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APRA releases final prudential practice guide on residential mortgage lending

Wednesday 5 November 2014



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

Prudential Practice Guide APG 223 Residential mortgage lending (APG 223) summarises APRA's expectations for good residential lending practices. It does not create any new prudential requirements for ADIs.

APG 223 includes guidance 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.

The guide is accompanied by a response paper that addresses the key areas raised in submissions APRA received during the public consultation on draft APG 223, released in May 2014.

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. However, for some time APRA has seen increasing evidence of residential mortgage lending with higher risk characteristics by Australian ADIs’ Mr Byres said.

‘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 released today is a continuation of APRA’s supervisory oversight of ADIs' 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 focussing on potential risks in the housing market. Earlier this year, APRA also sought assurances from boards of the largest housing lenders that they are actively monitoring lending standards.

APG 223 and the response to submissions paper can be found on the APRA website.

The Australian Securities and Investments Commission (ASIC) has also today released an updated version of its guidance on responsible lending obligations — Regulatory Guide 209 Credit licensing: Responsible lending conduct (RG 209). ADIs should consider both sets of guidance when engaging in mortgage lending.

The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, private health insurers, friendly societies, and most members of the superannuation industry. APRA currently supervises institutions holding $6 trillion in assets for Australian depositors, policyholders and superannuation fund members.