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APRA warns banks of third-party risks

The prudential regulator has warned banks that their reliance on mortgage brokers can lead to additional risk and levels of exposure beyond a lender’s risk appetite.

Released yesterday, APRA’s final prudential practice guide for authorised deposit-taking institutions (ADIs) on sound risk management practices for residential mortgage lending details how banks can mitigate the risks of third-party distribution.

The guide, APG 223 Residential mortgage lending, summarises APRA's expectations for good residential lending practices, but does not create any new prudential requirements for ADIs.

The guide includes direction on addressing housing credit risk within an ADI’s risk management framework, applying sound loan origination criteria and appropriate security valuation methods, managing hardship loans and establishing a robust stress-testing framework.

Noting that banks typically use various direct and indirect origination channels to source home loans such as branches, telephone, brokers and online, the guide states that a prudent ADI would recognise and address the risks arising from different origination channels in its risk management framework.

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“In APRA’s experience, ADIs that extend loans away from their core geographic market tend to be more reliant on third-party originators,” it stated.

“If not closely monitored, this reliance can potentially lead to additional risk and give rise to higher levels of exposure that may be outside the ADI’s risk appetite.”

APRA chairman Wayne Byres noted that residential mortgages constitute the largest credit exposure in the Australian banking system and developments in the housing market have been a significant area of supervisory focus for APRA over much of the past decade.

“Housing lending has historically demonstrated a low and stable risk profile compared with other lending exposures in Australia,” Mr Byres said.

“However, for some time APRA has seen increasing evidence of residential mortgage lending with higher risk characteristics by Australian ADIs,” he said.

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“Publishing this guidance is part of our ongoing effort to reinforce sound lending practices. The guidance should assist ADIs to provide strong oversight and rigorous risk management of their residential mortgage lending.”

The guidance is a continuation of APRA’s supervisory oversight of bank mortgage lending portfolios, which in recent years has included more extensive data collections, on-site reviews on mortgage lending, targeted reviews on serviceability standards, and a comprehensive stress test focusing on potential risks in the housing market.

Earlier this year, APRA also sought assurances from boards of the largest mortgage lenders that they are actively monitoring lending standards.

APRA warns banks of third-party risks
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