Banking regulator, APRA has released its final prudential practice guide outlining sound risk management practices for residential mortgage lending – and it doesn’t take too kindly to brokers.
When the regulator released its draft guide in May, it was slammed by both the MFAA and FBAA chief executives.
Phil Naylor, previous CEO of the MFAA said the report was misleading for asserting that broker introduced loans are riskier than other channels – pointing to the NCCP and MFAA Code of Conduct, which both hold brokers to a high standard.
“These are stringent rules that come with heavy penalties if problems occur, providing strong protection to consumers at every step of the process. On this basis it is ludicrous to single out broker loans for special attention in the draft guide,” Naylor said.
In APRA’s response to submissions – released with the final prudential practice guide – the regulator said that although home loan loss rates were low, its data indicates that there is a “significantly higher” default rate for broker-originated loans.
As such, in its final practice guide, APRA has cautioned lenders to be judicious when dealing through the third party channel.
“In APRA’s experience, ADIs that extend loans away from their core geographic market tend to be more reliant on third-party originators. If not closely monitored, this reliance can potentially lead to additional risk and give rise to higher levels of exposure that may be outside an ADI’s risk appetite,” the final practice guide states.
, CEO of the FBAA, defended broker commissions after the draft guide claimed that commissions paid upfront tend to encourage less rigorous attention to loan application quality.
“Brokers don’t get an annual salary; they have no annual leave, no sick leave. If they’re not working they don’t get paid. Whoever in APRA has written this obviously does not know what lending is about – and that is a major worry,” White said.
In the regulator’s response to submissions, it said lenders should consider clawing back commissions where there are high levels of delinquency or process failures on loans originated by third parties.
However, the regulator did partially concede and some amendments have been made to the final guide in this area. References to specific circumstances under which claw backs should occur have been removed and the guide instead refers to the importance of ensuring remuneration arrangements ‘discourage conflicts of interest and inappropriate behaviour’.
“A prudent approach to the use of third parties for residential mortgage lending would include appropriate measures to ensure that commission-based compensation does not create adverse incentives. Such measures would include consideration of appropriate claw back provisions and ensure that incentive arrangements discourage conflicts of interests and inappropriate behaviour,” APRA’s final practice guide states.