The Australian Banking Association (“ABA”) wrote to the Australian Securities and Investments Commission (“ASIC”) on 9 April 2020 seeking guidance on several issues relating to lending during the COVID-19 pandemic, and also requesting regulatory relief on various matters. ASIC responded on 24 April 2020. The Australian Prudential Regulation Authority (“APRA”) has also weighed in, publishing FAQs with guidance on its expectations during this period of disruption. We have set out below the main points made by ASIC and APRA.
Responsible lending and hardship variations
In its response to the ABA, ASIC noted that changes to loans such as converting from principal and interest to interest only, 6 month repayment deferrals with capitalisation of interest, and extending the loan term, can typically be achieved by varying the existing contract rather than entering into a new contract, and that the responsible lending obligations only apply to new contracts and credit limit increases. ASIC indicated that capitalisation of interest does not necessarily involve an increase in the amount of credit, because the National Credit Code excludes interest charges from the amount of credit.
APRA in its Prudential Practice Guide APG 223 – Residential Mortgage Lending (“APG 223”) says that it expects an authorised deposit-taking institution (“ADI”) to undertake a new serviceability assessment whenever there are material changes to the current or originally approved loan conditions. Such changes would include a change of repayment basis from principal and interest to interest-only, or the extension of an existing interest-only period.
APRA now says in its FAQs that there may be operational challenges in the current environment in evaluating the long-term impact of economic stress on borrowers as a result of COVID-19, but this should not prevent changes to loan conditions where they are otherwise assessed to be prudent. APRA accepts that in the next 6 months, some ADIs may not be able to complete a full serviceability assessment for borrowers seeking a change to their loan conditions. If changes are made to grant an interest-only period without a normal serviceability assessment, APRA expects that a reasonable period for such an arrangement would not exceed 12 months.
Loan repayment deferrals
Hardship variations may result in deferrals of loan repayments. In its FAQs, APRA notes that it has provided a regulatory capital approach which says that over the next 6 months, ADIs do not need to treat the period of the repayment deferral as a period of arrears for capital purposes. This can be applied to a broad class of otherwise performing loans, including loans that are less than 90 days past due and not impaired when the deferral is granted.
For small business loans, the regulatory capital approach applies for deferrals of up to 6 months. For other facilities, it applies for deferrals of up to 3 months, which may be extended another 3 months if considered appropriate. At the end of the 3 month period, APRA says that ADIs should conduct a check to see if there is any evidence that it is no longer appropriate to maintain the regulatory capital approach. ADIs should not be avoiding inevitable recognition of losses. The check is not expected to be a full credit risk assessment. However it should not be an automatic extension. It may include the use of information from proprietary sources, credit reporting bodies and borrower inquiries. ADIs should keep a record of the check.
APRA says that ADIs should publicly disclose the nature and terms of any repayment deferrals given to a broad class of loans, including the volume of loans affected, and that ADIs should monitor the portfolio credit risk of these loans.
Responsible lending and new loans
The ABA sought clarification from ASIC on the appropriateness of lenders making certain assumptions when making unsuitability assessments, including:
- that the income of persons adversely impacted by COVID-19 economic conditions are likely to regain previous income within a reasonable period after restrictions are removed;
- that any deterioration in asset values is unlikely to be permanent; and
- that the consumer’s requirements and objectives relating to their COVID-19 impacted financial position are likely to be a prominent consideration.
ASIC said that the provision of new credit must not be based on assumed changes where these are unlikely to be met. Lenders should not make assumptions without regard to the consumer’s actual circumstances, which may indicate that a recovery of income levels is more or less likely. Rather, lenders should seek to form a justifiable view of what is likely. ASIC said that a lender relying on assumed changes to the consumer’s financial position should consider how it will respond if the assumed recovery does not occur – or only occurs over a long period of time.
ASIC acknowledged that changes to asset values may be temporary, but pointed out that assets are not generally the primary basis of an assessment.
As to the prominence of COVID-19 considerations, ASIC noted that there is no impediment to a high priority being given to shorter-term funding needs.
APRA says that ASIC’s clarifications are consistent with APG 223, which states that an ADI would typically assess and verify a borrower’s income and expenses having regard to the particular circumstances of the borrower.
Acting efficiently, honestly and fairly
ASIC has acknowledged that in the current situation with the volume of hardship applications being made to the banks, it will not necessarily be unfair to take more time in processing some of the applications, and the mere fact that a hardship arrangement results in the consumer paying more for the credit in the longer term as a result of a hardship arrangement would not suggest a failure by the lender to act fairly.
Guarantor notice and acceptance – no exemption
ASIC declined a request from the ABA to grant an exemption from the requirements of section 61 of the National Credit Code, which relate to how guarantors must be notified of any proposed increase in liability, and agree to such an increase.
Notice of contract changes – no exemption
The ABA also requested an exemption from the requirements in sections 71 and 73 of the National Credit Code in relation to giving notice of agreed changes to a credit contract. ASIC in its response said that it would be inappropriate to grant an exemption from these requirements, as it would mean a real risk that consumers would not be properly informed about their obligations.
ASIC also advised in its response to the ABA that it will be publishing more guidance on its website to address the main questions raised about compliance in the current circumstances, and APRA says that it will be updating its FAQs periodically.