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APRA calls on credit unions and building societies to review property lending practices
19 Sep 2002
02.37
http://www.apra.gov.au/MediaReleases/Pages/02_37.aspx
The Australian Prudential Regulation Authority (APRA) has reacted to what appears to be an emerging trend in the very competitive property loans market by asking credit unions and building societies to review the soundness of their lending practices.
APRA will be communicating with banks on a series of similar matters. The agency has outlined its intended supervisory responses to any evidence of prudentially questionable practices and advised that, where appropriate, it will lift the minimum capital requirement to ensure depositors are adequately protected from unsound practices.
Although the great bulk of credit union and building society lending is sound and conservative, APRA has observed a small but growing tendency towards overly aggressive property lending. In a letter addressed to the Chief Executive Officers of credit unions and building societies, APRA’s Chief Executive, Mr Graeme Thompson outlined concerns for residential property lending:
- advance-to-valuation ratios that exceed 80 per cent without mortgage insurance and in some cases up to 100 per cent;
- credit being extended to borrowers who are only marginally qualified for the loan and without careful due diligence;
- the First Home Owners Grant counted as 100 per cent of the borrower’s required deposit, which in effect removes the need for some borrowers to contribute any personal funds;
- increased reliance on third party brokers to originate business; and
- growth in the proportion of investment property loans.
Mr Thompson said that residential property loans have historically been among the safest assets for Australian lenders. "In recent supervisory visits, however, we are seeing more and more lending practices that are questionable in their prudence. These practices are not widespread, but they are increasing due to competitive pressures," Mr Thompson said.
Building societies and credit unions have been expanding into commercial lending and APRA has also identified a number of areas for concern there, including:
- the incorrect assumption that experience in residential lending translates into expertise in commercial property lending – commercial cash flows and price movements differ materially from those in house lending;
- a lack of detailed commercial lending policies and procedures and of ongoing review of loans once advanced;
- the trend to originating loans through third party brokers, particularly outside the local service area;
- the advancement of loans to re-finance other lenders where the new terms and conditions are more generous than the previous lender’s terms and conditions, including higher advance ratios, longer maturities, and longer interest-only periods; and
- a failure to match the loan repayments properly to the underlying lessee cash flow.
As well as advising them to review their insured loan portfolio in the case of loan defaults, APRA has reminded credit unions and building societies that commercial loans must abide by criteria which include:
- being sourced and monitored by competent full time employees or directly contracted advisers who have a reasonable background in commercial property lending;
- comprehensive loan underwriting, risk rating, and risk review policies and procedures that are closely followed in practice; and
- adherence to reasonably conservative lending terms and conditions.
Commercial property portfolios without these criteria are likely to attract higher capital requirements and potentially other supervisory action.
APRA is the prudential regulator of the financial services industry including banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, friendly societies, and most members of the superannuation industry. It currently regulates $1.5 trillion in assets for 20 million Australians.