APRA revisions to the credit risk management framework for ADI residential mortgage lending

In the current environment, with high household indebtedness and rising interest rates, the Australian Prudential Regulation Authority (APRA) says it is important that authorised deposit-taking institutions (ADIs) are prudently managing risks in residential mortgage lending. 

APRA has published its finalised amendments to its prudential framework through new requirements on ADIs set out in an attachment to APRA’s prudential standard for credit risk, Prudential Standard APS 220 Credit Risk Management. The attachment, Macroprudential policy credit measures, comes into effect from 1 September 2022.

Banks will need to have systems in place to limit growth in higher risk residential mortgage lending, such as loans at high debt-to-income multiples or high loan-to-valuation ratios.

APS 220 Attachment C – Macroprudential policy: credit measures applies to credit exposures in Australia. Credit exposures in Australia are exposures where the majority of the collateral value securing the loan is located in Australia, or for unsecured loans where the ultimate risk of the exposure is located in Australia.

For residential mortgage lending, an ADI must apply a buffer over a loan’s interest rate to assess the serviceability of a borrower. The serviceability buffer must be applied to the interest rate on the loan to be paid by the borrower, ignoring any discounted introductory rates offered for a limited period at origination of the loan. The level of the serviceability buffer must be at least 3.0 per cent, unless determined otherwise by APRA. APRA may vary the minimum level of the buffer between 2.0 and 5.0 per cent.

For residential mortgage lending, an ADI must ensure that it has the ability to limit the extent of lending in the following loan types:
(a) lending with a debt-to-income ratio greater than or equal to four times or six times;
(b) lending with a loan-to-valuation ratio greater than or equal to 80 per cent or 90 per cent;
(c) lending for the purposes of investment;
(d) lending on an interest-only basis; and
(e) lending with a combination of any two of the types specified in (a) to (d).

APRA has made the following comments in response to feedback:

  • APRA says that ADIs would be given at least one month notice, prior to any lending limits being implemented.
  • It will not agree to any specific carve outs, such as construction loans, when future risks are not known, as they could reduce the effectiveness of APRA’s macroprudential policy toolkit.
  • For those loan types specified in Attachment C of APS 220, prudent ADIs would have systems in place to monitor growth in loans outstanding and new originations on at least a monthly basis.
  • APRA has clarified that HECS-HELP loans and debt incurred through BNPL schemes would be included in Debt-to-income (DTI) ratios.
  • Under the new attachment to APS 220, APRA may require ADIs to publicly disclose the level of lending against any limits specified by APRA, for the period in which the limits apply. PRA will consider ACCC advice as part of any future decisions to require public disclosure of macroprudential policy on a case by case basis.

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David Jacobson

Author: David Jacobson
Principal, Bright Corporate Law
About David Jacobson
The information contained in this article is not legal advice. It is not to be relied upon as a full statement of the law. You should seek professional advice for your specific needs and circumstances before acting or relying on any of the content.

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