No justification for removing responsible lending laws

Kevin Davis, Emeritus Professor of Finance at the University of Melbourne, has slammed the Morrison Government’s planned scrapping of responsible lending laws, which he argues is “particularly egregious” and a “triumph of ideology and vested interests over logic and evidence”:

The axing of responsible lending obligations (RLOs) under the National Consumer Credit Protection Act 2009 is particularly egregious…

Instead, it appears to be banking on market forces and voluntary codes of conduct to protect financially unsophisticated borrowers. This is the triumph of ideology and vested interests over logic and evidence.

Plenty of credit

The case for removing responsible lending obligations rests on a number of unsupported assertions.

First, Treasurer Josh Frydenberg has argued lending needs be made easier to “kickstart” economic growth in these troubled times. The responsible lending obligations, he has said, increase the cost and time involved in making lending decisions.

But it is difficult to discern evidence in public statistics that responsible lending obligations have adversely affected loan growth or the cost of household-sector borrowing…

Confusing regulatory roles

The second invalid assertion is that oversight of bank lending by the Australian Prudential Regulation Authority can substitute for explicit responsible lending laws enforced by the Australian Securities and Investments Commission.

This misconstrues APRA’s mandate and expertise, which is focused on institutional safety, not on consumer protection. APRA should be interested in the specifics of a very large loan that may affect the lender’s financial strength. It cannot be expected to examine thousands of smaller loans…

Fears no longer relevant

The third assertion is that responsible lending regulations have made lenders “increasingly risk averse and overly conservative”, out of fear of incurring onerous penalties.

That might have had some relevance in the past. But not so much since ASIC’s failed “Wagyu and Shiraz” case against Westpac in the Federal Court in 2020…

Loan processing costs should be falling

A fourth assertion is the excessive cost of gathering and processing borrower information. But the development of “open banking” is enabling fintechs to harvest data of consenting borrowers and provide information at lower cost than ever before.

Relying on codes of conduct is an act of faith

Finally, it is claimed that reforming industry codes of conduct, incorporating responsible lending objectives and making them legally enforceable, removes the need for separate lending laws.

But past experience with “self-regulation” does not promote confidence this approach will work…

This is a bad look for the federal government. It has the hallmarks of political opportunism, using the COVID crisis to be a friend of business at the expense of consumers.

These are all fair observations, but they miss the key point: Australia spent millions of dollars and many months conducting the Hayne Royal Commission (RC), which documented numerous cases of criminal and predatory lending by Australia’s banks. So much so that the very first recommendation from the RC was to keep the responsible lending rules in place:

So, for the Morrison Government to turn around only 18 months later and announce the abolishment of such rules is the ultimate chicanery, and reeks of a grubby back room deal forged between the Coalition and its financial backers in the banking and property industries.

Labor, The Greens and the Senate cross-bench must unite to block the Coalition’s proposed sabotage. The RC’s number one recommendation must be upheld.

Unconventional Economist
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  1. Even if lending is loosened, will the banks actually lend?

    We’ve also had calls from people who took a six-month deferral period and when they could start making repayments again were told they had to pay their arrears in full — which for one person was $20,000 — and then they would be allowed to make regular payments again.

    ^This is similar to what was going on before Covid. Arrears due in full after a mortgage repayment holiday. Lends some strength to the argument about banks deciding to push borrowers to sell given prices haven’t drastically fallen.

    • It will push people to shadow banks. Telemarketers already calling offering to help us minimize our taxes. My guess is negative gearing is popular again. I think access to credit became lot easier already. Perhaps not via our banks.

      Let’s see how these things work out from Apr/May onwards.

      I am still waiting for surprise March elections.

  2. adelaide_economistMEMBER

    I’m currently in the process of ‘trying to buy’ and there’s suddenly a flood of properties in the area I am interested in. Not sure if it’s just people waiting for the January holiday period to end or people getting the hurry up from their bank as the nature of what I’m looking at and the location tends to be popular with people who like to stuff four or more international students into a bedroom.

    I’m not sure how vigorous the responsible lending is either, based on my application process. I guess unless you think a couple of non-verified payslips, a credit check and saying you’ve got a decent deposit constitutes responsible lending. People on here saying they are checking whether borrowers pulled money out of super – I can say with safety they really aren’t bothered to check. They want warm bodies with perceived ‘safe’ jobs and that’s it. In fairness, I guess outside of government and a few health/education positions, that’s a pretty narrow list in these days of lockdowns and corona19.

    • For prices to have risen as they have suggests very lax lending standards.

      It’s Frydenturd the village idiot “little project”.

      • Prices have risen – CoreLogic is 100% rubbish – they are down in almost every single area in Victoria and most of NSW – use SQM instead o f what is essentially a Rea Estate Agents and Banking industry marketing tool with no basis in reality.

