RLOs should be ‘tweaked, not removed’: Pepper CEO

The proposal to remove responsible lending obligations (RLOs) is set to play out in 2021. 

Earlier this month, the bill relating to the RLO removal (as well as the introduction of new rules onto non-banks and the proposed extension of the best interests duty to more credit assistance providers) – the National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 – was introduced into Parliament.

However, it was later sent to the Senate for inquiry for further interrogation following political opposition. Submissions are now being accepted as part of this inquiry, with a deadline of 3 February 2021, and the Senate is expected to report back to the chamber on 12 March 2021.

The decision to remove RLOs has also been met with mixed reaction from industry. While many have welcomed the spirit of the change (to speed up the flow of credit), others have warned against potential harm to consumers and the undoing of a decade of work.

Indeed, speaking on the Mortgage Business’ Mortgage and Finance leader podcast, the CEO of non-bank lender Pepper Money Australia, Mario Rehayem, said that it “would be a shame to abolish what we have after the progress that was made by the whole industry on lending responsibility after the GFC”.

“There is no doubt that we need change, but what we should be doing is tweaking and not removing the responsible lending obligations of all lenders.

“I am really nervous about going down the path of borderline unethical practices that may be interpreted to be fine because there are no particular obligations anymore,” he said.

“Most obligations required by the lender are common sense obligations, so you would want to think why would you abolish all of this and why would you not go to where the real problem is.”

Mr Rehayem said he believes that the real problem is centred around the topic of living expenses.

“It is about who is responsible to disclose to the lender what the living expenses are and what the lenders’ responsibilities are to either accept that or just go down that rabbit hole and keep digging and digging to prove and validate those living expenses are true or correct,” he said.

Mr Rehayem told Mortgage Business that he is not a big believer in going down the rabbit hole of having a thousand items to try and validate the customer.

“It’s the right thing to do to ask the questions on the application form that would trigger the customer’s thought process on considering what their monthly liabilities are,” he said.

“But I think where we have fallen off and gone too far is [around] what constitutes the validation and how far we have to go to validate what that customer is applying [for]. And that is where the borrower’s responsibility comes in,” he said.

“That is where I think we have lost touch of the real world and what I think the government is trying to fix. To their point, we have indeed made it too hard for people to access credit, but to abolish the whole thing is definitely, categorically, not the right thing to do.”

Mr Rehayem believes that the bulk of the RLOs should remain, but there is a “grey area where there needs to be greater clarity for everyone”.

“I do believe we have the obligation, as the borrower, to wear this responsibility and the need to share the responsibility,” he said.

“But this then comes to communication and clarity. Not every Australian has high financial literacy to understand the nuts and bolts behind what they are entering. That’s what I believe needs to be tweaked,” he said.

“We need to tweak where there is an assessment made on the customer, nine times out of 10 that customer will be needing a very thorough plan or discussion to be had through a broker or branch over the phone to truly understand their responsibility. That is wh[at] we are missing..

“If you follow the letter of the law and recent trends, they are talking about product and price. But do customers understand the obligation? Do they understand that repayment is something you are always going to have when meeting your obligations?

“To abolish responsible lending, in my view, is totally incorrect, and instead it should be altered,” Mr Rehayem concluded.

“They are 100 per cent right when Treasurer Josh Frydenberg said there were too many pages in the legislation, that is spot on, but that doesn’t mean you throw the whole thing out.”

If you missed it, you can listen to the episode of the Mortgage and Finance Leader podcast with Mario Rehayem below, or find us on your preferred podcast provider (iTunes, Spotify, Google Podcasts etc).

[Related: Responsible lending ‘pendulum’ has ‘swung too far’: Lowe]