APRA flags deferred loan securitisation breach

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.

“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.

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]