The Reserve Bank is indicating that some - unnamed - banks have deliberately tightened internal credit policies by applying a more restrictive approach to LVR rules than necessary

By David Hargreaves

The Reserve Bank has pointed out that some banks - unnamed - appear to have been taking a more restrictive approach than required to some LVR rules.

The comment is contained in the RBNZ's response to the submissions on the changes to the LVR rules taking effect on October 1.

The RBNZ's not critical of the banks concerned for doing what they are doing, but it has nevertheless pointed it out.

It said the current scope of the exemptions to the LVR rules was described in section BS19 of the Banking Supervision Handbook.

"However, it is important to note that banks are not obligated to provide lending using the exemptions (or any other lending). RBNZ policy allows certain loans to be exempt from LVR restrictions, but it is up to banks whether they think particular loans also fit their risk appetite.

"For example, some banks appear to have deliberately tightened internal credit policies by making their approach to some LVR rules more restrictive than the requirements set out in BS19."

The RBNZ said an example of the issues that can arise are reports that banks are not willing to allow owner occupying customers to buy a second home to owner occupy (with the intention of selling the first), without being classified as a property investor.

"The definition of a property investor in BS2A/BS2B clearly does not require someone with this intention to be treated as a property investor.

"We would expect banks to undertake some due diligence with customers whose described intentions do not appear plausible (e.g. claiming more than two properties are owner occupied, or frequently buying new properties at different banks could be risk factors), but would be comfortable in general with banks treating customers buying a second owner occupied home as non-investors.

"However, banks have discretion to adopt a more stringent approach if they choose to, as with any other credit decision."

Additionally, the RBNZ said some public feedback had suggested that banks were requiring customers to reduce the LVR on a portfolio of rental properties below 60% when they sell one of the properties, before the customer takes any of the proceeds of the sale in cash.

"The Reserve Bank considers that repaying part of a mortgage (selling one of a pool of securities) does not need to constitute a new commitment as defined by the Reserve Bank, therefore it need not be in scope for the LVRs.

"However, more generally, how the proceeds are split between borrower and bank when a property is sold will depend on the mortgage contract and the policies of the bank."

There were 37 submissions received on the LVR proposals, including seven from registered banks that offer residential mortgage lending (ANZ, ASB, BNZ, The Co-operative Bank, Kiwibank, SBS Bank and Westpac), six from building industry participants and four from housing related industry organisations. 

In addition to this, round 3 of LVR rules, the RBNZ's also indicated it's looking at introduction of debt to income ratios next year and it may also look at capital buffers for banks - and these moves were also open for submission.

The RBNZ said submitters "generally supported" RBNZ initiatives to investigate debt servicing further, "including the possible development of standardised data metrics around mortgage serviceability".

"Several submitters noted that existing internal bank assessments and processes already consider a range of factors in assessing the mortgage serviceability of borrowers. The RBNZ was encouraged to consider these procedures when exploring the possibility of a DTI tool.

"Early and extensive banking industry consultation was encouraged to consider the relevance and operational costs/unintended implications of any debt-to-income ratio tool. The RBNZ was requested to consider the scope of other regulatory changes under implementation when assessing timeframes for implementation of any DTI tool.

"Some submitters suggested that capital requirements were already relatively high by international standards and that bank balance sheet resilience had improved as a result of LVR restrictions. Stricter capital requirements were seen as unlikely to deliver a substantial reduction in housing market price pressures.

"Many submitters encouraged the RBNZ to assess the impact of proposed LVR changes (and recent residential mortgage capital changes) before considering the implementation of further macro-prudential tools."

The RBNZ said in response that it would be investigating the case for using "a debt serviceability tool" in coming months.

"The Reserve Bank is planning to engage with banks on any issues that arise as part of this investigation, and begin collecting DTI data from all mortgage lending banks."

In addition, the RBNZ reiterated earlier comments that it was undertaking a fundamental review of prudential capital requirements for registered banks over the next year.

"The possibility of introducing macro-prudential capital buffers will be considered as part of this process."

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