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Responsible Lending or Irresponsible Lending?

That is the question.

By Michael Clarke

On the 10th December the Federal Government introduced a bill into the house of representatives to essentially remove current ‘Responsible Lending’ legislation in place under the National Consumer Credit Protection laws. Their motive was to make credit more accessible which had been impacted detrimentally by the onset and slowdown of the economy due to Covid. It should be noted, that lenders and consumer advocacy groups did not request these changes.

There is a section of laws that governs lending guidelines and is administered by APRA (Prudential Regulator). It regulates banks and credit unions that lend money and hold savings accounts etc, on behalf of depositor’s. If the bill is passed through both houses of parliament the regulator intends to update credit laws to include the following sentence ‘’assess an individual borrower’s repayment capacity without substantial hardship’’. I’ve highlighted this because it potentially places a great deal more flexibility around the decision as to what might be meant by ‘substantial hardship’ ? Remembering that officers of lending institutions still have monthly targets for the number of loans that they write.

It is good that some more recent lending reforms will place more focus on how loan products meet a customer’s objectives and needs, but the ‘buyer beware’ position that one could argue will become the fall-back with the removal of responsible lending laws, means that borrower’s essentially may need to rely wholly & solely on themselves when making a decision as to whether to take on debt or not. The exposure of the dangers to consumers that were revealed from the Royal Commission into the banking, finance, insurance and superannuation industry, although in the recent past (2019), appear to have been forgotten.

When applying for finance to purchase an asset or expand a business etc, think about the other parties involved in these transactions, lawyers, real estate agents, sales people, lenders, brokers . Who of these have the function of protecting the borrower or consumer? You could argue that none of them do. In looking forward into 2021 here are some points to note that could impact negatively for consumers with a relaxation of lending laws :-

  • 25% of small business loans and mortgage loans, as of 31/10/20, had not resumed, since the deferral granted to them in April 2020

  • The level of household debt in Australia remains high

  • Home prices in Australia remain high

  • We are experiencing the lowest sustained level of interest rates since 1960, so any upward pressure from inflation (not showing at present) can result in a strain on household budget

  • There has been no wage growth for over 15 years

  • Job creation will require sustained Government intervention in the hope that the private sector can bounce back and increase economic growth, in the face of the winding back of job keeper and job seeker support

The message I want you to take away from this, is that COMPASS takes the role of a lending adviser very seriously and will always work with you as the customer. We will look at the pros and cons of raising debt. We acknowledge that there is always risk in life and finance carries it’s own risk , but if you are armed with good information and good advice, you are better positioned to make sound decisions.

Wishing you all a safe and happy Christmas 😊

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