Banks get a year to assess changes

Banks must conduct a full serviceability assessment for customers who have changed their loan conditions within a year, APRA says.

The prudential regulator has clarified that banks should not wait longer than a year to conduct a full serviceability assessment for customers who have changed their loan conditions.

“Where changes to loan conditions are made that result in an interest-only period being granted without a normal serviceability assessment, APRA expects that a reasonable period for such an arrangement would not exceed 12 months,” the regulator said, answering a number of frequently asked questions on its website.

APRA issued the guidance in relation to the expectations of its supervisors during the disruption caused by the COVID-19 pandemic.

It said the questions would be updated “periodically over the coming months”, with the first set covering serviceability assessments in residential mortgage lending and the regulatory capital approach to loan repayment deferrals.

The nation’s banks have agreed to defer interest and principal repayments for six months if customers are experiencing stress as a result of the crisis.

On the issue of loan serviceability, APRA said it accepted there could be challenges for banks when evaluating the long-term impact of economic stress on borrowers.

“However, this should not prevent changes to loan conditions where these are otherwise assessed to be prudent,” the regulator said.

“Over the next six-month period, APRA therefore accepts that some banks may not be able to complete a full serviceability assessment for borrowers seeking a change in their loan conditions.

“Such changes may include converting principal and interest to interest only or for the extension of a loan term.”

APRA also confirmed its capital treatment for deferred loans, with banks not required to treat the deferral period as an arrears period.

This applied to a broad class of loans that were otherwise performing, including loans that were less than 90 days past due and unimpaired at the time of the deferral.

The approach also covered small business loans of up to $10m where banks offered a repayment deferral of up to six months.

APRA reaffirmed that banks should check in with the borrower at the end of the initial three-month period, although this did not apply to small business loans.

“The check should determine whether there is any objective evidence that it is no longer appropriate to maintain the regulatory capital approach, given for example more permanent changes in the borrower’s financial circumstances,” APRA said.

“Authorised deposit taking institutions should not be avoiding recognition of losses where inevitable.”

The check could be less rigorous than a full credit risk assessment, but it could not be an automatic decision to extend the regulatory capital approach.

Banks could use information gathered through their own sources, credit reporting agencies and inquiries with borrowers, and evidence should be kept to show the check was conducted.

They also had to publicly disclose the nature and terms of any repayment deferrals given to the broad class of loans.