Digital Finance Analytics (DFA) Blog – Page 1039

Vehicle Sales Down, Slightly – ABS

The ABS released the New Motor Sales statistics to November 2014 today. The trend estimate (92 324) has decreased by 0.2% when compared with October 2014. The trend estimate for year to date has new vehicle sales reaching the one million mark. The November 2014 seasonally adjusted estimate (91 869) has decreased by 0.6% when compared with October 2014.

When comparing national trend estimates for November 2014 with October 2014, sales of Passenger and Other vehicles decreased by 0.5% and 0.7% respectively. Over the same period, Sports utility vehicles increased by 0.4%. When comparing seasonally adjusted estimates for November 2014 with October 2014, sales of Passenger and Other vehicles decreased by 1.1% and 2.3% respectively. Over the same period, Sports utility vehicles increased by 1.3%.

Five of the eight states and territories experienced a decrease in new motor vehicle sales when comparing November 2014 with October 2014. Western Australia recorded the largest percentage decrease (1.3%), followed by both Queensland and the Australian Capital Territory (0.6%). Over the same period, the Northern Territory recorded the largest increase in sales of 0.7%. Five of the states and territories experienced a decrease in new motor vehicle sales when comparing November 2014 with October 2014. Western Australia recorded the largest percentage decrease (2.2%) followed by New South Wales (2.0%) and the Northern Territory (1.2%). Victoria and the Australian Capital Territory both recorded an increase of 1.7%.

ASIC Class Order Clarifies Fee and Cost Disclosure

ASIC today released a class order clarifying key fee and cost disclosure requirements for Product Disclosure Statements (PDS) and periodic statements for superannuation and managed investment products.

The class order, which ASIC consulted on in September 2014. addresses:

Disclosure of costs of investing in interposed vehicles
Disclosure of indirect costs
Removal of doubt that double counting of some costs for superannuation products is not required, and
The appropriate application of the consumer advisory warning.

The class order will apply to all PDS for superannuation and managed investment products from 1 January 2016. It will also apply to periodic statements that must be given for these products by 1 January 2017 or later.

Commissioner Greg Tanzer said, ‘For consumers to make effective decisions about their investments and superannuation they need information they can trust and that allows them to compare across products. These changes will help industry to improve the quality of their disclosure and promote consistency between products.

‘Consumers can have more confidence that industry is disclosing fees and costs more accurately and in the same manner, ensuring comparisons between products are made on the same basis.’

Investment Loans 50.8% Of Mortgages

The ABS released their finance data to October 2014. The total value of owner occupied housing commitments excluding alterations and additions rose 0.2% in trend terms, and the seasonally adjusted series rose 1.0%.

The trend series for the value of total personal finance commitments rose 0.7%. Fixed lending commitments rose 1.1% and revolving credit commitments rose 0.1%. The seasonally adjusted series for the value of total personal finance commitments rose 6.5%. Revolving credit commitments rose 11.2% and fixed lending commitments rose 3.0%.

The trend series for the value of total commercial finance commitments fell 2.6%. Revolving credit commitments fell 7.9% and fixed lending commitments fell 0.6%. The seasonally adjusted series for the value of total commercial finance commitments fell 2.2%. Revolving credit commitments fell 11.5%, while fixed lending commitments rose 0.9%.

The trend series for the value of total lease finance commitments rose 0.8% in October 2014 and the seasonally adjusted series fell 4.7%, following a fall of 0.9% in September 2014.

The housing lending data shows another record was achieved last month with 50.8% of mortgages for investment purposes. Another record.

This is starkly show by plotting the flows of owner occupied versus investment loans over the past few years.

Housing Finance Regulation – Tweaked, Not Reformed

Fresh on the heels of the FSI report, the core thesis of which is that the Australian Banks are too big to fail, so capital buffers must be increased to protect Australia from potential risks in a down turn (a “mild” crash could lead to the loss of 900,000 jobs and a $1-2 trillion or more cost to the economy), it was interesting to see the publication yesterday by APRA of the guidelines for mortgage lending, and ASIC’s targetting interest only loans. This action is coordinated via the Council of Financial Regulators (CFR). This body is the conductor of the regulatory orchestra, and has only had an independant website since 2013. It is the coordinating body for Australia’s main financial regulatory agencies. It is a non-statutory body whose role is to contribute to the efficiency and effectiveness of financial regulation and to promote stability of the Australian financial system. The Reserve Bank of Australia (RBA) chairs the Council and members include the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC), and The Treasury. The CFR meets in person quarterly or more often if circumstances require it. The meetings are chaired by the RBA Governor, with secretariat support provided by the RBA. In the CFR, members share information, discuss regulatory issues and, if the need arises, coordinate responses to potential threats to financial stability. The CFR also advises Government on the adequacy of Australia’s financial regulatory arrangements.

