Moody’s welcomes responsible lending revisions

Last week, the Australian Securities and Investments Commission (ASIC) issued a consultation paper to update its guidance on responsible lending. 

The regulator has claimed that it “considers it timely” to review and update the guidance in light of its regulatory and enforcement work since 2011, changes in technology, and the release of the final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. 

ASIC added that its review of RG 209 will consider whether the guidance “remains effective” and will seek to identify changes and additions to the guidance that “may help holders of an Australian credit licence to understand ASIC’s expectations for complying with the responsible lending obligations”.

In response to ASIC’s announcement, Moody’s Investors Service stated that enhancements to existing responsible lending guidelines, if adopted, would be “credit positive” for Australian banks, other mortgage lenders, and residential mortgage-backed securities (RMBS).

Moody’s claimed that potential changes would “improve the standard of underwriting and lift the quality of new loans”.

In its analysis of ASIC’s consultation paper, Moody’s observed that under the proposed changes, mortgage and other consumer lenders would likely “conduct more rigorous reviews of prospective borrowers’ financial positions before granting loans”.

ASIC has proposed that if lenders do not make use of readily available information, such as bank statements or pay slips, they would need to explain why it was not reasonable to do so, as opposed to applying the Household Expenditure Measure (HEM).

“Other sources of information, such as bank statements, to verify borrowers’ financial position will result in better assessments of borrowers’ capacity to service mortgages and therefore improve the credit quality of new loans,” Moody’s claimed.

However, Moody’s has said that it does not expect the potential changes to trigger further tightening in credit policies.

“Many Australian banks have enhanced underwriting criteria over the past 12 months, in part reflecting concerns raised by Australia’s Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry and ASIC,” the credit ratings agency stated.

“Therefore, we do not expect the proposals to drive a significant further tightening of standards.”

Moody’s added: “Nevertheless, ASIC’s proposals will ensure that the focus on enhancing underwriting standards that is already underway is sustained and occurs consistently across the mortgage lending sector.”

Further, Moody’s also expressed support for ASIC’s proposal to require lenders to make greater efforts to understand borrowers’ intended use of loans and assess whether the terms and conditions of loans meet borrowers’ requirements.

“If prospective borrowers have had difficulties making loan repayments in the past, lenders will have to examine the reasons for this and assess the likelihood that those circumstances will prevent borrowers from meeting loan obligations in future,” Moody’s observed.

ASIC is considering whether to provide an opportunity for key stakeholders to speak to the commission at public hearings in addition to making written submissions.

The consultation is open for a period of three months, with comments due by Monday, 20 May 2019.

[Related: ASIC to update responsible lending guidelines]