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%.
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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
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