The Australian Prudential Regulation Authority (APRA) has released Prudential Practice Guide APG 223 Residential mortgage lending (APG 223) to outline prudent practices in the management of risks arising from lending secured by mortgages over residential properties, including owner-occupied and investment properties.
In response to concerns that APRA’s guidance overlapped with the National Credit Act and ASIC’s RG 209 APRA responded that its prudential interest is in ensuring that ADIs are not unduly exposed to high defaults. Such a focus is different from standards for lending behaviour that apply to individual borrowers, which are addressed in consumer protection legislation. To ensure that the guidance does not conflict with existing requirements, including the recently updated RG 209, APRA consulted with ASIC in finalising APG 223.
The role of the Board in lending
APRA specifically sets out its expectations of the Board of lenders as opposed to operational management’s role in assessing loans.
APRA expects that the Board would take reasonable steps to satisfy itself as to the level of risk in the ADI’s residential mortgage lending portfolio and the effectiveness of its risk management framework.
Whilst any significant increases in high LVR lending would, in the first instance, be a trigger for an ADI’s senior management to review risk targets and internal controls for high LVR lending. Any material changes in residential mortgage lending that may indicate a deviation from the ADI’s stated risk appetite would, however, be expected to be brought to the attention of the Board in a timely manner.
APRA’s guide specifically addresses:
- Risk management framework
- Serviceability assessments
- Third-party originated loans
- Specific loan types
- Security valuation
- Hardship loans and collections
- Stress testing
- Lenders mortgage insurance (LMI).
