Responsible lending reforms: Why Aussies need to be protected

author-avatar By on June 02, 2021
Responsible lending reforms: Why Aussies need to be protected

OPINION

As Australia begins taking its first meaningful steps out of the COVID-induced recession, responsible lending has become a central part of the economic conversation.

In September of last year, the Federal Government announced plans to reform responsible lending regulation to speed up loan approvals and inject more credit into the economy.

The reforms will go to a vote in June and, if passed, would shift the burden to borrowers, allowing lenders to take information provided by borrowers at face value.

While alleviating restrictions on lending applications would accelerate the facilitation of credit, it risks causing an increase in lending to consumers who cannot afford to borrow.

Not only would this be largely irresponsible, it would also risk being detrimental to the economy at a time when Australians can least afford it.

Research suggests that as little as a 1% increase in domestic credit raises the likelihood of a banking crisis by 6 to 8%.


Buying a home or looking to refinance? The table below features home loans with some of the lowest interest rates on the market for owner occupiers. 

Lender
Advertised rate Comparison rate Monthly repayment Rate TypeOffsetRedrawOngoing FeeUpfront FeesLVRLump Sum RepaymentAdditional RepaymentsPre-approval
VariableMore details
LIMITED TIME OFFER

Smart Booster Home Loan Discounted Variable - 2yr (LVR < 80%)

  • Fast turnaround times, can meet 30-day settlement
  • For purchase and refinance, min 20% deposit
  • No ongoing or monthly fees, add offset for 0.10%
LIMITED TIME OFFER

Smart Booster Home Loan Discounted Variable - 2yr (LVR < 80%)

  • Fast turnaround times, can meet 30-day settlement
  • For purchase and refinance, min 20% deposit
  • No ongoing or monthly fees, add offset for 0.10%
VariableMore details
100% FULL OFFSET ACCOUNTNO APPLICATION FEE OR ONGOING FEES

Low Rate Home Loan - Prime (Principal and Interest) (Owner Occupied) (LVR < 60%)

  • No upfront or ongoing fees
  • 100% full offset account
  • Extra repayments + redraw services
100% FULL OFFSET ACCOUNTNO APPLICATION FEE OR ONGOING FEES

Low Rate Home Loan - Prime (Principal and Interest) (Owner Occupied) (LVR < 60%)

  • No upfront or ongoing fees
  • 100% full offset account
  • Extra repayments + redraw services
VariableMore details
REFINANCE IN MINUTES, NOT WEEKS

Nano Home Loans Variable Owner Occupied, Principal and Interest (Refinance Only)

  • Refinance only. Fast online application
  • No Nano fees. Free 100% offset sub account
  • Mobile app, Visa debit card & instant payments
REFINANCE IN MINUTES, NOT WEEKS

Nano Home Loans Variable Owner Occupied, Principal and Interest (Refinance Only)

  • Refinance only. Fast online application
  • No Nano fees. Free 100% offset sub account
  • Mobile app, Visa debit card & instant payments
VariableMore details
YOU COULD WIN $100k TO PAY DOWN YOUR LOAN*

Owner Occupier Accelerates - Celebrate (LVR < 60%) (Principal and Interest)

  • For a chance to win $100K towards your home loan, apply with Athena before Oct 31 & be approved by Dec 15
  • We lower your rate based off how much you’ve paid down your loan
  • Automatic rate match
YOU COULD WIN $100k TO PAY DOWN YOUR LOAN*

Owner Occupier Accelerates - Celebrate (LVR < 60%) (Principal and Interest)

  • For a chance to win $100K towards your home loan, apply with Athena before Oct 31 & be approved by Dec 15
  • We lower your rate based off how much you’ve paid down your loan
  • Automatic rate match
VariableMore details
AN EASY ONLINE APPLICATION

Yard Home Loan (Principal and Interest) (Special) (LVR < 70%)

  • Unlimited additional repayments
  • Unlimited free redraws
  • Optional 100% offset can be added for $120 p.a.^
AN EASY ONLINE APPLICATION

Yard Home Loan (Principal and Interest) (Special) (LVR < 70%)

  • Unlimited additional repayments
  • Unlimited free redraws
  • Optional 100% offset can be added for $120 p.a.^

Rates correct as of October 23, 2021. View disclaimer.


