* Westpac says mortgage book continues to do well
* Shares touch 2-yr low on UBS "sell" report, first in decades
* Inquiry hears industry associations complicit in wrongdoing
By Paulina Duran
SYDNEY, April 26 (Reuters) - Australia's Westpac Banking Corp WBC.AX was forced to defend the quality of its mortgage book on Thursday as documents it provided to a judicial inquiry into financial sector wrongdoing raised doubts about its integrity and sparked a share sell-off.
A report published by UBS said that mininum income verifications had not been completed for almost 30 percent of a sample of 420 loans made by Westpac in the year to September 2016.
In two thirds of the cases, itemised living expenses had not been collected, UBS said in the report, which delved into reams of mortgage data and documents provided to the independent judicial inquiry, known as a Royal Commission.
"This data raises questions regarding the quality of WBC's A$400 billion ($302.8 billion) mortgage book," UBS said in the report, which also downgraded the broker's recommendation for Westpac to "sell" for the first time since at least 1998.
Analysis of Westpac's 2016 mortgage data showed its debt-to-income level was much higher than UBS had initially believed, the Swiss bank added.
"Since these reports in mid-2017 Westpac has started to tighten underwriting standards. However, we believe there may be much further to go before the concerns of the Royal Commission are addressed," UBS analysts said in the report.
Westpac shares fell as much as 4.4 percent to A$27.90 after the report, to their lowest since July 2016, while other banks were also lower. The stock closed 3.6 percent lower at A$28.10.
Nine out of 10 controls to ensure borrowers provided accurate financial information to the bank were graded "ineffective" in either design or implementation by a confidential report addressed to the bank's board in May last year, according to documents subpoenaed by the inquiry.
In a statement to the exchange, Westpac noted the "control observations and qualifications" in the independent report should not be interpreted as a breach of regulations.
"Westpac's mortgage book continues to perform well," Westpac Chief Financial Officer Peter King said in the statement.
"Our mortgage delinquencies and losses remain low both relative to historical and industry averages.”
The Royal Commission has revealed the country's top banks routinely and repeatedly breached laws when issuing home loans, credit cards and other consumer loans. final recommendations could lead to criminal or civil prosecutions as well as greater regulation on the financial sector, including Westpac, Commonwealth Bank of Australia CBA.AX , National Australia Bank NAB.AX , and Australia and New Zealand Banking Group ANZ.AX .
In another internal document from July last year, a Westpac executive tells the board the banking regulator had raised concerns over the health of the bank's residential mortgage portfolio and its position as a "significant outlier" it its proportion of high-risk lending.
Westpac this month moved to tighten living expense assessments of new home loan customers, in order to make sure they could afford to service the debt.
From April 17, it is also requesting online banking details of potential borrowers, to check their income and spending habits.
The inquiry, which is in its fourth week of public hearings, on Thursday heard that the financial planning industry associations had turned a blind eye to widespread misconduct by advisers with the big banks and other large companies.
The Financial Planning Association and the Association of Financial Advisers were complicit in keeping misconduct secret and had failed to expel some members who had been banned by the corporate regulator, the inquiry heard.
($1 = 1.3208 Australian dollars)