Closing the gap between responsible lending and APS220 3 min read
In the absence of the Responsible Lending Obligations, lending by Australian banks will be regulated by APRA.
This means the new Credit Risk Management Prudential Standard (APS220) will be the central legislative guidance in designing consumer assessment and lending protocols. There is a new draft APS 220, which was finalised in December 2019, long before any changes were proposed to Responsible Lending.
Following the Responsible Lending changes, all eyes turned to APRA to see if there would be further changes to APS 220. The draft released in December 2019 effectively repeated many of the more prescriptive elements of the Responsible Lending Obligations. The effect of this is that in the absence of the Responsible Lending Obligations, non-bank lenders will have the freedom to operate under a broader 'principles based' regulatory regime, while Australia's banks will continue to follow a regime that is materially similar to the old Responsible Lending.
It seems likely that this will give rise to a significant obligation-gap between banks and non-banks.
For this reason, when APRA announced consultation on revision to APS 220 in early December, we anticipated that there may be significant changes to realign the obligations of banks with those that will apply to non-banks.
However, this is not the case.
There has been only one amendment proposed, which is to insert a new obligation that requires banks to assess an individual borrower’s repayment capacity without substantial hardship. If there was a minor 'gap' created between responsible lending and APS 220, this amendment closes it.
APS220 previously focussed on credit-risk management, which had the effect of assessing the borrower's ability to repay, but did not specifically consider hardship from the borrower's perspective. With this change, APS220 will effectively plug the entire gap created by the removal of the Responsible Lending Obligations. And perhaps this is APRA's wish.
The message we receive from this minor amendment is that APRA considers that credit risk can best be managed with a prescriptive approach. If APRA will not make its standard broader, perhaps instead there will be moves to tighten the non-bank standards, or otherwise we will see a marked difference in the lending landscape between banks and non-banks.
We will have to wait until 2021 to find out.