Loan shake-up ‘could hurt borrowers’

Lending reforms designed to make it easier for borrowers to get bank loans have the potential to ‘increase the risk of consumer harm’.

Federal Treasurer Josh Frydenberg. The government is hoping the consumer credit reforms will help boost the post-Covid economy. Picture: NCA NewsWire / David Geraghty

Lending reforms designed to make it easier for borrowers to get bank loans have the potential to increase the risk of consumer harm, according to an assessment of the planned changes by Treasury.

As well as shifting responsibility for bad loans onto borrowers, the reforms, which make up the proposed new national consumer credit protection rules, could lead to some borrowers getting lumped with loans too big to service, leaving them overextended, according to the document prepared by Treasury.

In addition, the reforms, which are due to commence from March, could result in lenders taking on more risk, Treasury’s regulation impact statement released under Freedom of Information rules said.

“Without every application subjected to the current intense inquiry and verification process, there is the potential for some consumers to get extended credit they previously would not have received,” Treasury said of the government’s move to remove responsible lending obligations.

“The imposition of obligations at the portfolio level may (also) lead to lenders taking on more risks — at the margin — in lending, which can lead to more instances of consumer harm,” it warned.

The biggest shake-up to Australia’s lending laws in a decade is just one of the steps taken by the government to boost the post-Covid economy.

Federal Treasurer Josh Frydenberg in September announced that the stricter rules brought in by the Rudd government during the global financial crisis would be abolished to unshackle lenders from excessive regulation.

“These changes will make it easier for the majority of Australians and small businesses to access credit, reduce red tape, improve competition, and ensure that the strongest consumer protections are targeted at the most vulnerable Australians,” Mr Frydenberg said at the time.

As part of the consumer credit amendment bill, which was introduced into parliament last month, responsible lending obligations will be removed from the national consumer credit rules, with the exception of small amount credit contracts and consumer leases, where heightened obligations will be introduced.

Lenders will be able to take at face value the information provided by borrowers in loan applications, meaning borrowers will shoulder the responsibility of providing accurate information.

This is unlike the current laws, which place the onus on lenders to verify the information contained in a borrower’s application.

In cautioning on the disadvantages of the government reforms, Treasury pointed to the shift from “lender beware” to “borrower beware”.

“Under (the reforms), consumers will need to take greater responsibility, in particular noting the potential risk they could face through receiving unsuitable credit, if they provide incorrect or incomplete information to a lender.

“Consumers may underestimate or misunderstand their repayment capacity, leading to them obtaining credit they may otherwise not have obtained,” it said in the impact statement.

The move by the government away from the one-size-fits-all regulatory approach comes two years after the financial services royal commission heard of multiple instances of dodgy consumer lending practises by both lenders and brokers.

It also comes after the Australian Securities and Investments Commission was unsuccessful in its landmark ‘wagyu and shiraz’ responsible lending case against Westpac Bank, which it lost last year.

And while Westpac won the landmark legal judgment against ASIC over the prescriptive nature of the credit rules this case “did not provide lenders with further clarity” on what is required to meet legal obligations Treasury said.

Still the major regulatory shift has drawn a mixed response, with the banking sector praising the overhaul and consumer groups slamming it as shortsighted.

While warning on the increased risk of consumer harm from the changes, Treasury noted that lenders were still required to carry out an assessment of a borrower’s capacity to repay without financial hardship.

“Additionally, consumers will continue to have access to remediation and redress through the Australian Financial Complaints Authority,” it clarified.

Treasury also said it anticipated current industry codes, such as those by the Australian Banking Association and the Customer-Owned Banking Association, along with AFCA’s ongoing role, would continue to inform best practices and prudent lending in the sector.

The advantages of implementing the new credit framework include that it supports credit supply, allowing lenders to be more flexible in adhering to “reasonable lending principles”, rather than prescriptive responsible lending obligations, Treasury said.

Compliance costs would also be reduced if the reforms are legislated, it predicted, with the ability to scale the credit assessment process, meaning less time would be required to meet compliance requirements. This would reduce costs for lenders and the majority of borrowers, Treasury said.

“For consumers, there will be reduced compliance costs as lenders streamline their processes and better target them to the financial situation of the borrower and type of product being sought.

“For small businesses, this option will remove the current ambiguity that exists for mixed-use loans, by clarifying that where lending is in part for a small business purpose it will not be subject to the new obligations,” it wrote in the regulation impact statement.

The reforms should also boost competition, reducing barriers to switching between lenders and encouraging borrowers to seek out better terms or a lower interest rate.

In contrast, maintaining the status quo would result in higher compliance costs, delays in credit assessments and difficulties in accessing credit.

“Obligations would continue to have an impact on credit supply and its timing. The contribution of credit supply to Australia’s economic recovery will continue along its current path,” it found in its assessment.

The proposed reforms come as the March end point for loan deferrals issued through the COVID-19 crisis edges closer, with banks facing the prospect of tough conversations with some customers.

At the peak of the crisis, Australian banks were sitting on loan deferrals of $250bn. That figure has steadily whittled down as the economy has opened up, and is sitting at $60bn, according to the latest data from the prudential regulator.