Whilst FSI recommended beefing up ASIC, and introducing a formal regulatory review body, it did not fundamentally disrupt the current arrangements. Interestingly, CFR is a direct interface between the “independent” RBA and Government.

So, lets consider the announcements yesterday. None of the measures are pure macroprudential, but APRA is reinforcing lending standards by introducing potential supervisory triggers (which if breached may lead to more capital requirements, or other steps) using an affordability floor of 7% or more (meaning if product interest rates fell further, banks could not assume a fall in serviceability requirements) and at least an assumed rise in rates of 2% from current loan product rates. In addition, any lender growing their investment lending book by more than 10% p.a. will be subject to additional focus (though APRA makes the point this is not a hard limit). These guidelines relate to new business, and does not directly impact loans already on book (though refinancing is an interesting question, will existing borrowers who refinance be subject to new lending assessment criteria?) ASIC is focussing on interest-only loans, which are growing fast, and are often related to investment lending.

The banks currently have different policies with regards to serviceability buffers. Analysts are looking at Westpac in the light of these announcements, because it grew its investment housing lending book fast, uses 180 basis points serviceability buffer and an interest rate floor of 6.8%. Investment property loans make up ~45% of WBC’s housing loan portfolio (compared with the majors average of ~36%), and has grown at ~12% year on year this financial year (compared with the average across the majors of ~10%). WBC made some interesting comments in their recent investor presentation relating to investment loans, highlighting that investors tended to have higher incomes than owner occupied loans.

Other banks have different underwriting formulations with buffers of between 1.5% and 2.25% buffers. ASIC has of course also stressed that lenders must consider borrowers ability to repay and take account other expenditure. There is evidence of the “quiet word from the regulator” working as recently we have noted some slowing investment lending at WBC (currently they would be below the 10% threshold) and amongst some other lenders too. However, some of the smaller lenders may be impacted by APRA guidance, given stronger recent growth.

What does this all mean. First, we see now what APRA meant in their earlier remarks “collecting additional information, counselling the more aggressive lenders, and seeking assurances from Boards of our lenders that they are actively monitoring lending standards. We’re about to finalise guidance on what we see as sound mortgage lending practice”. Second, we do not think this will materially slow down housing investment lending, and this is probably what the RBA wants, given its belief consumer spending should replace mining investment as a source of growth. The regulators are trying to manage potential risks in the system, by targetting higher risk lending whilst letting housing lending continue to run. Third, it leaves open the door to macroprudential later if needed. Lastly, existing borrowers may be loathe to churn if they are now required to meet additional buffers. This may slow refinancing, and increase longevity of loans in portfolio (and loans held longer are more profitable for the banks).

ASIC To Investigate Interest-Only Loans

In a parallel announcement, ASIC will conduct a surveillance into the provision of interest-only loans as part of a broader review by regulators into home-lending standards. The probe will look at the conduct of banks, including the big four, and non-bank lenders and how they are complying with important consumer protection laws, including their responsible lending obligations. The review follows concerns by regulators about higher-risk lending, following strong house price growth in Sydney and Melbourne.

Through the Council of Financial Regulators, ASIC, APRA, the Reserve Bank of Australia (RBA) and the Treasury are working together to monitor, assess and respond to risks in the housing market. Interest-only loans as a percentage of new housing loan approvals by banks reached a new high of 42.5% in the September 2014 quarter (this includes owner-occupied and housing investment loans). ASIC Deputy Chairman Peter Kell said, ‘While house prices have been experiencing growth in many parts of Australia, it remains critical that lenders are not putting consumers into unsuitable loans that could see them end up with unsustainable levels of debt. ‘Compliance with responsible lending laws is a key focus for ASIC. If our review identifies lenders’ conduct has fallen short, we will take appropriate enforcement action.’

