Responsible lending removal: The pros and cons

On Friday (20 November), the federal government’s consultation on changes to responsible lending obligations (RLOs) closed.

While the final decision around the consumer credit reforms is yet to be determined, several industry commentators have already made known their thoughts on the impact of the removal of RLOs for everything except small amount credit contracts and consumer loans.

The changes came after Treasurer Josh Frydenberg said that the principles-based responsible lending framework had become “an overly prescriptive set of obligations” which had stifled the flow of credit.

Speaking last week, Mr Frydenberg said that the current rules had “given rise to almost a hundred pages of ASIC regulatory guidance” which had “led lenders to become increasingly risk-averse and conservative for fear of falling foul of the guidance”.

The Treasurer said: “Borrowers, irrespective of their financial circumstances, have subsequently faced a longer and more intrusive approval process.”

He gave the example of a first home buyer who had put down a deposit after receiving pre-approval from the bank. 

“Before settlement, he received a promotion at work that involved a salary increase. He notified the lender before his loan was finalised and the bank told him that the promotion constituted a change in circumstance, requiring his loan application to be reassessed and delayed because he didn’t have a past history of income at that level to rely on.

“Even modest increases in credit limits for existing customers trigger the need for a reassessment of the customer’s financial circumstances.”

As such, he said the move to remove RLOs for all lenders except those issuing small account credit contracts or consumer leases would “restore balance and reduce the cost and time faced by consumers”.

Reaction to the move has been mixed. While many have supported the reason behind the change, others have highlighted that lenders will need to make drastic changes to the way they view borrowers and understand their financial position on an individual basis.

Data aggregation and data analytics platform Envestnet | Yodlee welcomed the move to “accelerate the flow of credit to consumers”, with country manager Tim Poskitt telling Mortgage Business: “Supporting economic activity is vital to our economic recovery. Alleviating financial institutions of the burden of proof on lending applications will have the desired effect of accelerating the facilitation of credit. 

“However, relaxing responsible lending requirements does risk an increase in lending to consumers who can't afford to borrow.”

As such, he highlighted that lenders would increasingly need to utilise solutions that provide them with rich and accurate data on a borrower’s financial status to “facilitate near-instant verification of borrower financial data”, or they would have to put in “a lot more effort to review the documentation, the income verification process and the qualification of any expenses through the full process”.

He added, however, that by employing solutions that streamlining the “digital data capture process” would help “ultimately say ‘yes’ or ‘no’ to a borrower quicker”.

“Ultimately, we see it as a winner from that perspective,” Mr Poskitt said.

“It has benefits to both parties [lenders and borrowers]. 

“Obviously, it’s going to be a change for some of the organisations to what they’ve done before, so it’ll require some changes in some processes which will take time.

“But by harnessing technology to ensure that they can quickly and responsibly approve credit to Australian consumers when it’s needed, at levels they can afford, this would be benefit to all.”

He added that comprehensive credit reporting and the Consumer Data Right would also help lenders in ascertaining a more clear picture of borrowers moving forward.

Meanwhile, consumer groups, financial counsellors and domestic violence advocates have slammed the Australian government’s plans to remove critical protections for women experiencing economic abuse.

The CEO of the Financial Rights Legal Centre, Karen Cox, outlined that the current lending obligations prescribes “important steps which often identify red flags in domestic and family abuse”.

“These critical protections serve a vital purpose, requiring the lender to make inquiries as to the loan’s purpose, suitability and affordability,” Ms Cox said.

“Australia’s lending laws require lenders to undertake an assessment process that will often put them on notice when loans should not be approved.

“This is an important role in identifying and preventing the financial abuse of vulnerable women.”

Likewise, Laura Bianchi, team leader of Redfern Legal Centre’s Financial Abuse Service NSW and coordinator of the Economic Abuse Reference Group NSW, said its members had “grave concerns” about the impact of removing lending protections on people experiencing domestic and family violence.

“The wind back of responsible lending obligations will have dire consequences for people experiencing financial abuse. Coerced debt is a common factor preventing victim survivors from leaving a violent relationship and re-establish their lives,” Ms Bianchi said.

“It has been well documented that rates of family violence and economic abuse have risen sharply during the COVID-19 pandemic.

“Removing these critical protections at a time when so many women are more vulnerable than ever to economic abuse could have devastating results.”

The measures will commence on 1 March 2021, subject to the passing of legislation.

[Related: Consultation launches on responsible lending changes]