APRA releases draft prudential practice guide on residential mortgage lending

14.11

The Australian Prudential Regulation Authority (APRA) today released for consultation a draft prudential practice guide that provides guidance to authorised deposit-taking institutions (ADIs) on sound risk management practices for residential mortgage lending.

Residential mortgage lending has been a significant source of balance sheet growth and profitability for ADIs over a long period. Residential mortgages constitute the largest credit exposure in the Australian banking system and, for many ADIs, well over half their total credit exposures.

Draft Prudential Practice Guide 223 Residential Mortgage Lending outlines prudent practice in addressing housing credit risk within an ADI’s risk management framework, in applying sound loan origination criteria and appropriate security valuation methods, in the management of hardship loans and in establishing a robust stress-testing framework.

APRA Chairman Dr John Laker says credit standards in residential mortgage lending have been a major focus of APRA’s prudential supervision of ADIs, particularly in the current environment of strong pricing pressures in some housing markets and very active competition between lenders.

‘In this environment, APRA is seeing increasing evidence of lending with higher risk characteristics and it does not want this trend to continue. The draft prudential practice guide reinforces the importance of maintaining prudent lending standards when competitive pressures may tempt otherwise’, Dr Laker said.

The draft Prudential Practice Guide 223 Residential Mortgage Lending can be found on the APRA website.