APRA issues best practice guidance for deferrals

The Australian Prudential Regulation Authority (APRA) has issued a letter to authorised deposit-taking institutions (ADIs), which has outlined acceptable practices for the management of loans transitioning from repayment holidays.

After reviewing plans for the management of deferrals – submitted by ADIs in response to a request from APRA in July – the regulator acknowledged that successful implementation “remains a critical risk” for both lenders and borrowers.

As a result, APRA stated that it expects ADIs to “exercise appropriate governance and monitoring over all aspects of the plan’s implementation”, to ensure that lenders can “identify and respond to any material issues that may arise”.

Accordingly, APRA has encouraged ADIs to consider the following areas of better practice identified during its review of plan submitted by ADIs:

• regular operational reporting to senior management to enable timely escalation of issues that may require management attention and oversight of progress against the implementation of the plan by the board/board committee; 
• allowing for sufficient time (up to six weeks) to contact customers and arrive at a credit decision prior to the expiry of the deferral, with contingencies in place for “uncontactable customers”;
• clear and well-articulated credit assessment processes in circumstances where the borrower requires additional assistance, which may include restructures, deferral extensions or hardship/default arrangements;
• material additional resourcing for the management of deferrals, including the incorporation of strong operational reporting capability, with regular oversight by executive management, and supported by contingency plans for identification, training and allocation of additional resources at short notice.

Moreover, in relation to plans which involve accessing a borrower’s superannuation to repay their loan, ADIs have been encouraged to have “appropriate controls in place to ensure they are not providing unlicensed financial product advice and are ensuring compliance with requirements for giving financial product advice. 

ADIs have ben urged to report any material issues identified during the governance and oversight of deferral management plans to APRA or the Australian Securities and Investments Commission (ASIC). 

This latest guidance offered by APRA follows its decision to expand capital concessions for loans impacted by the COVID-19 crisis.

Earlier this month, APRA removed a requirement under paragraph 8 of APS 220, which prohibits lenders from restructuring a loan subject to COVID relief more than once.

As a result, temporary capital concessions granted by APRA in the wake of the pandemic will apply to COVID-impacted loans that have been restructured on more than one occasion.  

The revision was made following consultation with the banking sector, which called on the regulator to provide “additional flexibility” for restructures in light of continued uncertainty in the economic environment.

[Related: APRA expands capital concession for COVID-impacted loans]