        • Bollocks. I’m in regional Vic and have been following our market closely as looking to buy. People here are asking for and getting peak prices +5-10%. Several friends and family have all recently sold in south east Melb, all have done better than their expectations. Easy money is flowing in Vic and I get the impression it’s people buying up and FHB, maybe trying to get in before the Chinese come back? (Their sentiment not mine)

    • I am always amazed how everyone skates through the credit approval with banks.
      Wife and I have significant , stable incomes and employment histories. I paid off a previous property mortgage in about 5 years before upgrading a few years ago. I have never missed a loan or bill repayment.
      Yet every time I apply for a loan I get a forensic, financial going over. Questions and queries and supporting information always requested. Follow up emails and clarifications abound.
      Where are people borrowing from when they have these experiences of being waved through the process by uninterested lenders.

      • A mortgage broker tends to hide all the bits and pieces requests from the lenders and just get it all off you in one hit, if that is any help.

        • There are apps being developed as we speak which allow prospective buyers to request a loan on a property with instant approval via the app.

          This is 100% about to be released – they value the property with their own “system”, do your credit check and instantly approve the purchase – literally you can walk up to an auction, get approval and bid.

          One of the big 4 – released this year.

      • I will echo bjw678 – go through a Mortgage Broker.
        We recently bought. With 20% deposit, stable jobs and income, and no other debt, we had to provide to the Mortgage Broker was proof of income and monthly expenses. Pre-qualified for a number of products and went with ING. Formal approval took 10 days, no further questions asked.

      • “I paid off a previous property mortgage in about 5 years before upgrading a few years ago”

        There lies your problem. You are problem customer because your ‘customer-lifecycle-value-to-bank’ could be negative where as Dave of FB with 10% deposit on a 150K pre tax household income who will slave away for 30 years to the bank has very high ‘customer-lifecycle-value-to-bank’. So they wave Dave through the gates and you get a thorough once over because you are not an ‘ideal customer’

        • darklydrawlMEMBER

          This is exactly the same reason banks prefer CC customers who are always struggling to pay off their cards and are close to the maximim limits et al (You will note they constantly try to poach these types from other banks with frequent “Zero interest for 6 months” promotions and similar incentives. They know there is little chance the new customers will change their habits so they are happy to wear a few months of zero interest for a guaranteed income stream in future.

          Despite what they say publically, the banks dislike the organised folks who pay off their card balance each month (and as a result, use the bank’s credit for free).

      • Why there is suspicion is that the vast majority be don’t have any of those borrower attributes. Lax lending world.

    • Stock on the market has absolutely exploded post Covid – the spruik being pushed here is rubbish and hence why it relies on the most obscure irrelevant stats from CoreTragic to make its case, which is usually self negating tripe.

      Check out SQM – stock pile up reduced again during December / January holidays as it always does – it will then resume – market is crashing big time.

      • happy valleyMEMBER

        Not if SFM, the RBA, APRA and ASIC have anything to do with it – they’ll do whatever it takes.

  3. happy valleyMEMBER

    I wouldn’t expect anything better from Josh the Pawnbroker, Scotty from Marketing and the rest of this LNP gubmint.

  4. To be honest they are shovelling money out the door with no responsible lending to be seen. I know of people who bout a $1.2 mil property with less than 10% deposit, a household income of about $175k before tax, of which 45% of it is contract work that ends in March. Nothing responsible there!

    • By historic standards that’s pukeworthy, but is it cheaper to buy than rent that property at the moment? Sounds like that’s the key metric being peddled at the moment.

    • Jumping jack flash

      I can borrow 35% more debt on 15% less income compared to 2012.
      Responsible lending be damned.

  5. Jumping jack flash

    “First, Treasurer Josh Frydenberg has argued lending needs be made easier to “kickstart” economic growth”
    He’s right. In a debt economy, debt growth is economic growth.

    “The responsible lending obligations, he has said, increase the cost and time involved in making lending decisions.”
    Also it limits the amount of debt, which limits the amount of growth! We can’t have that.

    Joshy boy might not know all that much, but he seems to know which side his bread is buttered on.

    “Australia spent millions of dollars and many months conducting the Hayne Royal Commission (RC)”
    Pretty sure this was a Labor thing, and it was certainly an attempt to crash the economy so they would look good.
    Labor are probably still fuming about the snide comments about “sound economic managers” and “the adults are in charge” and they wanted to discredit the Libs by forcing the economy to crash by getting an RC to point to the pile of debt that is the economy, and say “Bad banks! Bad, bad, bad!”.

    Fortunately for everyone Joshy is large and in charge and he knows that debt is the answer. He mightn’t know much about anything, but he has it on good authority that more debt means more growth and instant riches without effort from his banking buddies, who are always eager to help him out when he’s in a bit over his head on these kinds of things.