Background

The Australian Prudential Regulation Authority (APRA) announced today it has written to all authorised deposit-taking institutions (ADIs) to set out plans for a heightened level of supervisory oversight on mortgage lending in the period ahead. See the earlier DFA post in relation to this.

With interest-only loans, a borrower’s repayment amount will only cover the interest on the loan. The principal amount borrowed will not reduce unless the borrower chooses to make extra repayments. Paying interest-only means that a borrower will pay more interest over the term of the loan. Some borrowers choose interest-only loans to maximise the amount they can borrow, especially if it is for investment purposes. Loans are usually only interest-only for a set period of time, after which the borrower will either need to increase their repayments to start reducing the principal, or repay the loan in full.

Although interest-only loans can be appropriate in the right circumstances, interest-only loans can raise a number of risks, such as:

Whether the borrower can only afford a loan because it is interest-only
Whether the borrower can afford principal and interest repayments at the end of the interest-only period, and
Whether the borrower understands the impact of not making principal and interest repayments.

The responsible lending obligations require credit licensees to ensure that consumers are only placed in credit contracts that meet their requirements and objectives and that they can meet their repayment obligations without substantial hardship. In doing this, credit licensees must make reasonable inquiries into an individual consumer’s specific circumstances and take reasonable steps to verify the consumer’s financial situation.

In August 2014, the Federal Court handed down its first decision on the responsible lending obligations: ASIC v The Cash Store (in liquidation) [2014]. The Federal Court’s decision made it clear credit licensees must, at a minimum, inquire about the consumer’s current income and living expenses to comply with the responsible lending obligations. Further inquiries may be needed depending on the circumstances of the particular consumer.

In response, in November 2014 ASIC updated Regulatory Guide 209 Credit licensing: Responsible lending conduct to incorporate the general findings of the Federal Court on the responsible lending obligations for credit licensees. ASIC also updated RG 209 to make it clear that credit licensees cannot rely solely on benchmark living expense figures rather than taking separate steps to inquire into borrowers’ actual living expenses.

APRA Reinforces Sound Residential Mortgage Lending Practices

The Australian Prudential Regulation Authority (APRA) has today written to authorised deposit-taking institutions (ADIs) outlining further steps it plans to take to reinforce sound residential mortgage lending practices. These steps have been developed following discussions with other members of the Council of Financial Regulators.

In the context of historically low interest rates, high levels of household debt, strong competition in the housing market and accelerating credit growth, APRA has indicated it will be further increasing the level of supervisory oversight on mortgage lending in the period ahead.

At this point in time, APRA does not propose to introduce across-the-board increases in capital requirements, or caps on particular types of loans, to address current risks in the housing sector. However, APRA has flagged to ADIs that it will be paying particular attention to specific areas of prudential concern. These include:

higher risk mortgage lending — for example, high loan-to-income loans, high loan-to-valuation (LVR) loans, interest-only loans to owner occupiers, and loans with very long terms;
strong growth in lending to property investors — portfolio growth materially above a threshold of 10 per cent will be an important risk indicator for APRA supervisors in considering the need for further action;
loan affordability tests for new borrowers — in APRA’s view, these should incorporate an interest rate buffer of at least 2 per cent above the loan product rate, and a floor lending rate of at least 7 per cent, when assessing borrowers’ ability to service their loans. Good practice would be to maintain a buffer and floor rate comfortably above these levels.

In the first quarter of 2015, APRA supervisors will be reviewing ADIs’ lending practices and, where an ADI is not maintaining a prudent approach, may institute further supervisory action. This could include increases in the level of capital that those individual ADIs are required to hold.

APRA Chairman Wayne Byres noted that while in many cases ADIs already operate in line with these expectations, the steps announced today will help guard against a relaxation of lending standards and, where relevant, prompt some ADIs to adopt a more prudent approach in the current environment.

‘This is a measured and targeted response to emerging pressures in the housing market. These steps represent a dialling up in the intensity of APRA’s supervision, proportionate to the current level of risk and targeted at specific higher risk lending practices in individual ADIs’ he said.

