Regulators announce mortgage market probe

APRA and ASIC have announced a widespread investigation into interest-only loans, high LVRs and investor loans in the Australian mortgage market.

The prudential regulator has proposed a three-point plan to target high LVR loans, lending to property investors and to monitor loan affordability tests for new borrowers.

“In the context of historically low interest rates, high levels of household debt, strong competition in the housing market and accelerating credit growth, APRA has indicated it will be further increasing the level of supervisory oversight on mortgage lending in the period ahead,” APRA said in a statement.

However, the prudential regulator will not introduce across-the-board increases in capital requirements, or caps on particular types of loans, to address current risks in the housing sector.

In the first quarter of 2015, APRA supervisors will be reviewing ADIs’ lending practices and, where an ADI is not maintaining a prudent approach, may institute further supervisory action.

APRA said this could include increases in the level of capital those individual ADIs are required to hold.

APRA chairman Wayne Byres noted that while in many cases ADIs already operate in line with these expectations, the steps announced today will help guard against a relaxation of lending standards and, where relevant, prompt some ADIs to adopt a more prudent approach in the current environment.

“This is a measured and targeted response to emerging pressures in the housing market,” Mr Byres said.

“These steps represent a dialling up in the intensity of APRA’s supervision, proportionate to the current level of risk and targeted at specific higher risk lending practices in individual ADIs,” he said.

“There are other steps open to APRA, should risks intensify or lending standards weaken and, in conjunction with other members of the Council of Financial Regulators, we will continue to keep these under active review.”

Mr Byres said the steps announced today build on the enhanced monitoring and supervisory oversight of residential mortgage lending risks that APRA has put in place over the past year, which has included a major stress test of the banking industry, targeted reviews of ADIs’ residential mortgage lending and the release of detailed guidance to ADIs on sound residential mortgage lending practices.

APRA’s heightened supervisory focus on lending standards will be conducted in conjunction with the review of interest-only lending announced by ASIC.

ASIC will conduct a surveillance of the provision of interest-only loans as part of a broader review by regulators into home-lending standards.

The probe will look at the conduct of banks, including the big four, and non-bank lenders and how they are complying with important consumer protection laws, including their responsible lending obligations.

The review follows concerns by regulators about higher-risk lending, following strong house price growth in Sydney and Melbourne.

Through the Council of Financial Regulators, ASIC, APRA, the Reserve Bank of Australia and the Treasury are working together to monitor, assess and respond to risks in the housing market.

Interest-only loans as a percentage of new housing loan approvals by banks reached a new high of 42.5 per cent in the September 2014 quarter (this includes owner-occupied and housing investment loans), according to the corporate watchdog.

ASIC deputy chairman Peter Kell said that while house prices have been experiencing growth in many parts of Australia, it remains critical that lenders are not putting consumers into unsuitable loans that could see them end up with unsustainable levels of debt.

“Compliance with responsible lending laws is a key focus for ASIC,” Mr Kell said.

“If our review identifies lenders’ conduct has fallen short, we will take appropriate enforcement action."

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