Big banks are moving to plug gaps in response to reports that hundreds of mortgages have been approved based on falsified documents about foreign income.

Westpac and ANZ have admitted they approved home loans based on fraudulent documents.

Reports say they lent money to Australian residents based on income that they claimed they had earned overseas.

The fraudulent practices were revealed in internal investigations, and the banks have alerted police and ASIC already.

The banks say the issue only affects a small amount of borrowers.

Reports say several mortgage brokers are under investigation for manufacturing fake Chinese income documents.

Economist Lindsay David reflected on the seemingly low lending standards of big banks in a recent interview with the ABC.

“The banks have trashed their lending standards over a prolonged period of time with significant evidence of banks massaging people's incomes in their loan application forms to make them look a lot more creditworthy than what they really are, which is essentially fraud,” Mr David said.

“The banks would do this for various reasons. One is the highly competitive environment between the banks. Second of all is profitability.

“The safer your mortgage book looks, the lower it costs you to do business — simple as that. If you show that your borrowers are very creditworthy then you are going to get cheaper funding costs, and that's a win-win for the bank — until the whole system breaks down, obviously.”

Westpac, ANZ and now NAB say they are tightening their provision of home loans to foreign buyers.