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Banking & Finance | Legal

Where to now on responsible lending? – Gerard Brody

5 Nov 2020, by Amy Sarcevic

Gerard Brody of the Consumer Action Law Centre has expressed concern over Treasurer Josh Frydenberg’s intention to scrap responsible lending laws, describing the move as a “risky and dangerous policy” that will hurt Australian households.

The proposed reform, currently being drafted, could mean the abolishment of all responsible lending obligations that form the National Consumer Protection Act 2009, with the exception of consumer leases and small amount credit contracts.

Although designed to aid economic recovery by simplifying the credit process, Brody is concerned the measure will do just the opposite: over-indebt Australians at the expense of financial and economic health – and ultimately prolong the recession.

“There is profit to be made from overextending credit to individuals and households, and it is often to the detriment of consumer wellbeing and the broader economy,” said Brody ahead of the Australian Financial Review Banking & Wealth Summit.

“With fewer administrative hurdles to jump when obtaining credit, it is almost inevitable that we will see a rise in defaults, distress sales, repossessions and bankruptcies.

“Moreover, the reforms could mean there is no avenue to hold banks legally accountable for predatory lending practices – which we know from first-hand experience is still an issue, even after the Royal Commission.”

At around 120 per cent of GDP, Australians already have the world’s second-highest household debt figures, globally, with debt growth outpacing that of assets and income in recent years. According to ABS Statistics, around three in ten households were classed as over-indebted in 2015-16, with 77 percent lacking sufficient liquid assets to cover a quarter of the value of their debts.

This year, the effects of a national debt over-commitment have been felt profoundly with 32.8 percent of home loan-holders (1.1 million households) falling into mortgage stress, amid widespread job losses. With the Federal Government’s Job Keeper scheme due to end in March 2021, it is predicted that home loan defaults will climb from 80,000 to 100,000, by the end of the year.

The current crisis has been likened, by many, to the 2008 Global Financial Crisis (GFC) during which responsible lending obligations were first introduced in Australia as a permanent remedial measure. In 2019, the laws were revisited during the Hayne Royal Commission, amid revelations of widespread malpractice – consistent with actions that sparked the GFC.

Brody does not understand why laws that have been proven to work in the past are being reversed, and argues that lifting consumer protections will do little to improve credit flow.

“I am confused as to why a measure that has proven to rectify the economy in the past – and which has been endorsed by Commissioner Hayne as a primary recommendation of the Royal Commision – is being totally disregarded,” he said.

“Consumer protection regulation in the credit market will not threaten credit flow. This year Australia has already seen record numbers of owner-occupier mortgage applications, and ANZ CEO Shayne Elliott admitted that removing responsible lending laws would do little to enhance credit flow further.

“Any potential drop in application numbers we may see later on in the COVID-19 crisis will be a product of economic uncertainty, not ‘overregulation’,” he added.

Brody, who recommends that responsible lending laws continue as a permanent fixture of the lending industry, is “disheartened” by the government’s suggestion that APRA’s prudential standards will be a reasonable substitute for responsible lending laws.

“Without stating the obvious, APRA is a not a consumer protection regulator. They are interested in the stability of the system and in making sure banks don’t fall over. They are not there to protect individual borrowers,” he said.

However, Brody is “heartened” by discussions with parliamentarians surrounding the potential reform.

“From the preliminary conversations I have had so far, it does seem likes Parliamentarians are on the same page as us [Consumer Action Law Centre]. Many agree that they are a reasonable consumer protection and that lenders have behaved better since their arrival. Let’s hope they also realise the value these laws bring to the economy,” he concluded.

Gerard Brody is Chief Executive of the Consumer Action Law Centre and an advocate for ethical banking.

Join him for a lively debate on this issue at the Australian Financial Review Banking & Wealth Summit – held as a virtual event on November 18.

Learn more and register.

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