The Morrison government wants to weaken laws that were introduced to stop banks from engaging in predatory lending practices in the wake of the global financial crisis (GFC).
The proposed changes would see the removal of the responsible lending obligations from the National Consumer Credit Protection Act and allow lenders to rely on the information provided by borrowers.
Treasurer Josh Frydenberg, at a press conference to deliver the final budget outcome, said the moves were necessary as the obligations on banks for lending had become too onerous, and it was important that they were able to provide credit to help the Australian economy emerge from the pandemic stronger. But the moves have been slammed by consumer groups.
“It [the legislation] has become over prescriptive, and responsible lending has become restrictive lending,” Mr Frydenberg said.
“The governor of the Reserve Bank has pointed out that banks have become risk averse to the point they don’t want to make loans they fear may be going bad. We need our banks to be extending credit.”
The government provided the following case study as one of the reasons for making the necessary change.
Case study
Lisa is a retiree who recently lost her husband. They had a $3000 credit card account in both their names, but upon her husband’s death the bank closed the account as he was the main cardholder. Over the past two years, Lisa was the only person using and paying for the card, but was informed by the bank that she could not obtain a credit card in her own name as it could put her in ‘severe financial distress’.
Despite Lisa having $430,000 in her accounts, including her husband’s Refundable Accommodation Deposit being repaid to his estate, the bank notified Lisa that it was not able to consider her assets in her credit evaluation, but only the actual income she received each month.
Following the proposed changes, the lender would instead be able to consider Lisa’s financial circumstances, including that she has sufficient available assets to meet the total amount of outstanding credit and make their own assessment regarding whether to extend the product.
Mixed reaction
Banks stocks surged after the government’s announcement, with Westpac shares up 6.5 per cent, NAB up 6.3 per cent and ANZ up 5.3 per cent shortly after 11am on Friday.
Labor’s shadow treasurer, Jim Chalmers, told ABC News Breakfast that the opposition would consider the legislation when it was presented but was wary of the government giving too much leeway to the banks.
“The government does have a bit of form, unfortunately, at going easy on the banks and loan sharks at the expense of ordinary people,” Mr Chalmers said.
“We will have a look at it. If it makes sense, we’ll support it but if it tips the balance too far in one direction, we’ll have something to say.
“We want to make sure that any lending is responsible though. We want to make sure that people don’t get in over their heads. We want to make sure that people aren’t caught in debt traps.”
Karen Cox, chief executive of the Financial Rights Legal Centre, who was the opening witness at the banking royal commission, said the changes did little to address the real issues coming out of the pandemic and showed little forethought for the potential damage that could be caused.
“The problem people are having right now is too much debt and not enough income. The government’s solution is to take on more debt with fewer protections. Unsustainable debt hurts real people and is a short-sighted fix for a flailing economy,” Ms Cox said.
“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.
“Our service has 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?”
CHOICE chief executive Alan Kirkland said the potential for damage from removing the lending protections was enormous.
“We got rid of the idea of ‘buyer beware’ in consumer law decades ago. To make it the principle that guides lending in the middle of a recession has disaster written all over it,” Mr Kirkland said.
“Piling more debt onto people who can’t afford it has never solved an economic crisis.
“Products like credit cards are complex. That’s why banks make so much money out of them. Banks are in a much better position to assess a person’s ability to repay, so they need to shoulder some of the responsibility.”
Financial Counselling Australia chief executive Fiona Guthrie said the move ignored the lessons that should have been learned from the GFC.
“Weaker lending standards mean people will be loaded up with as much debt as possible. There is significant profit to be made in pushing borrowers to the edge,” Ms Guthrie said.
“Removing responsible lending obligations will free banks up to aggressively push credit onto their customers.”
Gerard Brody, chief executive of the Consumer Action Law Centre, questioned whether the changes were even necessary given the current lending levels.
“Responsible lending laws ensure safe access to credit,” Mr Brody said.
“The Commonwealth Bank recently said that the flow of credit is above pre-COVID levels and that lending is growing at a strong pace. And none of the big banks opposed the responsible lending laws at the recent House of Economics committee hearings.”
“Leaving people with more debt than they can afford is no way out of an economic crisis. Pushing too much credit that people can’t afford to repay creates hardship, stress, anxiety for individuals and families.”
Do you support the relaxing of lending laws to kickstart the economy? Will banks abuse their power again and put us at risk of another GFC? Have you had trouble securing credit when you needed it? Do you think this change will help you?
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