The Federal Government is threatening to take an axe to our responsible lending laws.
These laws currently prevent lenders from selling unaffordable loans and saddling people with debt they will never be able to pay off.
The Australian economy is in recession for the first time in nearly three decades. The absolute last thing we need is for banks and lenders to sell people bad debts.
Australia’s responsible lending laws were introduced in 2009, following the Global Financial Crisis (GFC).
During the US subprime loan crisis, which kickstarted the GFC, people became so over-indebted to lenders that many lost their homes and banks had to be bailed out with public funds. Australia was not immune, with asset-based lending too common – people being given loans when the only way to repay was to sell their home.
The laws require banks to ensure a loan is “not unsuitable”, able to be repaid “without substantial hardship”, and meets the customer’s “requirements and objectives”.
They’re a preventative measure to make sure banks don’t sell loans, including credit cards, to people who can’t afford to repay them.
The proposed laws are yet to be seen, but there are two key changes that will drastically change the balance of power in our marketplace.
- The law will no longer require lenders to properly verify the affordability and suitability of a loan.
- People will be restricted in taking action against the banks when they do the wrong thing.
- There won’t be any oversight or enforcement of consumer protections.
In May 2020, ratings agency Fitch Ratings warned that Australia’s household debt posed “an economic and financial stability risk”. At 186.8 per cent of disposable income, our household debt levels are one of the highest levels among triple A rated countries.
Removing high lending standards during a recession, when many people are facing reduced incomes and financial hardship, is dangerous. With 1 in 10 loans deferred (amounting to $274 billion), it’s likely that many people will turn take on additional debt as repayments resume, which will only worsen their financial situation.
In April 2020, the Reserve Bank of Australia warned:
…the level of household debt and elevated housing prices are longstanding risks for the Australian financial system. In the period ahead, many households will find their finances under strain due to efforts to contain the virus.
Strong lending standards are crucial for supporting our economic recovery.
Years of misconduct exposed during the Financial Services Royal Commission shows that competitive pressure means banks place their pursuit of profit ahead of the interests of their customers.
Banks have the experience, expertise, and data to run rigorous assessments to determine whether a borrower will be able to afford a loan – advances in technology have only made this easier. Whereas for many borrowers, a home loan might be the first and only time they’ve applied for such a significant amount of credit. Placing the responsibility on the borrower – whose primary interest is obtaining a loan for a home, for example – instead of the lender, creates a fundamentally imbalanced dynamic.
When people start struggling to make repayments on loans, the impact can be broad and long lasting. Often people try to forgo other essential expenses, such as groceries or heating. In some cases, it can lead to bankruptcies and home repossessions. The stress and anxiety experienced by people in debt affects their mental health and their family. For many, unaffordable debt is a pathway to poverty.
The first recommendation of Commissioner Kenneth Hayne was that responsible lending laws should be enforced, not changed (Recommendation 1.1). The Government’s proposal directly contradicts this recommendation and ignores the work of the Banking Royal Commission.
The stories shared at the Banking Royal Commission shocked Australia and demonstrated the need for stronger rules and oversight of financial services. Removing lending obligations would reduce both the oversight of, and consequences for, misconduct by these very same lenders.
It’s often those who struggle to make minimum repayments or are repeatedly hit with late fees who are the most profitable for lenders.
The evidence? The same day Frydenberg announced that responsible lending laws would be axed, the Big Four bank stocks surged $14.6 billion.1
 Big bank stocks surge as responsible lending laws axed, Australian Financial Review, 25 September 2020