The debate

Last year Australia fell into a recession for the first time in nearly three decades as the country felt the full impact of pandemic-induced lockdowns.

The Federal Government was quick to support the economy. Payments such as Job Keeper and Job Seeker reduced the impact of job losses, while responsible lending exemptions made it easier for small and medium businesses to borrow.

These measures had the common goal of stimulating economic activity to limit the impact of reduced demand and consumer spending.

Over the last six months, the debate has shifted to whether we should be making it easier for everyday Australians to borrow more quickly.

The Government’s proposed reforms to responsible lending requirements would certainly make it easier for consumers to spend.

However, many believe the changes would put consumers at risk, exposing them to loans they may be unable to repay.

Appeasing both sides of the debate will require finding a solution that allows credit to flow more freely to consumers without placing them at greater risk of financial hardship in the future.


Industry discourse

Major lenders are in favour of the proposed reforms, suggesting they would have a positive impact on accelerating the speed of loan approvals, rather than encouraging banks to issue riskier loans.

Westpac chief executive Peter King said “the Government proposal strikes a good balance between reducing regulatory burden on credit providers while ensuring we have rigorous credit processes in place.”

He further noted that “it is in Westpac’s interest to only lend to customers who are in a position to meet their financial obligations.”

His views are supported by other banking executives, including NAB chief executive Ross McEwan, who noted that the reforms are not about wanting to “lend to people who can’t afford it. NAB will continue to lend responsibly and diligently.”

This is not the case for all lenders, however. The CEO of digital lender Tic:Toc has publicly opposed the impending repeal of responsible lending laws, noting that the supply of credit in the economy is currently strong.

His views have been supported by a number of consumer groups who fear the amendments could lead to an increase in predatory lending.

Financial Rights Legal Centre chief executive Karen Cox noted that, if approved, the reforms would “take consumer protection backwards by a decade and expose ordinary Australians to more debt.”


The role of technology

The issue is the time it takes financial institutions to assess applications for credit.

Legacy technology means that verifying application information can be a lengthy process, increasing costs for lenders and slowing the approval of credit to borrowers.

Removing these requirements would address this issue. However, rather than removing responsible lending requirements and risking unintended consequences, the financial sector and Government should be looking to technological solutions.

Today, FinTechs in Australia offer data aggregation and enrichment products that give financial institutions the ability to facilitate near instant verification of borrower financial data.

These tools give financial organisations a comprehensive and accurate view of a consumer’s financial position, allowing them to speed up lending processes while still adhering to existing responsible lending guidelines.

In short, the answer lies in technological innovation, not reducing the need for responsible lending protocols.

Australian financial institutions can meet our country’s responsible lending guidelines quickly, today.

We simply need to innovate.


Photo by Jon Moore on Unsplash

Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:

  • The big four banks are: ANZ, CBA, NAB and Westpac
  • The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2020. They are (in descending order): Great Southern Bank, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
  • The larger non-bank lenders are those who (in 2020) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.
  • If you click on a product link and you are referred to a Product or Service Provider’s web page, it is highly likely that a commercial relationship exists between that Product or Service Provider and Savings.com.au

Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site.

In the interests of full disclosure, Savings.com.au, Performance Drive and Loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.

*Comparison rate is based on a loan of $150,000 over a term of 25 years. Please note the comparison rate only applies to the examples given. Different loan amounts and terms will result in different comparison rates. Costs such as redraw fees and costs savings, such as fee waivers, are not included in the comparison rate but may influence the cost of the loan.

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Tim Poskitt is the Australia New Zealand Country manager of Envestnet | Yodlee, a leading data aggregation and analytics platform powering dynamic, cloud-based innovation for digital financial services. He has 15 years of international experience in financial services and data analytics, including senior roles at HSBC and illion.

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