretching the truth a little bit, which is troublesome because if interest rates increase over time or we see greater inflation, living expenses will increase and you’re in a precarious position.”
“There’s an obligation on both parties and income verification isn’t an exact science. Some consumers, when applying for a loan, might look at their expenses and see them as luxury items – eating out, expensive gym memberships etc – and might believe that, once they have a loan and increased financial obligations, these are the sort of things that I’ll compromise on and sacrifice.”
“By the letter of the law, they should be included as part of the application and process. Those are the types of things that get understated.”
CBA recently changed their Home Loan Assessment Rate, a key factor in how they decide which loans are accepted.
“It’s a very competitive market with limited differentiation in the mortgage space,” said Demetriou. “CBA are taking a pragmatic approach, and others are doing the same thing. There’s more pressure on them on the back of the Royal Commission and increased RLOs. It should be a standard practice to have a strong buffer, and in a record low interest rate environment, it’s more important than ever.”
