APRA reviews loans risk weighting

The Australian Prudential Regulation Authority (APRA) has released revised criteria for authorised deposit-taking institutions (ADIs) to qualify for the concessional risk-weighting of residential mortgage lending for capital adequacy purposes.

The revised criteria ensure that the 50 per cent risk-weight applies only to residential mortgage lending by ADIs which have adequate procedures to gauge the ability of the borrower to meet repayment obligations and to assess independently critical information in respect of the borrower. This new element is targeted at low-doc loans.

To be eligible for the concessional risk-weighting, ADIs must also implement:

  • policies for determining the marketability of residential properties offered as security;
  • documented procedures regarding the valuation of properties; and
  • processes for outsourcing any part of the credit assessment process to third parties.

    The revised prudential standard covering changes to the risk-weighting of residential mortgage lending comes into effect from 1 October 2004, and will need to be reflected in reporting to APRA for the quarter ending on 31 December 2004.

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