Are responsible lending changes on the way?

Australia has scrapped responsible lending laws in the wake of Covid-19. Advisers tell us what aspects of NZ responsible lending they want to see change.

BY DANIEL DUNKLEY

In late September, Australian treasurer Josh Frydenberg announced that the country’s government would scrap controversial responsible lending laws created in the aftermath of the global financial crisis.

Following Australia’s first recession in three decades, the Aussie government moved to end legislation that bound the country’s major lenders to strict credit criteria and customer processes.

The decision, designed to kick-start the economy in the wake of Covid-19, effectively watered down credit rules for the nation’s banks, making lenders subject to less onerous oversight.

Announcing the decision, Frydenberg described the move as “the most significant reforms to Australia’s credit framework in a decade”.

The Aussie government is keen to boost lending and unleash credit controls.

Changes to Aussie lending rules

Under the changes, the Australian Securities and Investments Commission (ASIC) will no longer enforce responsible lending laws. Instead, ASIC will be given greater oversight of payday lenders and vulnerable borrowers.

Banks and non-banks will be policed by prudential lending standards overseen by APRA, eliminating the old ASIC lending rules.

The Aussie government hopes the decision to scrap responsible lending laws will free up banks to lend more to homeowners and small businesses, in turn stimulating the economy following the pandemic.

Following the rule changes, Australia will allow banks to rely on income and spending information provided by borrowers when assessing loan applications rather than conducting indepth verifications.

The changes mark a U-turn in Australian banking regulation. Since the GFC, Aussie banks were put under everincreasing regulation, culminating in the Royal Commission into misconduct in the financial services sector.

Despite the damning findings from the Commission, Australian authorities have deemed it necessary to loosen credit controls in this new financial crisis.

Australian banking chiefs hailed the government’s decision, which will reduce the need for extensive verification procedures for customers. It is expected to lead to quicker lending decisions and fewer instances of high-quality borrowers being rejected.

Westpac Group chief executive Peter King said: “This is a significant initiative that will reduce red tape for consumers seeking a loan and importantly speed up the process for customers to obtain approval for a loan ... It will also play an important role in ensuring access to credit for businesses wanting to invest and grow.”

We have been struggling to get them to make the supportive lending decisions that are in the best interests of clients.

-Stephen Wilton

ANZ Bank CEO Shayne Elliott said the move would “speed up the flow of credit during these difficult economic times while still providing the necessary protections for Australians when accessing credit”.

Potential impact for NZ’s big four lenders

The changes are likely to have an impact on New Zealand’s big four lenders, ANZ, BNZ, Westpac and ASB, all of which are Aussie-owned.

Advisers and market commentators hope that the relaxation of Australian responsible lending rules will change behaviours here, with banks sticking to cautious credit criteria in recent times.

New Zealand lenders will continue to operate under the Responsible Lending Code (RLC). The NZ rules force lenders to abide by responsible lending principles, and have been blamed for over-aggressive customer scrutiny in recent years.

It remains to be seen whether NZ regulators will change their approach to responsible lending.

The nation’s banks have increased lending since the level four lockdown earlier this year, reaching an August record two months ago, according to RBNZ data. But advisers say clients are hampered by forensic applications and a lack of flexibility.

The Responsible Lending Code was introduced in 2015 to protect consumers from taking on debt they cannot afford, but mortgage advisers say it has gone too far. They say banks are bogged down by regulation, forced to ask too many questions, and lack a common-sense approach to mortgage decisions.

What do advisers think?

Stephen Wilton of The Advice Group said the news from Australia was the best he’d heard “for a long time”, and hopes NZ will follow suit.

Wilton said the NZ Code has forced lenders “to use a calculator as the yes or no tool and not considered the liquidity of assets and quality of the clients”.

“We have been struggling to get them to make the supportive lending decisions that are in the best interests of clients,” Wilton said.

Mortgage People’s Martin Thomas believes the Code “will have to be reviewed here as well”.

Thomas hopes the “crutch” that “many lenders have been forced to lean on when making decisions” will be removed.

He added: “Hopefully, we can move back to assessing the borrower in the primary instance and his or her ‘numbers’ in the latter. When I first joined the banking industry in 1971, we were taught ‘it’s all about the borrower’ and I don’t think that mantra’s been evident for many years due to regulatory demands on the bank.”

Andrew Dunning of Merx Business, Property Loans and Investments would like to see evidence of whether the Code had achieved its intended outcomes, “or whether the unintended outcome was a reduced availability of credit for good borrowers”.

We were taught “it’s all about the borrower” and I don’t think that mantra’s been evident for many years.

_ Martin Thomas

He added: “My view leading into the introduction of the Code was that most lenders were already responsible and taking an approach consistent with the framework.”

Riona Rameka of Homelend said the RLC had “created a workforce of employees who do not know how to work outside the system decision”. She added: “It’s a ‘computer says no’ environment because they have created so many layers.”

Rameka said it would be “great to go back to a time where we can assess each person’s individual situation and tailor their loan application to their situation”.

It’s a “computer says no” environment because they have created so many layers.

_ Riona Rameka

“Banks have been so scared to think outside the box that the non-bank lender market has grown so much over the last four years,” she added.

Rameka is sceptical whether NZ will follow Australia on responsible lending.

“It would require more credit assessment that the banks are currently struggling to do in today’s environment,” she added.

Glen McLeod of Edge Mortgages described the Responsible Lending Code as “one of the most troubling” aspects of the lending market.

“It takes away the borrower’s ability to make and change decisions around how they spend their money,” he added.

“When you legislate and enforce compliance that is open to interpretation, you just never know what the answer will be. That seems to be the attitude taken by each of the lenders, respectively.”

McLeod said the Code had led to banks being “controlled by the nanny state”. He said clients were unfairly penalised over their spending patterns, and banks were failing to take a pragmatic approach.

“For example, if a client is saving some money to buy a house and they are having a good time along the way, that is reflected in their bank statements, and will work against the client. The common-sense part is that they made a decision to buy a house, and therefore their spending habits will change.”

McLeod said the Code has made it more difficult for clients who had separated or divorced from their partners.

“If you’ve got a client that buys a house at 50 because they have divorced or separated, we now have to explain what’s going to happen in the future,” McLeod added. “Now most clients will look to downsize their home. Alternatively, they could look to clear the debt using KiwiSaver or some other mechanism.

We have to explain all of this as a part of the Responsible Lending Code.”

“The reality is that it seems everyone is running scared of having the finger pointed at them. Therefore, they take everything to the absolute maximum. I would hope what’s being looked at across the Tasman would come to New Zealand, and that clients can make some decisions themselves,” McLeod added.

“I do agree that the client having a full understanding of what they are signing up [to] is an important part of any application. It’s more about having a balanced approach, rather than everything being pushed to the maximum.” ✚