The responsible mortgage lending fix is in

On Friday, the Senate Economics Committee released its assessment of the Morrison Government’s planned axing of responsible lending rules, which supported winding back regulations to support greater credit provision across the economy:

The committee notes that a well-functioning credit market is essential for economic growth generally, and for Australia’s recovery from the COVID-19 pandemic specifically. The committee agrees that the current consumer credit protection framework is potentially overly prescriptive and that regulatory duplication between the responsible lending obligations, under the Credit Act, and the prudential standards issued by APRA could be an issue.

The committee is concerned by evidence that the regulatory framework has resulted in consumers being unable to access credit in a timely manner to buy their first home or to obtain a grant under the HomeBuilder scheme. The committee is also concerned by the invasive and onerous nature of the inquiry and verification processes required under the existing responsible lending obligations…

The committee is of the view that these regulatory changes will not undermine consumer protections and that the principal of ‘responsible lending’ is deeply embedded in Australia’s broader regulatory framework, which credit providers and credit assistance providers must still operate within and comply with.

It must be noted that this Senate Committee was Coalition-led. Therefore, it is no surprise that it found in favour of Coalition policy.

What is particularly concerning about their assessment is that it directly contradicts the view of the exhaustive Hayne Banking Royal Commission (RC), which handed down its final report only two years ago and outlined numerous cases and examples of irresponsible and predatory lending.

In fact, the Hayne RC was so concerned about predatory lending that its very first recommendation was to ensure that existing responsible lending rules remain in place:

The Hayne Banking Royal Commission’s central recommendation was to keep responsible lending laws.

What’s the point of conducting RCs if the government that ordered the inquiry acts directly against its recommendations?

If the Morrison Government’s changes are passed by the Senate, it will represent the biggest relaxing of lending rules in a generation and act as a ‘red rag to a bull’ for Australia’s financial institutions to engage in sub-prime lending.

I would love to see Kenneth Hayne give his take on the reforms, particularly how the RC came to the polar opposite view. What has changed over the past two years to warrant scrapping the rules?

It is also difficult to argue that lending standards are too tight when the volume of new mortgage commitments are at a record high and Australian property prices are soaring.

New mortgage commitments are experiencing a record boom.

We can add the Council of Financial Regulators is on the move in the opposite direction, last week indicating that:

There has been some increased availability of mortgage finance recently, though lending standards are generally being maintained at this stage. The Council places a high emphasis on lending standards remaining sound, particularly in an environment of rising housing prices and low interest rates. It will continue to closely monitor developments and consider possible responses should lending standards deteriorate and financial risks increase.

So, if responsible lending is scrapped then it will immediately hasten macroprudential tightening with the two hands of government working at complete cross-purposes.

The National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 will be debated in the Senate today with the Bill reportedly on a knife’s edge. Labor and the Greens oppose the legislation, meaning the Bill’s fate will rest with the cross-bench.

Let’s hope the Senate upholds the Hayne Banking RC, blocks the legislation, and keeps responsible lending rules in place.

Unconventional Economist


    • What’s the point of conducting RCs if the government that ordered the inquiry acts directly against its recommendations?
      Makes the punters feel like someone is doing something…looking out for them..short memories..

  1. Ritualised Forms

    I think the blowing apart of responsible lending is the vehicle of choice to blow apart the entire economy and to essentially create a situation where Australian society faces a hostage dilemma – We either give into the the vested housing interests and accept a population ponzi, low wages growth, the worlds most expensive land, energy, people and education or we have a precariat of mainly younger people who have gone into debt miles beyond what makes any sense, working in bubble jobs which have low wages outcomes, are largely temporary or contractor, and which can be obliterated with the stroke of a pen who will wear an economic implosion like no other.

  2. SoCalSurfCreeperMEMBER

    I dunno. Applying for an Australian mortgage is a joke. Having experienced Australia both pre and post responsible lending and the US pre and post GFC I think the US post GFC is the right model. There is none of the ridiculous forensic analysis of your bank statements. All they need is your credit report and income. They calculate using ratios. You either qualify or you don’t based on your income and your debts. They don’t care about spending. If you have the income and you’re a grownup you can manage your own spending. Most people pay for their house first. If you want to pay for private schools or wagyu or life insurance on top of that that’s your business, not the banks.

      • SoCalSurfCreeperMEMBER

        For your primary home PITI (principal, interest, taxes and insurance) is generally 28% of gross income and total debt service ratios (DTI, includes mortgage, car payments, card payments etc) needs to be under 42% of gross income. Keep in mind for LTI your taxes (rates) and interest are fully tax deductible.

  3. happy valleyMEMBER

    “So, if responsible lending is scrapped then it will immediately hasten macroprudential tightening with the two hands of government working at complete cross-purposes.”

    LOL – APRA would have to look up the meaning of MP to find out what it is? Meanwhile, the APRA boys and girls are seeing their own OO and IP house prices boom.

  4. – It reminds me of what happened on the other side of the big fishpond (a.k.a. Pacific) in the US between 2005 and 2009. In each of those years the % of mortgages that were of “Sub Prime” quality rose every year. In 2008 a record 80% of all new mortgages were deemed to be “Sub Prime”.