News Corp reports Westpac insiders told The Australian the bank had expected to be approved as the second major lender for the scheme, but understood it would now be excluded in the wake of money laundering allegations against it.

On Tuesday, NAB got the green light from the National Housing Finance and Investment Corporation (NHFIC) to support the scheme.

The Australian understands Westpac’s bid was one of the two best applications reviewed by the NHFIC under strict evaluation criteria, one of which included “the reputation of the respondent”.

According to NHFIC’s request for proposal, lenders were asked to provide details of “any regulatory matter (in the last five years), or any other matter that has had or may have a material adverse effect on the reputation of your organisation. This includes any claims, litigation or threatened litigation and any investigation or adverse findings”.

Westpac has been accused of 23 million money-laundering breaches by watchdog AUSTRAC, some of which may have funded child exploitation in Southeast Asia.

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Westpac’s chief executive officer Brian Hartzer will step down on December 2 in the wake of the scandal.

The government is expected to now choose between either Commonwealth Bank or ANZ to participate in the scheme, with a decision on the second major bank and approved non-major bank lenders expected to be made by the end of the year before the scheme kicks off on January 1 2020.

The big banks could only be entitled to receive up to half of the 10,000 guarantees allocated each financial year, while a range of non-major lenders will receive the other half.

Housing Minister Michael Sukkar said this is to keep the home loan space competitive.

“These rules are designed to ensure the Government’s expectation that smaller lenders play a significant role in the First Home Loan Deposit Scheme to boost competition is met,” Mr Sukkar said.

The scheme, one of Prime Minister Scott Morrison’s key pledges at the May 18 election, allows some first home buyers to secure a home loan with a 5% deposit and not have to pay for lenders mortgage insurance (LMI). The NHFIC would then guarantee the rest of what would normally be a 20% deposit.

Applicants will be subject to an income threshold of up to $125,000 for singles and a combined income of $200,000, provided both individuals are first home buyers.

Property price caps will also apply under the scheme to reflect the median house prices and stamp duty concessions in each of the states and territories. has reached out to Westpac and NHFIC for comment.

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