The association has expressed its support for the prudential regulator’s changes to home loan serviceability guidelines, despite concerns that the reforms would increase credit risks.
Last week, the Australian Prudential Regulation Authority (APRA) finalised its proposal to scrap the 7 per cent interest rate floor for home loan serviceability assessments, effective immediately.
Instead, ADIs will be permitted to review and set their own minimum interest rate floor for use in serviceability assessments and utilise a revised interest rate buffer of at least 2.5 per cent over the loan’s interest rate.
APRA sought consultation from industry stakeholders before proceeding with its reforms, with the Mortgage & Finance Association of Australia (MFAA) among the respondents.
In its submission to APRA, the MFAA backed the proposals, supporting the regulator’s consideration for changes in the economic environment.
“We agree that the merits of a single floor rate across all lending products and customers is now unsuitable,” the MFAA stated.
“APRA guidance that allows ADIs to review and set their own minimum interest rate floor in their serviceability assessments appears to us to be appropriate.”
The broking industry association also dismissed concerns that credit risks would resurface if the interest rate floor was removed.
“The MFAA notes that there has been commentary that a reduction in the serviceability floor rate may come with an associated increase in risk,” the association stated.
“The MFAA is however of the view that, in an environment of differentiated pricing as currently exists, and given the present lower interest rate environment, that an adjustment to a more flexible floor rate as recommended in the proposal is entirely appropriate.
“We also expect that all lenders should continue to meet their obligations to make loans that are not unsuitable.”
Further, the MFAA submitted that if deemed appropriate, lenders should be permitted to use the interest rate on a particular product as the serviceability floor.
“While [APRA’s] consultation paper states that lenders can determine their own level of floor rate based on their portfolio mix, risk appetite and other circumstances, we believe lenders should not be precluded from using the interest rate on a particular loan for a customer as the most appropriate floor rate for that loan and customer,” the MFAA stated.
However, the association acknowledged that the implementation of such a regime could be “challenging for most lenders due to its inherent complexity”.
The MFAA concluded: “In our view, what has been proposed in APRA’s consultation paper strikes the correct balance between maintaining consumer protection, allowing access to credit, and ensuring an appropriate level of competition between lenders.”
APRA’s home lending reforms coincide with the Australian Securities and Investments Commission’s (ASIC) move to update its responsible lending guidance (RG 209).
ASIC is currently seeking consultation from the industry, with several stakeholders, including the MFAA, issuing their responses.
ASIC will host public hearings in August to further consult on its proposed changes, with stakeholders invited to participate in the hearings to be drawn from the groups or individuals who provided a written submission to ASIC in the first round of consultation.
The hearings will be held in Sydney and Melbourne.
Charbel Kadib is the news editor on The Adviser and Mortgage Business.
Before joining the team in 2017, Charbel completed internships with public relations agency Fifty Acres, and the Department of Communications and the Arts.
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