The Australian Prudential Regulation Authority is discouraging banks from paying high up-front commissions to brokers in a crackdown on mortgage risk.
In tough draft residential mortgage lending guidelines released yesterday, APRA emphasises the importance of “prudent” lending standards, as it attempts to keep the housing market bubble in check.
This includes discouraging banks from offering high up-front commissions to brokers, to make sure incentives do not lead to extra risk taking.
“Experience has shown that commissions paid upfront tend to encourage less rigorous attention to loan application quality,” APRA says.
“Trailing commissions are more likely to provide incentives for brokers to retain and monitor customers.”
The regulator recommends commissions are clawed back when neccessary to avoid loss to the lender.
Other risk management practices APRA is pressing on lenders includes putting limits on loans relative to incomes, reporting on broker relationships and performance, stress-testing borrowers and taking care when rapidly expanding market share.
“When an ADI is increasing its residential mortgage lending at a rate materially faster than its competitors, either across the portfolio or in particular segments or geographies, a prudent board would seek explanation as to why this is the case,” APRA says.
The bank regulator warns against lenders letting lending standards slip, saying “lengthy periods of economic growth combined with low interest rates and a sustained period of rising house prices can create a sense of complacency among residential mortgage lenders”.
Comments on the draft regulations
can be made up until 21 July.
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