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A SOARING rise in home loans approved outside serviceability requirements has prompted the nation’s financial regulator to put banks on notice and demand a “please explain.”

The ease of loans getting ticked off despite failing to meet lenders’ set criteria has been described as a “potential time bomb” waiting to happen, Financial Counselling Australia’s executive director Fiona Guthrie said this week.

Despite the Australian Prudential and Regulation Authority launching a giant crackdown on lending practices on the bigger banks at the end of 2014, new figures show a surge in “loans approved outside serviceability” requirements.

The latest data released by APRA shows in the December quarter almost $2.8 billion in home loans slipped through the big banks’ approval stages despite customers failing to meet their serviceability requirements.

This climbed from $2.04 billion in the past year — a jump of more than 37 per cent.

Based on the average loan of $300,000 this equates to more than 9000 loans getting the tick of approval by lenders this way.

The Australian Bankers Association’s chief executive officer Steven Munchenberg confirmed the banks were working with the regulator on loan serviceability issues.

“APRA is working with all authorised deposit-taking institutions to create more consistency in monitoring of loans approved outside serviceability,’’ he said.

“Banks have comprehensive and rigorous processes to assess a person’s capacity to repay.

“How banks assess serviceability may vary a little across banks but what doesn’t change is that banks will only approve loans they think can be paid back.”

In August last year APRA’s chairman Wayne Byres said the spotlight would be put on lenders approving loans without meeting proper criteria.

“A close eye will need to kept on policy overrides — in other words, the extent to which lenders

approve loans outside their standard policy parameters,’’ he said in a speech.

“There are some definitional issues that mean care is needed with this data, but the rising trend for loans to be approved outside policy needs to be watched.”

Approving loans outside serviceability criteria can occur in cases for example when a customer’s income and expenses fail to meet the lender’s serviceability requirements.

For instance they may only assess a customer on their income and not bonuses, but they have the ability to override this decision and give the light the green light.

For smaller lenders there’s been a similar alarming new — the value of loans approved outside serviceability climbed by 78 per cent.

Almost $680 million were approved in the December quarter last year despite not correctly meeting serviceability requirements — up from $382 million in December 2014.

In July last year APRA announced the major banks would have to account for more risk within their home loan books, meaning they would have to set aside more cash.

This prompted lenders to implement independent rate hikes outside of the Reserve Bank of Australia making any adjustments to the cash rate.

It is understood the regulator is aiming to have all banks implement one set criteria for loan serviceability to avoid confusion.

Ms Guthrie said it was of enormous concerns these loans were getting rubber stamped.

“It’s a worry people are getting loans approved on wonky criteria,’’ she said.

“You have either got criteria or you haven’t got criteria.”

EMAIL: sophie.elsworth@news.com.au