Responsible Lending or Irresponsible Lending
Later this week Australia’s upper house will debate significant changes to laws that govern consumer lending known as (NCCP) National Consumer Credit Protection. Amendments to the laws have been introduced by the ‘Senate Economics Legislation Committee’. Essentially this is what is proposed. Currently, the responsibility is on lenders to thoroughly screen and check borrowers for their loan suitability. This NCCP act was introduced in Jan 2010 in the aftermath of the Global Financial Crisis and was designed to limit and reduce the incidents particularly of home mortgage default. The section of the act of particular issue centers around the current drilling down into a borrowers daily expenses by lenders and brokers, to make sure their lifestyle habits ‘discretionary and non-discretionary’ expenses are properly assessed in conjunction with the loan they are seeking. Should the reforms be passed, it would see emphasis shift somewhat back in favour of lenders. They would then be able to take borrowers at face value based on the information that they supply, without further investigation required. It’s worthwhile now mentioning the following recommendation that came out of the Hayne Royal Commission into Banking :-
Recommendation 1.1 of the Hayne Royal Commission into the banking sector explicitly warned against amendments to the NCCP Act and put the job of addressing suitability to receive a loan onto the lender.
So here’s some observations or comments if you like, that bare considering :-
Who’s responsibility is it for determining whether a borrower’s expenses are discretionary or not, and whether the non-discretionary expenses can be easily stopped ? As an example alcohol & gambling are seen as ‘non-discretionary’ expenses. Are they easily stopped? A financial planner might counsel a borrower about taking on more debt because it’s their job to assist in managing their client’s personal and financial goals, but in the world of mortgage lending, the broker and real estate agents (as applicable), stand to gain commission if a property purchase proceeds with a loan. The conveyancer / lawyer gets paid a service fee, and the lender makes another product sale. All these ‘stakeholders’ for want of a better word, stand to gain from the loan transaction, but is it in the client’s best interest?
A home loan is considered to be a complex product . Who is best positioned to unravel that complexity , and therefore important in the decision making process? Should sole responsibility rest with the consumer?
Obtaining finance and particularly a home loan, is in many cases one of the top 5 biggest incidents in a person’s life . It’s up there with Marriage, Divorce, Birth of Children, and of course Death.
We are in a current environment of record lending rates, high home prices , low interest rates and a volatile employment market. Is now the time to wind back ‘Responsible Lending’ laws. The entering into a home loan contract is not something that should be taken lightly. Time plus information and Education should always be afforded to consumers to enable them to make a better and more informed decision.
From a broad Australian economic perspective , if the Government was concerned back in 2016 about the ‘Banks’ exposure to high levels of home and investment loan mortgage debt , what has changed over the 5 years to now?
Anna Bligh, then CEO of the Australian Bankers Association is quoted as saying “This reform means less time and paperwork for borrowers, not less scrutiny for lenders. Banks know from decades of experience that Australians are reliable and responsible borrowers. They adjust their lifestyle to repay their loans, and when things go wrong it is rarely, if ever, due to spending habits but more to major life events that impact income, such as job loss, illness or divorce. That's why this change makes sense.”
Certainly some can support Bligh’s argument but it highlights this grey area. Who really knows best about whether a consumer should be borrowing or not? Do we leave it to ‘Buyer Beware’? In the case of a young couple buying their first home is that wise? Each person’s circumstances are unique and there is no doubt in home lending we are dealing with complex products. As I said in the 4th point above, ‘Time, Education, and Information’ are very important elements to provide to consumers and they should not be sacrificed for the sake of getting a transaction to happen.
We will await the outcome of the Senate debate.
Michael Clarke, COMPASS lending & finance