APRA warns banks about 'disconcerting' credit assessments

by Julia Corderoy15 May 2015
Corporate regulator APRA has warned banks about the importance of vigilant credit assessments, after the outcomes of a hypothetical borrower survey were “a little disconcerting in places”.

Speaking at the COBA CEO & Director Forum in Sydney this week, APRA chairman Wayne Byres reinforced the significance of sound lending practices, as the proportion of home loan lending has increased over the past decade from an already dominant 55% to a little under 65%. 

Specifically, he spoke about the room for improvement when it comes to lenders’ credit assessments, following the results of a recent hypothetical borrower survey where the regulator asked a number of the larger housing lenders to provide their serviceability assessments for four hypothetical borrowers – two owner-occupiers and two investors.

“The outcomes for these hypothetical borrowers helped to put the spotlight on differences in credit assessments and lending standards. The outcomes were quite enlightening for us – and, to be frank, a little disconcerting in places,” Byres said.

“…The first surprising result from our review was the very wide range of loan amounts that, hypothetically, were offered to our borrowers. It was not uncommon to find the most generous ADI was prepared to lend in the order of 50% more than the most conservative ADI.”

One significant factor behind differences in serviceability assessments, particularly for owner occupiers, was how lenders measured the borrower’s living expenses. 

“As a regulator, it is hard to understand the rationale for large differences in what should be a relatively objective, and extremely critical, metric,” Byres said.

Of major concern, according to APRA, were the few lenders who opted to base their credit assessment on a lower level of living expenses than that declared by the borrower. 

“That is obviously a practice that should not continue, and ADIs should be making reasonable inquiries about a borrower’s living expenses. In fact, best practice (and intuition) would be to apply minimum living expense assumptions that increase with borrower incomes; this was a practice adopted by only a minority of ADIs in our survey.”

Another area of interest were the differences in the treatment of interest only loans in the hypothetical test, which included one borrower seeking a 30-year loan, with the first 5 years on an interest-only basis.

“Only a minority of surveyed ADIs calculated the ability to service principal and interest (P&I) repayments over the residual 25 year term. Despite the contractual terms, the majority assumed P&I repayments over the full 30-year term, and hence were able to inflate the hypothetical borrower’s apparent surplus income by, in our particular example, around 5%.”

Whilst Byres admitted Australian lenders are "well away" from the types of subprime lending that have caused so many problems elsewhere, the overall conclusion from the hypothetical borrower exercise was that there were “clearly examples of practice that were less than prudent”.


  • by Greg Reid 15/05/2015 9:26:29 AM

    It should stagger me that APRA (read most corporate regulators) are so out of touch that they come up with suddenly being enlightened for a practice that has existed for many years, but unfortunately it does not. Lenders target different market segments to suit their own needs and books, so should have different criteria. If they were all the same criteria, what would differentiate them other than price?

    They can change regulations like wanting specific living expenses, but how many people would know what their living expenses are? Regulation is fine but in practice, can it work?

    Where have these regulators been living the last two decades or more? Perhaps not in the real world.

  • by john 15/05/2015 9:30:40 AM

    Idiots.... higher min cost of living based on you earning more??? Serving interest only on 25 years plenty of lenders do but the rationale for serving on 30 makes plenty of sense.

    God Government employees justifying their pay packets as usual.

  • by Tom 15/05/2015 9:38:36 AM

    Now these comments would seem to support what we brokers have been saying for ages, that the internal lending processes are significantly lower then the ones we are subjected to.

    Perhaps it's time each bank lending staff member had to be compliant with NCCP guidelines.

    I know I've lost a couple of deals directly to the banks because I asked clients to sign the Compliance docs before taking an application.

    They thought I was was scamming them because they'd been pre-approved by the banks and compliance was never mentioned! Let alone having to sign some forms!!