‘There are other steps open to APRA, should risks intensify or lending standards weaken and, in conjunction with other members of the Council of Financial Regulators, we will continue to keep these under active review.’

The steps announced today build on the enhanced monitoring and supervisory oversight of residential mortgage lending risks that APRA has put in place over the past year, which has included a major stress test of the banking industry, targeted reviews of ADIs’ residential mortgage lending and the release of detailed guidance to ADIs on sound residential mortgage lending practices.

APRA’s heightened supervisory focus on lending standards will be conducted in conjunction with the review of interest-only lending announced today by the Australian Securities and Investments Commission (ASIC). APRA and other members of the Council of Financial Regulators will continue to work closely together to monitor, assess and respond to risks in the housing market as they develop.

Today’s letter to ADIs can be found on the APRA website here: www.apra.gov.au/adi/Publications/Pages/other-information-for-adis.aspx
BACKGROUND

Q: What impact does APRA expect this announcement to have?
A: The aim of this announcement is to further reinforce sound residential mortgage lending practices in the context of historically low interest rates, high levels of household debt, strong competition in the housing market and accelerating housing credit growth. We expect this announcement will help guard against any relaxation of lending standards, and also prompt some ADIs to reinforce their lending practices where there is scope for a more prudent approach in the current risk environment.

Q: What ‘higher risk lending’ practices will APRA be focussing on?
A: APRA will be focussing on the extent to which ADIs are lending at high multiples of borrower’s income, lending at high loan-to-valuation ratios, lending on an interest-only basis to owner-occupiers for lengthy periods and lending for very long terms.

Q: How was the 10 per cent threshold for investor lending determined?
A: The 10 per cent benchmark is not a hard limit, but is a key risk indicator for supervisors in the current environment. The benchmark has been established after advice from members of the Council of Financial Regulators, taking into account a range of factors including income growth and recent market trends.

Q: How was the 2 per cent buffer and 7 per cent floor lending rate determined?
A: The guidance on serviceability assessments was based on a number of considerations, including past increases in lending rates in Australia and other jurisdictions, market forecasts for interest rates, international benchmarks for serviceability buffers, and long-run average lending rates.

Q: Is the 10 per cent growth in investor lending, or the 2 per cent buffer, a hard limit?
A: No. These figures are intended to be trigger points for more intense supervisory action. Where banks are achieving materially faster growth, utilising a lower buffer, and/or otherwise materially growing the other higher risk parts of their portfolio, it will be a trigger for supervisors to consider whether more intensive supervisory action, including higher capital requirements, may be warranted.

Q: What sort of supervisory action might be considered if banks exceed these thresholds?
A: There are a range of actions that APRA can take, depending on the circumstances. These could include some or all of increased reporting obligations, additional on-site reviews, mandated reviews by external parties, and higher capital requirements.

Q: How may this affect borrowers from obtaining home loans from ADIs?
A: APRA does not expect this to have any effect on the availability of credit for people borrowing within their means to purchase a home. ADIs already conduct affordability tests to ensure that new borrowers are not overstretching themselves to purchase property, or relying on expectations of future increases in house prices to afford to do so. This guidance will primarily guard against any further relaxation in standards.

Q. Why has APRA not introduced high LVR or serviceability limits, as in other countries?
A: In short, we do not see those sorts of limits as necessary or appropriate at this stage. APRA’s response has been targeted on the specific areas of prudential concern in the current environment: these include risks around serviceability when interest rates are at historically low levels, strong investor loan growth and broader considerations of each ADI’s risk profile. The impact of any APRA actions will therefore be felt by those banks pursing higher risk lending strategies and/or using lower loan underwriting standards.

There is, of course, a range of further actions that could be taken in relation to residential mortgage lending practices if the risk outlook intensifies, and APRA will continue to keep these under review as market conditions and lending standards evolve.

Q: What role did the Council of Financial Regulators play in the decision-making?
A: Given that these supervisory tools sit within APRA’s supervisory and regulatory framework, APRA is ultimately responsible for determining the appropriate supervisory response. However, we have taken advice from other members of the Council of Financial Regulators in developing our approach, and will continue to do so. ASIC has also today announced a review that it will be carrying out a review of interest-only lending, which will support APRA’s efforts to reinforce sound lending practices.

