Some home lenders overly cautious: regulators

A too cautious approach to tougher lending standards may be curbing loans to households and small business, regulators say.

A house auction in Melbourne which, with Sydney, has seen the biggest falls in house prices. Pic: Michael Klein

An overly cautious approach by some lenders to tougher lending standards may be affecting their decisions to give loans to households and small business, according to regulators.

The concern emerges in the newly published minutes of a high-level meeting between watchdogs and Treasury, as they closely monitor the housing market.

The minutes of the Council of Financial Regulators reveal the worries about the tightening of credit among council members the Reserve Bank, the Australian Prudential Regulation Authority, the Australian Securities and Investments Commission and Treasury, which met on Monday.

High on the agenda was the tightening of credit in the Australian economy in the wake of the royal commission, where banks have been shamed by the Hayne inquiry for loose lending outside the bounds of the law.

Analysts have warned this tightening could accelerate into a credit crunch, and have pointed to a 6 per cent slide in house prices across the nation, with deeper falls in Sydney and Melbourne, as evidence of the restricted market.

“A tightening of lending standards over recent years has been appropriate and has strengthened the resilience of the system,” the minutes said.

“At the same time, members agreed on the importance of lenders continuing to supply credit to the economy while they adjust their lending practices, including in response to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

“Members discussed how an overly cautious approach by some lenders to incorporating relevant laws and standards into loan approval processes may be affecting lending decisions.”

The minutes noted that the CFR would be watching developments in the market closely, although it said there was strong employment and favourable economic conditions.

It was also concerned by the rising amount of borrowing for property investment by super funds. The so-called limited recourse borrowing arrangements have surged in popularity with many SMSF owners being encourage to borrow money to invest in property.

David Murray’s Financial System Inquiry recommended banning borrowing for property investment through super, but the government dismissed the idea — one of the few recommendations not accepted by the government.

“The use of limited recourse borrowing arrangements remains relatively small, but has risen over time. Leverage by superannuation funds can increase vulnerabilities in the financial system, though near-term risks have reduced with the shift in dynamics in the housing market,” the minutes said.

Last week, RBA deputy governor Guy Debelle warned a lending slowdown could hurt the economy, in a sign the bank is fretting about the potential fallout from an emerging slump in house prices­.

“There is a risk that a reduced appetite to lend will overly curtail borrowing with consequent effects for the Australian economy,” Dr Debelle said.

The CFR also discussed introducing a mechanism to bring further clarity to the mortgage pricing market. The opaque pricing regime foisted on consumers by the major banks was slammed in an Australian Competition and Consumer Commission report this week, which found customers were being slugged a loyalty tax to the tune of tens of thousands of dollars for sticking with their lender.

“The council strongly supports improved transparency of mortgage interest rates and a working group is examining a number of options,” the minutes said.