APRA and residential mortgage lending

In a recent speech APRA Chair Wayne Byres explained that whilst APRA’s review of lending policies has seen serviceability assessments strengthen, investor loan growth slow, high LVR lending reduce and new interest-only lending fall it is now focussing on actual lending practices, seeking additional assurance that tighter loan policies are actually translating into more prudent lending decisions.

Mr Byres explained that APRA has three core expectations in this area:

Firstly, it’s important that lenders accurately assess borrower income and living expenses. Living expenses, in particular, are difficult to measure, and so banks often utilise benchmarks as a proxy where borrower estimates appear too low. In fact, our recent work showed the lion’s share of loans by the larger lenders are assessed using expense benchmarks, rather than the borrower’s own estimates. There is nothing wrong in principle with using benchmarks, provided they aren’t seen as a substitute for proper inquiries of the borrower about their expenses. Benchmarks also need to be genuinely representative, incorporate a degree of conservatism, and responsive to a changing external environment. We still see scope for improvement here.

Secondly, a lender should have robust controls to check for information on borrowers’ pre-existing debts, to ensure that all debt repayments are accurately factored into loan assessments. Here, the industry has been slow to adopt positive credit reporting, creating a blind spot in terms of sound credit assessments. A move to positive credit reporting is needed to mitigate this shortcoming.

Finally, there should be effective oversight to ensure that lending practices consistently meet standards, with close management of any policy overrides, and well-targeted assurance processes. Stronger policies mean little if they can be overridden, or if data deficiencies mean compliance with policy cannot be fully monitored.

Given the environment that we are in – high house prices, high household debt, low interest rates and subdued income growth – that scrutiny won’t lessen any time soon.

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