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Liar loans could return to haunt ASX bank shares as 1-in-5 borrowers lie to lenders

The Motley Fool logo The Motley Fool 22/06/2021 Brendon Lau
a man holding a phone: Liar loan ASX banks banker with calculator tries to make sense of the Big Four banks, indicating tough time ahead for banking shares © Provided by The Motley Fool Liar loan ASX banks banker with calculator tries to make sense of the Big Four banks, indicating tough time ahead for banking shares

Around 20% of borrowers lie on their loan applications and that should make ASX banks nervous.

A survey by credit reporting agency Experian found that borrowers are hiding the truth in order to secure loans, reported the Australian Financial Review.

While the issue of so-called “liar loans” aren’t new, these loans could become a bigger headache for lenders in a rising interest rate environment.

ASX bank shares rallying today

The news hasn’t dampened enthusiasm for ASX banking shares. Australia’s largest mortgage lender, the Commonwealth Bank of Australia (ASX: CBA) share price, jumped 2.2% to $100.23 on Tuesday.

CBA is closely followed by the Australia and New Zealand Banking GrpLtd (ASX: ANZ) share price with a 2.1% bounce, Westpac Banking Corp (ASX: WBC) share price with a 1.8% increase and National Australia Bank Ltd. (ASX: NAB) share price with a 1.2% advance.

Liar loans yet to hurt ASX banks

The Experian survey of 1,000 mortgagees noted that around 21% of liar loans relate to overestimating income, while 28% were understating living expenses.

Further, 20% of these untruths were for hiding a pregnancy and a quarter withheld information about job changes.

BNPL also in the firing line

What could also be alarming for Afterpay Ltd (ASX: APT) and Zip Co Ltd (ASX: Z1P) shareholders is that the survey claimed that buy now, pay later (BNPL) services were highly vulnerable to inaccurate information.

This will give BNPL opponents arguing for more industry regulation extra ammunition to attack the fledging sector.

Rising rates from record lows exacerbate liar loan risks

But perhaps ASX banks won’t be caught with their pants down. They have recently moved to tighten lending standards. This is probably due to their belief that interest rates will rise sooner rather than later, although they may have also caught wind of this potential issue.

A lift in rates at a time when borrowers have gotten comfortable with record low debt costs could deliver a shock to the system.

Throw record high house prices into the mix and you can see how liar loans can come back to bite the banks.

What may exacerbate this issue is the attitude of borrowers. Experian said that most borrowers believe that the banks are either fully or partially to blame if they can’t repay their loans!

Silver-lining

But it isn’t all bad news. Earlier studies from UBS, which was the first to flag this issue with liar loans, found that nearly 40% of mortgage applications were liar loans in 2019.

This is up from around 33% from the UBS survey in 2018. The fact that Experian “only” found 20% of borrowers lied, could be considered a big step up.

Of course, that’s taking the glass-half-full view of this risk.

The post Liar loans could return to haunt ASX bank shares as 1-in-5 borrowers lie to lenders appeared first on The Motley Fool Australia.

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Brendon Lau owns shares of Commonwealth Bank of Australia, National Australia Bank Ltd., Westpac Banking Corp and Australia and New Zealand Banking GrpLtd. Connect with me on Twitter @brenlau.

The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended AFTERPAY T FPO and ZIPCOLTD FPO. The Motley Fool Australia owns shares of and has recommended AFTERPAY T FPO. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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