Q: Why is there a threshold for growth in investor lending, not total housing credit?
A: There is currently very strong growth in lending to property investors, as highlighted by the Reserve Bank in its most recent Financial Stability Review (FSR). This is leading to imbalances in the housing market; the RBA noted in the FSR that “the direct risks to financial institutions would increase if these high rates of lending growth persist, or increase further.” APRA’s approach has therefore sought to target the higher areas of risk.

Q: Does this relate to the recommendation on risk weights in the Financial System Inquiry report?
A: No. The recommendation on risk weights in the FSI report is focused on competitive issues with risk modelling, whereas the announcement today is in relation to further supervisory steps to address specific risks in residential mortgage lending.

The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the Australian financial services industry. It oversees Australia’s banks, credit unions, building societies, life and general insurance companies and reinsurance companies, friendly societies and most of the superannuation industry. APRA is funded largely by the industries that it supervises. It was established on 1 July 1998. APRA currently supervises institutions holding $4.9 trillion in assets for Australian depositors, policyholders and superannuation fund members.

ASIC On Payday Lenders Again

ASIC crackdown stops another payday lender from overcharging consumers.

Fast Easy Loans Pty Ltd has agreed to refund more than 2,000 consumers a total of $477,900 following ASIC’s concerns that it charged consumers a brokerage fee where it was prohibited from doing so.

From September 2010 to June 2013, Fast Easy Loans Pty Ltd (Fast Easy) acted as the broker for a related lender, Easy Finance Loans Pty Ltd (Easy Finance), and unlawfully charged consumers a brokerage fee in excess of certain state and territory interest rate caps. In charging a brokerage fee, Fast Easy engaged in credit activities without a credit licence.

Fast Easy and Easy Finance operated under a previously commonly promoted business model where consumers dealt with both a broker and a payday lender at the same time, with the entities having the same directors and owners and operating out of the same premises. One reason for using this model was to provide a means (via the broker entity) to charge consumers an amount in excess of state and territory interest rate caps.

Commonwealth legislation introduced a cap on payday loans in July 2013 which supersedes the state and territory-based interest rate caps, and together with further Regulations in June 2014, make it clear that broker costs do not sit outside the small amount loan cap.

Deputy Chairman Peter Kell said, ‘ASIC will act to prevent payday lenders structuring their business to improperly impose fees and charges on consumers.

‘Our message to the industry and those who advise payday lenders is clear; if you set up business models to avoid the small amount loan cap, ASIC will take action’, Mr Kell said.

In response to ASIC’s concerns, Fast Easy has agreed to refund all affected consumers in Queensland, New South Wales and the Australian Capital Territory any amounts paid in brokerage fees above the state-based interest rate caps of 48% by November 2014.

Although the brokerage fee did not exceed any applicable interest rate caps in other states, Fast Easy has also put in place steps to notify consumers in Northern Territory, Western Australia, South Australia, Victoria and Tasmania (where the same 48% state interest rate cap law did not apply) that they can claim a refund for the brokerage fee that was charged.

Easy Finance has also engaged an external legal firm to conduct a compliance review on their current business model to ensure it meets the requirements of the National Consumer Credit Protection Act 2009.

ASIC’s action against Fast Easy means that since 2010, close to $2 million dollars has been paid in refunds to over 10,000 consumers who have been overcharged when taking out a payday loan. Further, payday lenders have been issued with just under $120,000 in fines in response to ASIC concerns about their compliance with the credit laws.

Background

Under the National Consumer Credit Protection Act 2009 (National Credit Act), individuals or businesses who engage in credit activities are required to hold an Australian credit licence.

Any person who does engage in credit activities (such as acting as a broker) without the appropriate licence must not demand or receive any fees or charges from a consumer (s32 National Credit Act)

Prior to July 2013, some States and Territories held laws capping the cost of credit for small amount loans. These laws were superseded by the Commonwealth cap which was introduced in July last year.

A small amount loan, in general terms, is a loan where the amount borrowed is $2000 or less and the term is between 16 days and one year. From 1 July 2013, only the following fees can be charged on small amount loans:

a monthly fee of 4% of the amount lent
an establishment fee of 20% of the amount lent
Government fees or charges
enforcement expenses, and
default fees (the lender cannot recover more than 200% of the amount lent).