Responsible lending rules are on the cutting board this federal budget

The responsible lending obligations that place the burden on banks to make sure a person can afford to repay the debt they’re being sold could be scrapped in the upcoming federal budget, Treasurer Josh Frydenberg has said.

The move is designed to make credit available to more people quicker as the country climbs out of its first recession in almost three decades, Mr Frydenberg said, in an opinion piece published in The Australian.

“Lenders have become increasingly risk averse and overly conservative. As a consequence, borrowers, irrespective of their financial circumstances, have faced an ever more intrusive, difficult and drawn-out approval process,” he said.

“The removal of responsible lending obligations (RLO) substantially will cut red tape and improve consumer outcomes.

“It will restore balance to the system after 10 years of regulatory creep that has seen the pendulum swing too far away from borrower beware to lender beware.”

Getting credit? Here’s what it could mean

Responsible lending obligations were introduced after the Global Financial Crisis (GFC). They prohibit financial institutions from selling, suggesting or helping a borrower sign a credit contract if the product is “unsuitable” for them, according to the Australian Securities and Investment Commission (ASIC).

They place the obligation on banks to inquire, verify and assess a customer’s financial situation before granting them a credit card, a personal loan or a mortgage, among other kinds of credit.

The Reserve Bank’s view on responsible lending obligations

Mr Frydenberg paraphrased select testimony from Reserve Bank of Australia (RBA) Governor Philip Lowe in his thinking behind eliminating responsible lending laws.

“I think the principles in the legislation are sound, but I think the way we've translated those principles into reality needs looking at again,” Dr Lowe said, before a standing economics committee in the house of representatives last month.

“... We can't have a world in which, if a borrower can't repay the loan, it's always the bank's fault. 

“On a portfolio basis, we want banks to make some loans that actually go bad, because if a bank never makes a loan that goes bad it means it's not extending enough credit.”

He added fewer banks had expressed concerns “in the past three or four months” following new guidance introduced by ASIC. 

“Institutions are gradually coming to grips with those,” he said.

Four consumer groups denounce the plan

Consumer groups were quick to denounce the indication responsible lending obligations could be scrapped in the coming federal budget, due October 6.

The Consumer Action Law Centre, Financial Counselling Australia, Financial Rights Legal and Choice released a joint statement asserting borrowers need more income, not more debt.

“Watering down credit protections will leave individuals and families at severe risk of being pushed into credit arrangements that will hurt in the long term,” Karen Cox said, chief executive of Financial Rights Legal Centre, and an opening witness to the recent banking royal commission.

“Our service helped thousands of Australians drowning in debt and we continue to see legacy debt that predates the Hayne Royal Commission. How can we have so quickly forgotten the hard lessons from the GFC and the Hayne Royal commission?”

Businesses generally praised the move

Others welcomed the news, including property developers and investors, claiming the elimination of RLO will give the economy a much needed jump start at a time when it needs it.

“The measures announced by the Treasurer today appear focused on getting the balance right between a fit-for-purpose framework, which supports the flow of credit with regulatory oversight and consumer protections in place,” Ken Morrison said, chief executive of the Property Council of Australia. 

“A competitive and well-functioning credit market, subject to prudent regulatory oversight, will help more Australians buy or invest in property, improving housing supply and affordability and support jobs and economic growth.”

Only responsible lending practices will be scrapped, Treasurer Frydenberg said, and not other regulatory checks and balances introduced after the GFC.

Other financial reforms will stay in place

 “Importantly, the many additional protections the Coalition has introduced will remain in place, including the best interest duty for mortgage brokers, ASIC’s product intervention power, design and distribution obligations on lenders, and the continued free access to consumers to dispute resolution via the Australian Financial Complaints Authority,” he said.

“As the economy emerges from the COVID-induced recession, we know credit will be essential to the speed and strength of recovery. 

“These reforms are in pursuit of that objective.”

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