Parliamentary committee to look at controversial loan impairment practices

A Parliamentary committee will look into the practices of financial institutions in relation to the impairment of customer loans and the forced sale of property.

Assistant Treasurer Josh Frydenberg has referred a number of matters to the Parliamentary Joint Committee on Corporations and Financial Services.

Banks and other financial institutions have been criticised for using "constructive default" to impair loans, where the financial institution reduces the value of the assets used to secure a loan - thereby raising the loan-to-valuation ratio of the loan and triggering an impairment.

The committee will look at the role of property valuers in constructive default.

It will also look at financial institutions using non-monetary conditions of default to impair loans.

In small business lending non-monetary covenants can include such things as change of business ownership, capital expense limits and limits on the sale of assets.

The Financial System Inquiry raised the issue of the use of non-monetary default covenants, calling for the development of industry standards and better disclosure in this area.

A number of submissions to the FSI said the use of non-monetary loan covenants was often unfair and that lenders needed to be more transparent when exercising them.

The committee will look at the extent to which borrowers are given an opportunity to rectify defaults and whether they are given reasonable notice when a loan is required to be repaid.

The banks have been over this ground before. In 2012 the Senate Economics Committee reviewed the post-GFC banking sector, with emphasis on practices at Bankwest after it was taken over the Commonwealth Bank.

The committee's report found there was little evidence to support submissions that Bankwest had treated borrowers harshly.

The committee has been asked to report by March next year.