Mr Mott also said 86 per cent of the loans in the sample were approved on the assumption that the customers' expenses were equal to a widely-used benchmark, known as the Household Expenditure Measure (HEM).

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Financial regulators have been pushing banks to be less reliant on the HEM amid concerns it is an unrealistically low measure of the cost of living that many borrowers face in Sydney and Melbourne.

The UBS report also noted that 66 per cent of the Westpac loans had not collected itemised living expenses from customers, and in 30 per cent of the sample, "the borrower's financial position was suggested to have been misrepresented".

Mr Mott said his analysis had also found the median debt-to-income multiple among the sample home loan customers was 5.4 times, and 35 per cent of the sample had a multiple of more than seven times.

"This data raises questions regarding the quality of [Westpac's] $400 billion mortgage book (70 per cent of
of its loans)," Mr Mott wrote.

"While [Westpac] has undertaken significant work to improve its mortgage underwriting standards over the last 12 months, we expect it and the other majors to further sharpen underwriting standards given the royal commission's concerns with responsible lending."

Westpac shares were down 3.7 per cent, at $28.10, shortly after 2pm. The bank has been contacted for comment.

Mr Mott also quoted from Westpac board papers prepared last year that said the bank was a "significant outlier" - which prompted it to tighten underwriting standards last year.

The share plunge drop comes after the royal commission last month published internal reviews that revealed a series of flaws in the systems used by CBA and Westpac for checking customers' expenses, incomes and debts.

Westpac's performance in this review was particularly poor, and a memo from last July to the board's risk and compliance committee had flagged flaws in the banking industry's responsible lending processes as a "real and material risk."

The memo told committee members that although there were few problems with customers repaying loans, there was a risk of lawsuits to the bank from customers who were sold loans in breach of responsible lending laws.

Previously, the risk to the bank from responsible lending breaches was seen as fines, compensation, and damage to reputation. But now, the board needed to consider "there is a risk that responsible lending issues could impact enforceability of our security and accelerate losses in a downturn," the memo said.