APRA, the Australian Prudential Regulation Authority and the key banking regulator, has waggled its fingers at home lenders and warned them they will be picked off individually where they engage in what the regulator believes is imprudent home lending activities, especially with investors.
APRA called an emergency meeting last night with the nation’s banks to tell them of the new limits that will prevent them from aggressively lending to investor borrowers in particular.
And if lenders are found to be engaging in imprudent lending, they could be forced to raise extra capital to hold against their home loans – a move which could impact profits, dividends and the reputation of the lender, its board and management.
The areas where APRA will concentrate include: the serviceability of loans with borrowers having to to be able to cope with home loan rates of at least 7%, with a buffer on top of that; interest only lending where ASIC will conduct an investigation to see if there has been any dodgy lending; and especially investor lending by banks and other lenders where the annual growth rate in loans exceeds 10% or more.
Rather than introduce quantitative restrictions on certain types of home loans – such as the restrictions the RBNZ introduced on loans with a high loan to valuation ratio (LVR) – APRA yesterday indicated “it will be further increasing the level of supervisory oversight on mortgage lending in the period ahead.”
“At this point in time, APRA does not propose to introduce across-the-board increases in capital requirements, or caps on particular types of loans, to address current risks in the housing sector,” the regulator told Authorised Deposit taking Institutions (ADIs) in a letter sent to them and published on its website.
APRA said it would “be paying particular attention to specific areas of prudential concern”. These it said in the letter include:
• higher risk mortgage lending – for example, high loan-to-income loans, high loan-to-valuation (LVR) loans, interest-only loans to owner occupiers, and loans with very long terms;
• strong growth in lending to property investors – portfolio growth materially above a threshold of 10% will be an important risk indicator for APRA supervisors in considering the need for further action;
• loan affordability tests for new borrowers – in APRA’s view, these should incorporate an interest rate buffer of at least 2 per cent above the loan product rate, and a floor lending rate of at least 7%, when assessing borrowers’ ability to service their loans. Good practice would be to maintain a buffer and floor rate comfortably above these levels.
ADI’s face stepped up scrutiny from APRA supervisors in the first quarter of next year. This will include reviewing ADIs’ lending practices “and, where an ADI is not maintaining a prudent approach, may institute further supervisory action. This could include increases in the level of capital that those individual ADIs are required to hold.”
APRA Chairman Wayne Byres said that while in many cases ADIs already operate in line with the expectations of regulators,”the steps announced today will help guard against a relaxation of lending standards and, where relevant, prompt some ADIs to adopt a more prudent approach in the current environment.”
"Based on our current assessment of the risk outlook, however, APRA considers that it is necessary to further increase the level of supervisory intensity in this area, to reinforce sound lending practices, with a particular focus on some specific areas of prudential concern,” APRA said in the letter to ADIs yesterday.
"This is a measured and targeted response to emerging pressures in the housing market. These steps represent a dialling up in the intensity of APRA’s supervision, proportionate to the current level of risk and targeted at specific higher risk lending practices in individual ADIs,” Mr Byers said in yesterday’s statement.
"There are other steps open to APRA, should risks intensify or lending standards weaken and, in conjunction with other members of the Council of Financial Regulators, we will continue to keep these under active review."
APRA said the moves announced yesterday “build on the enhanced monitoring and supervisory oversight of residential mortgage lending risks that APRA has put in place over the past year, which has included a major stress test of the banking industry, targeted reviews of ADIs’ residential mortgage lending and the release of detailed guidance to ADIs on sound residential mortgage lending practices.”
Lending to investors will draw special attention from APRA, as the letter to ADIs explained.
Any growth in lending to investors of 10% or more will result in APRA swooping to examine the ADI’s accounts.
"Given the currently very strong growth in investor lending, supervisors will be particularly alert to plans for rapid growth in this part of the portfolio. For example, annual investor credit growth materially above a benchmark of 10 per cent will be an important risk indicator that supervisors will take into account when reviewing ADIs’ residential mortgage risk profile and considering supervisory actions.
"The benchmark is not intended as a hard limit, but ADIs should be mindful that investor loan growth materially above this rate will likely result in a supervisory response,” APRA warned.
APRA said its heightened supervisory focus on lending standards will be conducted in conjunction with the review of interest-only lending announced yesterday by ASIC.
“ASIC will conduct a surveillance into the provision of interest-only loans as part of a broader review by regulators into home-lending standards, "ASIC said in its announcement.
The probe will look at the conduct of banks, including the big four, and non-bank lenders and how they are complying with important consumer protection laws, including their responsible lending obligations. “The review follows concerns by regulators about higher-risk lending, following strong house price growth in Sydney and Melbourne,” ASIC said.
"Through the Council of Financial Regulators, ASIC, APRA, the Reserve Bank of Australia (RBA) and the Treasury are working together to monitor, assess and respond to risks in the housing market.
“Interest-only loans as a percentage of new housing loan approvals by banks reached a new high of 42.5% in the September 2014 quarter (this includes owner-occupied and housing investment loans),” ASIC said yesterday.
ASIC Deputy Chairman Peter Kell said in the statement, “while house prices have been experiencing growth in many parts of Australia, it remains critical that lenders are not putting consumers into unsuitable loans that could see them end up with unsustainable levels of debt."
"Compliance with responsible lending laws is a key focus for ASIC. If our review identifies lenders’ conduct has fallen short, we will take appropriate enforcement action.“ he said.
