APRA worried about growth of high risk lending in Australia’s $1.3 trillion mortgage market


THE nation’s banking watchdog says it has witnessed “increasing evidence” of high-risk lending in the $1.3 trillion mortgage market as the scrap for market share intensifies in the face of low lending rates.

The Australian Prudential Regulatory Authority has laid down the law to banks and other lenders with a series of new draft guidelines aimed at sharpening risk management.

The Reserve Bank has maintained official interest rates at a historic low of 2.5 per cent since August last year.

That’s created a hothouse atmosphere among banks which are fiercely competing to grab as much of the mortgage market as possible.

“In this environment, APRA is seeing increasing evidence of lending with higher risk characteristics and it does not want this trend to continue,’’ APRA chairman John Laker said.

“The draft prudential practice guide reinforces the importance of maintaining prudent lending standards when competitive pressures may tempt otherwise,’’ Dr Laker said.


The residential mortgage market underpins lending in Australia but equally provides the greatest amount of credit exposure in the nation’s banking system.

The draft outlines best practice for lenders, including the need for sound criteria at the loan’s origin, appropriate security valuation practices, the management of hardship loans and a robust stress-testing framework.

The guidelines also underscore the responsibility of boards to cast a sceptical eye over lending growth.

“When (an institution) is increasing its residential mortgage lending at a rate materially faster than its competitors ... a prudent board would seek explanation as to why this is the case,” the guidelines said.

“Rapid relative growth could be due to an unintended deterioration in the (institution’s) loan origination practices.’’

In such a case APRA expects an institution’s risk management framework “would facilitate rapid and effective measures to mitigate any consequences”.

The guidelines also examine the standard market practice to pay brokers either an upfront or trailing commission.

It says “experience has shown” that commissions paid upfront tend to encourage less rigorous attention to loan application quality.

It says trailing commissions are more likely to provide incentives for brokers to retain and monitor customers.

But the guidelines say a prudent institution “would recognise the incentives and potential

risks inherent in its broker remuneration structure”.

“It would have in place appropriate monitoring and controls to guard against incentives to pursue loans with inadequate or false verification, marginal serviceability, excessive leverage or unsuitable terms for a borrower.”