It will be harder to get a mortgage, car loan or a credit card increase if banks take heed of the banking royal commission's call to verify customers' expenses.
Commissioner Kenneth Hayne QC has called out the banks for failing to fulfil their legal obligations to make reasonable inquiries about consumers' financial situation and take reasonable steps to verify the information.
It means banks will have to do more to verify customers' income and their actual living expenses, rather than relying on the widespread use of the benchmark household expenditure measure (HEM).
Mr Hayne said the evidence showed that more often than not, each of the big four banks took some steps to verify the income of people applying for a home loan.
But much more often than not, none of them took any steps to verify the applicant's outgoings.
Verifying outgoings was considered "too hard".
"But what was meant by verifying outgoings being 'too hard' was that the benefit to the bank of doing this work was not worth the bank's cost of doing it," Mr Hayne said in his interim report on Friday.
Mr Hayne said the HEM was used to calculate only modest weekly household expenditure and took no account of whether a particular borrower had unusual household expenses, such as if they were caring for someone with special needs or an aged parent.
"It follows that using HEM as the default measure of household expenditure does not constitute any verification of a borrower's expenditure.
"On the contrary, much more often than not it will mask the fact that no sufficient inquiry has been made about the borrower's financial position."
Mr Hayne noted the practice of using HEM as the default measure of expenses extends well beyond home loans, with entities making car loans and considering credit card limit increases also taking no steps to verify household expenditure.
Banking analysts expect a tightening of lending standards since the royal commission began will now become more pronounced, further restricting the availability of credit.
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