Responsible lending laws: Too much red tape or not enough?

James McCay

May 6, 2021

In September 2020, Treasurer Josh Frydenberg announced a bill to strip some responsible lending obligations from the National Consumer Credit Protection Act (NCCP), to buoy the economy following COVID-19.1

This decision continues Australia’s rollercoaster ride when it comes to mortgages and the laws that govern home loan lending.

To strengthen and reform lending laws following the Global Financial Crisis (GFC), the Rudd Government introduced the National Consumer Credit Protection Act (NCCP) in 2009. The NCCP is designed to impose better ethical standards in the financial industry.

Regulators began increasing their oversight on mortgage lending. A decade after the NCCP was enacted, the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry uncovered dodgy dealings and shook public trust in Australia’s banks.

Compare the Market’s General Manager of Banking and Finance, David Ruddiman, points out that within the bill currently before the Senate (known as the Economic Recovery Bill 2020), banks will still be held to account to ensure they assess a borrower’s capacity to repay the loan without substantial hardship.

‘While the Government wants to remove Australian Securities and Investments Commission’s (ASIC) oversight of the bank’s lending assessments, they will still be bound by regulatory oversight in this regard, instead only by the Australian Prudential Regulatory Authority (APRA),’ says Ruddiman.

Despite these other oversights that will remain in place, the Government’s announcement to repeal sections of the NCCP has some scratching their heads.

‘Simplifying access’ or opening the door to ‘bad debt’?

Frydenberg’s plan to remove most responsible lending obligations from the NCCP Act is supposed to ‘cut red tape’ and make it easier for Australian households and small businesses to get credit. Currently before the Senate with the final sitting pushed back to 11 May 2021,2 the principle of ‘lender beware’ will be replaced with a ‘borrower responsibility’ mentality.

Professor of Finance Shaun Bond from the University of Queensland broke down the intended impact of the bill in an interview with Compare the Market.

‘One of the key ideas behind the amendments to the NCCP Act is to give lenders some flexibility in dealing with borrowers who have been impacted by the COVID crisis,’ Bond said.

‘Financial institutions face a lot of regulatory requirements when making loans, and changes to these laws will allow banks to service a wider range of clients. More weight will be given to assessing the risk associated with each application and matching the loan’s terms to that risk.’

Ruddiman notes that while responsible lending laws will largely disappear if the legislation is passed, mortgage brokers will have to comply with a new statutory obligation, known as the best interests duty, which requires brokers to act in the best interests of borrowers.

‘This is a much higher benchmark than the responsible lending laws. However, this best interest duty only applies to credit assistance providers (i.e. mortgage brokers) and not bank staff. While consumers can go directly to a financial institution, we would recommend that they also consider utilising the services of mortgage brokers when looking to secure a home loan,’ Ruddiman says.

Despite the Economic Recovery Bill’s intentions and the other fail-safes that will be in place, the move to strip back responsible lending obligations has been widely condemned by consumer advocates.

Fiona Guthrie, CEO of Financial Counselling Australia, said in an interview with Compare the Market, that it would lead to a debt disaster.

‘Financial counsellors cannot see any benefit in removing responsible lending obligations. We believe it will only lead to a debt disaster and cause enormous harm to people and the community.’

 

This statement was echoed by the Financial Rights Legal Centre’s Policy Officer, Julia Davis, in an interview with Compare the Market.

‘We talk to people in financial hardship every single day, and we know for a fact rolling back these laws is going to hurt people,’ said Davis.

‘People will be set up to fail and spend years trying to pay off toxic debt that they can’t afford.’

When asked whether he had any concerns about the NCCP amendment bill, Professor Bond noted that APRA still maintains oversight over all financial institutions.

‘The Reserve Bank of Australia (RBA) will be watching credit markets closely for any signs of imbalance or aggressive lending practices that could increase the overall risk to financial markets,’ Bond explained.

The ‘wagyu and shiraz’ case: Who determines what a borrower can afford?

In 2017, ASIC sued Westpac, alleging that the bank broke the NCCP 261,987 times by not properly assessing whether borrowers could afford their mortgages.3

However, Justice Nye Perram ruled in Westpac’s favour, stating: ‘I may eat wagyu beef every day washed down with the finest shiraz but, if I really want my new home, I can make do on much more modest fare.’4

ASIC later appealed the decision, but the appeal was rejected by the Federal court in a two-to-one ruling in 2020.5

How do lending laws compare in different countries?

Are people good judges of whether they can afford a home loan?

The crux of the issue with responsible lending is this: whose responsibility is it to determine how much money you can borrow? Your own, the lender’s or the Government’s?

Regulation is required to stop home loan borrowers biting off more than they can chew. Davis noted that, in general, people aren’t good judges of what they can afford.

‘What people are mostly not great at is estimating how much money they actually spend before they apply for a mortgage. This can make it hard to cut back on expenses if the loan gets more expensive.’

Conversely, Professor Bond said that people are good judges of their ability to pay back a loan, but he did note that unexpected events can affect even the best borrowers.

‘That’s why banks now go to a lot of trouble to analyse spending patterns, work history, and other financial resources when deciding on the size of a loan to offer to a borrower.’

However, Financial Rights Legal Centre’s Policy Officer, Julia Davis explains that because of this reason, banks are in a much better position to determine whether a borrower can afford their home loan or not.

‘People might get a mortgage or take out a car loan once or twice in their entire lives. Banks do this all the time, day in and day out.’

 

As the Australian Government prepares to debate the bill, potential borrowers could face greater ‘borrower responsibility’ when it comes to applying for a mortgage.

Disclaimer: This article is general in nature and not intended as financial advice. For expert financial advice specific to your situation, seek out a qualified financial adviser. If you’re struggling with debt, you can contact the National Debt Helpline for assistance.

 

Brought to you by Compare the Market: Making it easier for Australians to search for great deals on Home Loans.

Sources

  1. Simplifying access to credit for consumers and small business. The Hon. Josh Frydenberg, MP, Treasurer, Australian Government. 2020.
  2.  National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020. Senate Standing Committees on Economics, Parliament of Australia, Australian Government. 2021.
  3. Australian Securities and Investments Commission v Westpac Banking Corporation [2020] FCAFC 111. Federal Court of Australia. 2020.
  4.  Australian Securities and Investments Commission v Westpac Banking Corporation (Liability Trial). Federal Court of Australia. 2019.
  5.  20-166MR ASIC will not appeal Federal Court decision on Westpac’s ‘responsible lending’ obligations. Australian Securities and Investments Commission, Australian Government. 2020.