Modern Australian

It's about to become easier to lend irresponsibly, to help the recovery

  • Written by Jeannie Marie Paterson, Professor of Law, University of Melbourne

What used to be known as a requirement to lend responsibly is now regarded as red tape.

The National Consumer Credit Protection Act introduced by the Rudd government after the global financial crisis introduced responsible lending obligations that required lenders to ensure the loans they were offering were “not unsuitable” for borrowers.

No longer. If passed into law, changes announced by treasurer Josh Frydenberg last week in the leadup to the budget will remove the obligation for most lenders, allowing them to rely instead on the information presented to them by borrowers.

In the treasurer’s words, it will replace the current principle of “lender beware” with “borrower responsibility”.

He says it will make it easier for consumers to borrow, which would have been a disquieting prospect during the borrowing and house price boom that peaked three years ago under the old rules and was only slowed by intervention from the Australian Prudential Regulation Authority (APRA).

Safeguards offered…

Frydenberg says there will be safeguards. Lenders will have to comply with APRA lending standards. The special restrictions on “small amount credit contracts” (a discrete category that covers payday loans) will remain in place. Debt management firms will be required to hold licences.

But the provisions will not require lenders to assess the crucial question of whether a particular product is suitable for an individual borrower.

For the first time in a decade, that will be up to the borrower.

Read more: Government proposes changes to smooth the path for borrowers

Lenders might decide to do that, but they won’t have to. What the treasurer calls “borrower responsibility” will become “buyer beware”.

Lenders will be obliged to be members of the Australian Financial Complaints Authority and have to act efficiently, honestly and fairly.

And members of the Banking Association will be subject to a code of practice that requires them to exercise the care and skill of a diligent and prudent banker.

But the duty of a banker is to the bank. That means a banker’s job is to ensure that a loan can be recovered, perhaps by selling property, rather than that the borrower can afford to make the payments.

…but bankers work for banks

When the financial crisis struck, equity was stripped from family homes by lenders looking after themselves. The new proposed changes would allow it to happen again.

The government says lenders have had to devote substantial resources to checking incorrect and misleading information provided by borrowers.

But much of it would have come from mortgage brokers acting on behalf of borrowers but being paid as if they were lenders, receiving a commission related to the size of the loan.

And brokers work for banks

It's about to become easier to lend irresponsibly, to help the recovery Mortgage brokers till get paid by banks, despite a recommendation of the royal commission.

The Royal Commission recommended that brokers be subject to a new “best interest” requirement, which is due to come in in January, untested, just before the responsible lending requirement is withdrawn in April.

Commissioner Kenneth Hayne also recommended banning brokers’ commissions and having them accept payment instead in the form of an upfront fee paid by the borrower not the lender. The government at first accepted and then rejected the recommendation.

Even where they are not encouraged to over-borrow, consumers are often making decisions under stress or blinded by optimism bias.

Even where entirely honest they can be unable to make reliable predictions about the level of credit they can bear.

If the responsible lending rules we have are considered too prescriptive, complex and onerous as the treasurer says, a reasonable approach would be to make them simpler and principles-based rather than prescriptive as recommended by Commissioner Hayne.

Read more: Vital signs. It's one thing to back down on Hayne's recommendation about mortgage brokers, it's another to offer nothing in its place

The Australian Law Reform Commission has just commenced an inquiry into how to simplify Australia’s complex financial services regime.

The government might have asked it for a heads up or kept the responsible lending obligations in place until it saw what it had to say.

Authors: Jeannie Marie Paterson, Professor of Law, University of Melbourne

Read more https://theconversation.com/its-about-to-become-easier-to-lend-irresponsibly-to-help-the-recovery-146916

NEWS

New polling shows 79% of Aussies care about climate change. So why doesn't the government listen?

We will remember 2020 as a year of crisis. COVID-19 hit Australia just as we were beginning to make sense of the horror bushfires and smoke of last summer, a...

Why this Queensland election is different — states are back at the forefront of political attention

Glenn Hunt/AAPOn October 31, Queensland will become Australia’s first state to go to the polls during the pandemic. Normally, state elections pass amiably. They matter to the MPs, ministers and...

here’s what women should be getting screened regularly

ShutterstockThroughout the COVID-19 pandemic, many have felt anxious about going to the GP and other health facilities, believing these places have had a greater risk of transmission. A lot of...

why this brutal action film remains a classic

People often roll their eyes when they hear about a major Hollywood studio re-releasing a film from its back catalogue to cinemas. Director’s cuts, “reduxes” and remastered prints can seem...

Will I or won't I? Scientists still haven't figured out free will, but they're having fun trying

ShutterstockSocial media algorithms, artificial intelligence, and our own genetics are among the factors influencing us beyond our awareness. This raises an ancient question: do we have control over our own...

a good but small step to tap the talents of women in STEM

Gorodenkoff/ShutterstockAn overarching criticism of the recent federal budget is that it overlooked the workers hit hardest by the COVID-19 pandemic, namely women. However, the budget includes one promising, albeit small...

what the budget did for working mums

Amy Humphries/UpsplashWorking mothers get something in the budget, but not much, and not for long.Before the budget the second earner in a couple with young children (usually the mother) lost...

New MP Ibrahim Omer's election highlights the challenges refugees from Africa face in New Zealand

Ibrahim Omer campaigning with Labour MP Chris Hipkins during NZ's 2020 general election.GettyImagesThe election of Labour candidate Ibrahim Omer on October 17 makes him New Zealand’s first African MP and...

Facebook is tilting the political playing field more than ever, and it's no accident

As the US presidential election polling day draws close, it’s worth recapping what we know about how Facebook has been used to influence election results.The platform is optimised for boosting...

this time the advantage is with Joe Biden

Polls highly favour Joe Biden to win the US presidential election. These polls are not just abstract information. By telling prospective voters who is the most likely to win, can...

The Year That Changed Us

DSCFToday we’re launching 2020: The Year That Changed Us, a collection of essays written by Australia and New Zealand’s leading academics on what will be one of the most signifcant...

Who will Muslim Americans vote for in the US elections?

ShutterstockMuslims are a small minority in the United States, but they may have a significant influence on the US elections. Muslim Americans, however, are often torn between the anti-Muslim rhetoric...



News Co Media Group

Content & Technology Connecting Global Audiences

More Information - Less Opinion













Popular articles from Modern Australian

4 Memorable Places to Visit in IndiaGoogle's New Pixel 5 is 5G Ready, but is it Good for Gamers?Mistakes To Avoid When Choosing Your Tasmanian Vacation AccommodationBonus Codes for Online PokiesParental Responsibility and Rights When Handling Custody MattersSix Things You Should Never Do During DivorceShipping Container Homes Made From BlocksNHL's Best and Brightest All You Need To Know About The Hyundai i45 For SaleThe Most Popular Cosmetic Surgery Procedures to Look Out for in 2021Tadalafil vs. Vardenafil: Which Is Better?Benefits of sleep for a healthier life5 Ways Safety and Performance of Your Car Go Hand-in-Hand7 Sporting Events For Australians to Enjoy From The Comfort Of Their Homes This Spring & SummerWeighted Blankets: Do They Work?