“Old generals always fight the previous war” goes the old adage – many of the old arguments are being rolled out by both sides in the proposed changes to Responsible Lending rules.
But, as we enter 2021 and a likely busy property market, Accredited Broker believes Responsible Lending is yesterday’s argument.
At the heart of the battle is a proposal by the federal government to free up the flow of credit by making borrowers more responsible for the loans they take out, rather than the onus falling on lenders.
The opponents of the change argue it will lead to the bad-old days of predatory lending with people up to their eyeballs in debt they cannot afford.
However, while this is a legitimate concern, Accredited Broker believes this is only a part of the story – and that, if managed effectively, Australians can have access to credit easier while robust lending standards are maintained.
New technology and business models are the reason why the dilution on Responsible Lending rules may not lead to the dilution of lending standards.
The biggest driver is the impact of Comprehensive Credit Reporting. The banks, utilities, phone companies now have to share a whole heap of history on a borrowers’ credit history such that, whenever a new loan application is received, the banks can see the extent of someone’s debt and how good they have been at paying back their loans.
With such up-to-date information a bank is better positioned than ever to establish if a loan request is too risky. Here the detractors of the proposed changes do not understand how banking works – it would be irresponsible of a bank’s risk team to sign-off on a loan application if the lender is unlikely to get its money back.
And the recent Westpac v ASIC court case proved this, where Westpac was able to show data on borrower behaviour that showed even high spenders reduce their spending habits once they take out a mortgage.
But the banks have also changed their business models; during the Covid-19 pandemic, all have been very accommodating to those who cannot make their repayments.
Under the proposed changes Responsible Lending matters have now become the jurisdiction of a different regulator, APRA, rather than ASIC. As the main banking regulator, APRA has many ways of managing bank behaviours. One way it is doing this is through changes to the bonus structures – gone are the days of huge bonuses for bankers who bring in lots of busines, banks are now required to pay some bonus based on non-financial measures – such as community satisfaction, employee wellbeing and gender equality
Anecdotally, Accredited Broker is aware of lenders already taking a more reasonable response to Responsible Lending while balancing their obligations as a good corporate citizen. Banks are increasingly accepting that someone’s high living costs now, will reduce when they have a mortgage
For or against the changes, Responsible Lending rules are only a small part of the picture of how mortgages will be arranged in 2021