Powered by MOMENTUM MEDIA
subscribe to our newsletter

APRA flags deferred loan securitisation breach

ADIs are facing scrutiny of their securitisation practices after APRA identified that some have repurchased residential mortgage loans that were subject to repayment deferrals.

The Australian Prudential Regulation Authority (APRA) has written to all authorised deposit-taking institutions (ADI) revealing that it believes that it is necessary to conduct a “program of securitisation thematic reviews”, which it said has commenced and will continue into 2021.

The announcement of the review has come after APRA recently identified that some ADIs had repurchased residential mortgage loans that were subject to repayment deferral from their securitisations, along with other issues in relation to compliance with APS 120.

APRA said that it holds the view that this practice represents “implicit support”, which is a breach of regulatory standards, adding that this is inconsistent with Prudential Standard APS 120 Securitisation (APS 120), specifically paragraph 13(b).

APS 120 requires ADIs to be clearly separate from their securitisations, and to permanently transfer credit risk to the securitisation investors, except in limited pre-defined circumstances.

Advertisement
Advertisement

“APS 120 only allows ADIs to repurchase mortgages from their securitisations under limited circumstances and if the borrower is in good standing,” APRA said in its letter to ADIs.

“The intent of APS 120 is that mortgages are not repurchased by ADIs if the borrower is in hardship or the loan is of lower quality, as this would undermine the principle of a clear transfer of credit risk that is at the heart of the regulatory treatment of securitisation.”

APRA has therefore required any ADIs who have have provided implicit support to publicly disclose their repurchases as part of upcoming Pillar 3 reporting requirements.

Furthermore, they will be required to have a third party review their program’s APS 120 compliance and “mitigate the findings prior to further securitisation issuance”.

APRA warned that depending on its findings, its review of ADIs’ securitisation programs may be expanded further.

PROMOTED CONTENT


If it identifies non-compliance with APS 120, ADIs may be required to publicly disclose their non-compliance and/or be required to hold additional regulatory capital.

ADIs may also face additional consequences, including needing to engage an APRA-approved independent third party to review their compliance with the prudential standard, and APRA pre-approval of further securitisation issuance.

In the meantime, APRA has advised ADIs to ensure that they comply with the letter and intent of APS 120 and ensure that they implement procedures and controls to maintain compliance. This would apply to the documentation and ongoing management of the securitisation.

“Self-identification and timely reporting by ADIs to APRA of non-compliance will be favourably considered by APRA when determining the appropriate actions,” APRA advised.

APRA has already identified deficiencies as part of its thematic review, including:

  • little or no procedures or controls to challenge or provide oversight of ongoing securitisation operations, such as approving repurchases;
  • requirements for ADIs to repurchase loans from their securitisations under certain circumstances, in breach of APS 120 paragraph 18; and
  • considering capitalising interest to be a further advance and insufficiently considering the provision of implicit support and the guidance in Prudential Practice Guide APG 120 Securitisation for the purposes of APS 120.

[Related: Loan deferral exits pick up pace]

APRA flags deferred loan securitisation breach
APRA flags deferred loan securitisation breach
mortgagebusiness

Are you a new-to-industry broker in the process of growing your business? Then there’s some great news: The Adviser’s New Broker Academy is back in 2021 and will provide you with essential insights into cutting-edge tools, strategies and processes to fast-track to success. Don’t miss your chance to attend. To secure your FREE place, visit newbroker.com.au now!

Malavika Santhebennur

Malavika Santhebennur is the features editor on the mortgages titles at Momentum Media.

Before joining the team in 2019, Malavika held roles with Money Management and Benchmark Media. She has been writing about financial services for the past six years.

Latest News

Reverse mortgage lenders have accessed a small fraction of the potential retiree housing market in Australia, according to Deloitte. ...

Pepper Money has priced its second I-Prime deal for the year, upsizing the figure to $850 million. ...

The LMI provider has announced a new CFO following the resignation of its current CFO, effective 24 September. ...

Join Australia's most informed brokers

Do you know which lenders are providing brokers and their customers with the best service?

Use this monthly data to make informed decisions about which lenders to use. Simply contribute to the survey and we'll send you the results directly to your inbox - completely free!

How long do you think it should take to discharge a mortgage?

Website Notifications

Get notifications in real-time for staying up to date with content that matters to you.