A ratings agency has said the growth of the broker channel is an area of potential risk when it comes to verifying expenses.
In a report discussing the decline of lenders mortgage insurance (LMI) in residential backed mortgage securities, S&P Global Ratings looked at the changing lending space and regulatory environment.
Discussing debt-serviceability standards, it said the average household debt to income ratio had grown, driven by strong property price growth and low interest rates.
The group said it expected to see an increased regulatory focus on the verification processes lenders use to determine borrowers’ living expenses, adding that the growth in third-party originated lending was an area of potential risk.
It went on to say that with third parties providing borrower information to lenders it led to a risk of broker fraud if procedures were not in place to verify the “accuracy and completeness of the information”.
It said, “Third-party originated loans were a common origination channel before the financial crisis.
“Their share of new lending declined to 36% after the financial crisis in the authorized deposit-taking institutions sector. By June 2018, it had increased to 50% of new lending, according to APRA statistics.
“The involvement of brokers and third-party originators in the RMBS sector is limited to the referral of borrowers to lenders, with brokers performing more of an intermediary role between the lender and borrower.
“Credit decisions generally are made centrally, and third parties are not involved. However, third parties can provide borrower information to lenders, leading to a risk of broker fraud if appropriate procedures are not in place to verify the accuracy and completeness of the information provided.
“Some lenders have processes in place to verify the information they receive from brokers, but practices vary. With the growing reliance on this origination channel to expand market share, this will be an area of increased regulatory focus.
“S&P Global Ratings believes debt-serviceability standards have increased in line with regulatory expectations, but there is always room for improvement.”
The report was titled ‘Does The Declining Use Of Lenders' Mortgage Insurance Make Australian RMBS 'Less Prime'?’.
It looked at the declining use of LMI, which the group said reflected the reduced need for high loan to value ratio lending, which has slowed in the regulatory environment.