Dáil Éireann Debate, Tuesday - 22 June 2004
119 Mr. Cuffe asked the Minister for Finance if he has any plans to introduce a requirement on lending institutions to limit the amount of borrowing on domestic loans and mortgages to a multiple of annual income after taking into account the net worth of the person or persons. [18288/04]
View answerThe Irish Financial Services Regulatory Authority, a constituent part of the Central Bank and Financial Services Authority of Ireland, is responsible in the first instance for ensuring that credit institutions have prudent lending policies as part of its general supervisory role.
The Financial Services Regulator has continuously emphasised to credit institutions the importance of strict ongoing monitoring and management and control of credit risk and the need to maintain prudent lending practices in order to avoid problems which become apparent only when the economic climate is less favourable. In July 2001 the Central Bank issued guidance on "Additional Characteristics of Prudent Home Loan Assessment", the main focus of which was to strengthen lending practices. The bank has required that stress-testing techniques be performed in credit institutions to measure the capacity of lending institutions to withstand economic shocks. In November 2002 credit institutions were advised not to relax their lending criteria in order to increase their market share. They were also advised to alert their borrowers to the risks associated with all mortgage based lending products and to remain fully alert to the dangers of lending to marginal borrowers. However, it is the obligation of each credit institution and its board to ensure that prudent lending policies are adopted, that the appropriate standards are maintained and that loan books are of a sufficiently high quality to withstand an economic shock.
The Financial Services Regulator performed a mortgage credit review in the first quarter of 2003. The overall general findings from that inspection were that no matters of financial soundness came to light, however credit institutions were required to put more robust procedures in place in the area of client income verification and the funding of mortgage loan balances to ensure that loans are properly secured and will be repaid in full. It is important to note that the majority of credit institutions now utilise net disposable income criteria in underwriting mortgage applications. Net disposable income criteria are considered to be a more accurate reflection of repayment capacity. For example, a simple multiple would not capture the difference in the ability to make repayments on a loan at 10% interest and at 3% interest. An examination of net disposable income can capture this difference. At the same time, this has to be combined with a stress-test of the loan to assess the ability to repay should interest rates increase from current levels.
As will be clear from the foregoing, the question of the level of borrowing/lending that would be appropriate is, in the first instance a matter for the borrowers and lenders themselves, subject to overall monitoring from a prudential regulatory aspect by IFSRA, which is statutorily independent in the exercise of its regulatory functions. I have no plans for any detailed legislation in this area at this time. Should IFSRA report to me at any time that it felt it required additional powers in this regard, I would respond quickly to such a request.
