'No sense': Consumer groups slam lending changes
Responsible lending obligations (RLOs) are set to be watered down in hopes of boosting the flow of credit circulating through Australia's banking sector, but consumer groups say the move will make loans more expensive and harder to get.
In short, the government plans to do away with much of the lending red tape that was imposed by the Credit Act established in the wake of the global financial crisis. The government claims that this 'one size fits all' approach has jammed up the lending process with lengthy credit approval processes that put the burden of responsibility on the lender rather than the borrower.
"As Australia continues to recover from the COVID-19 pandemic, it is more important than ever that there are no unnecessary barriers to the flow of credit to households and small businesses," says Treasurer Josh Frydenberg.
"By simplifying the loan application process for borrowers it will reduce barriers to switching between credit providers, encouraging consumers to seek out a better deal."
The changes follow a recent statement by Reserve Bank of Australia governor Philip Lowe that the RLOs disincentivise banks from making loans.
"[The] pendulum has probably swung a bit too far to blaming the bank if a loan goes bad," said Lowe.
"So some of the banks have had this mindset, 'Well, we can't make loans that go bad'."
In effect, the risk burden of a loan going bad will be transferred from the finance sector to consumers.
"[The changes] play an important role in ensuring access to credit for businesses wanting to invest and grow. SME businesses drive employment and this is very important for economic recovery," says Westpac CEO Peter King.
"The Government proposal strikes a good balance between reducing regulatory burden on credit providers while ensuring we have rigorous credit processes in place."
So the banks are happy about it. Consumer groups, not so much.
Higher protected earning amounts will be applied to small amount credit contracts (SACCs) such as payday loans, preventing people receiving more than 50% of their net income from Centrelink having more than 10% of their earnings going towards repayments, while people receiving less than 50% of their net income from Centrelink will be prevented from having more than 20% of this allocated to repayments.
The National Credit Providers Association believes this will drive up the cost of a small loan and make it harder Australians who need access credit.
"This makes no sense at a time when the Treasurer is saying to banks for a loan of $500,000 responsible lending laws are being relaxed and it's buyer beware, but for the same consumer who wants to borrow $500, they are making it harder and more expensive."
Joining the chorus, Consumer Action Law Centre CEO Gerard Brody says the reforms will work against the intended aim by increasing costs for consumers.
"Allowing very large establishment fees for rental arrangements, of 20% of the value of the goods, will not mean that renting essential household goods are affordable.
"The only explanation for these changes is that the Government has bowed to the sustained lobbying by industry. The ongoing delays and pandering to industry interests is simply unacceptable.
"Unaffordable credit will destroy our economy. These proposals are the kind of short-sighted thinking that led to the global financial crisis."