Commonwealth Bank may be in breach over stressed loan buybacks | Ralph Lauren

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Commonwealth Bank has been buying back stressed mortgages from its securitisation trusts during the coronavirus pandemic, possibly breaching banking standards.

CBA from March to July bought back about $80 million worth of stressed home loans from securitisation trusts, which are residential mortgage-backed bonds usually sold on to investors, according to The Australian.

The concept behind selling on stressed loans in the form of a collective mortgage-backed security is to remove the risk from the respective bank’s balance sheet.

The buying back of stressed loans is a practice that potentially breaches prudential standards set by the Australian Prudential Regulation Authority, which in July said banks were not able to buy back loans that were deferred because of COVID-19.

It is understood CBA halted the buybacks once APRA issued the guidance at the beginning of the current financial year.

On Monday, APRA issued a letter of warning to the banking sector, noting it had identified several institutions conducting the practice, which it deemed “inconsistent” with standards.

“APS 120 (banking standard) only allows ADIs (banks) to repurchase mortgages from their securitisations under limited circumstances and if the borrower is in good standing,” APRA said in its letter.

“The intent of APS 120 is that mortgages are not repurchased by ADIs if the borrower is in hardship or the loan is of lower quality, as this would undermine the principle of a clear transfer of credit risk that is at the heart of the regulatory treatment of securitisation.”

APRA said it was reviewing the securitisation practices of each Australian bank and mortgage lender.

It is understood the regulator will force banks to reveal if stressed loan buybacks took place in the upcoming pillar 3 reporting requirements.

At its peak, more than $250 billion worth of loan repayments were put on pause, according to the Australian Banking Association. This includes both residential and business loans.



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