The Australian Prudential Regulation Authority's stricter oversight of mortgage ending standards, which began at the end of 2014, has had a "material and positive" impact on standards, the regulator says.APRA general manager for industry analysis Heidi Richards said that there was a tightening of standards last year, reflecting "more sensible risk assessment practices."These practices include more realistic assessments of living costs, discounts to non-PAYG income, the inclusion of other debt in serviceability assessments and the use of appropriate interest rate floors when calculating interest rate buffers.Speaking at Macquarie University's Financial Risk Day last week, Richards said: "We were concerned that, as the housing market appeared to pick up steam, individual ADIs may face a wood for trees problem; they may be able to benchmark aspects of their own lending standards against peers and feel justifiably comfortable that they are in the pack."However, they may not clearly see the impact on the system as a whole."Richards said a related risk was adverse selection. "When borrowers now have many channels to obtain information about lending criteria across the industry, the lowest quality borrowers could be expected to be directed to the lenders with the loosest standards. This may not be evident to individual lenders."APRA benchmarked lending policies, taking surveys of 17 lenders in December 2014 and than again in September last year.The first survey showed that it was not uncommon for the most generous ADI to offer to lend 50 per cent more than the most conservative.On the income assessment side, the big difference was the discount applied to non-PAYG income, such as rent from investment properties.In December 2014 APRA found that some ADIs were not applying any discount to non-PAYG income, whereas other discounted by 20 per cent or more to reflect uncertainty.Richards said: "All ADIs are now applying discounts on uncertain sources of income. And some have increased their discount levels."APRA also found that some lenders were including expected future tax benefits from negative gearing on a rental property in the calculation of income. APRA's view is that it is prudent practice not to rely on negative gearing "to get a borrower over the line."On the expense side, some lenders used standard benchmarks to calculate living costs. In the most recent survey APRA found that all lenders were using the customer's declared expenses where those figures were higher than the benchmark figure.In estimating serviceability, since the end of 2014 all lenders in the APRA survey have brought their assessment rate up to a floor of seven per cent and most are above this level.When assessing the serviceability of interest-only loans APRA was keen to see lenders apply serviceability criteria to principal amortisation as well as interest payments. APRA was concerned that some lenders were not reflecting amortisation over short repayment terms."We have since clarified expectations in this regard," Richards said.Richards said lenders had made progress in meeting the regulator's expectations. However, there is still work to do.