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Brokers: Watch out for ‘liar loans’

Brokers: Watch out for ‘liar loans’
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“Liar loans” are becoming more popular with younger borrowers. What does it mean and what are the impacts of this trend?

A liar loan is where a borrower intentionally inflates income or understates debt. This can prove to cause issues not just for the individual but the whole market. It may also be more common than you think.

According to a study from FICO, 30 per cent of Aussies believe exaggerating income on a loan application is justifiable.

It’s far more popular with the younger generations, with this figure rising to 53 per cent of Gen Z. This drops to just 12 per cent of those aged 65 and over.

When it comes to mortgages, 29 per cent of Australians believe inflating income on applications is either acceptable or routine. This climbs to 52 per cent among Gen Z.

Clearly there is a generational divide. But with the state of the housing market and how Gen Z have been exposed to constant unaffordability, it’s easy to see why opinions would differ.

According to FICO’s senior decisioning, risk and analytics expert in Australia, Corey Smith, the trend is more pronounced in the larger cities of Sydney and Melbourne where house prices outpace income growth.

“Borrowers (especially young people still building careers and assets) may feel pressured to misrepresent finances just to secure a loan,” he said.

But what are the consequences of liar loans? Smith said there is a “significant” risk to borrowers, lenders and the economy if this trend persists.

“For lenders, these loans increase default rates, exposing financial institutions to bad debt and regulatory scrutiny. For borrowers, the risk is personal financial distress, foreclosure and long-term credit damage. At a macro level, widespread misrepresentation can destabilise housing markets and contribute to financial crises, as seen in the 2008 crash in the USA,” he said.

Despite liar loans’ increasing popularity, insurance fraud still remains a taboo topic, with 73 per cent of Aussies against the practice.

With housing affordability remaining tight and economic trouble placing constant strain on the cost of living, brokers should be aware and prepared of the possibility of encountering a liar loan.

“Lenders using analytic software can flag applications that warrant closer investigation. Brokers can also look for discrepancies between stated income and actual financial data, unusually high debt-to-income ratios and inconsistencies in supporting documents. Cross-referencing credit bureau data, tax returns and transactional records can help identify red flags,” Smith added.

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