NOTICE

As Australia begins to take its first significant steps to emerge from the COVID-induced recession, responsible lending has become a central part of the economic conversation.

In September last year, the federal government announced plans to reform responsible lending regulations to speed up loan approvals and inject more credit into the economy.

The reforms will go to a vote in June and, if passed, would shift the burden to borrowers, allowing lenders to take the information provided by borrowers at face value.

While easing restrictions on loan applications would speed up credit facilitation, it risks increasing lending to consumers who cannot afford to borrow.

Not only would this be largely irresponsible, it could also hurt the economy at a time when Australians can least afford it.

Research suggests that an increase of just 1% in domestic credit increases the likelihood of a banking crisis by 6-8%.


Buying a home or looking to refinance? The table below shows home loans with some of the lowest interest rates on the market for homeowners.

Basic criteria: a loan amount of $ 400,000, variable, fixed, principal and interest (P&I) home loans with an LVR (loan to value) ratio of at least 80%. If the listed products have an LVR


Debate

Last year Australia fell into recession for the first time in nearly three decades as the country felt the full impact of lockdowns induced by the pandemic.

The federal government was quick to support the economy. Payments like Job Keeper and Job Seeker reduced the impact of job losses, while responsible lending exemptions made it easier for small and medium-sized businesses to borrow.

These measures had the common objective of stimulating economic activity to limit the impact of falling demand and consumer spending.

Over the past six months, the debate has shifted to whether we should allow ordinary Australians to borrow faster.

The government’s proposed reforms to responsible lending requirements would certainly make spending easier for consumers.

However, many believe the changes would put consumers at risk, exposing them to loans they may not be able to repay.

To appease both sides of the debate, a solution will have to be found that allows credit to flow more freely to consumers without putting them at increased risk of financial hardship in the future.


Industry Speech

Major lenders are in favor of the proposed reforms, suggesting that they would have a positive impact on speeding up the speed of loan approval, rather than encouraging banks to issue riskier loans.

Westpac Managing Director Peter King said “the government’s proposal strikes the right balance between reducing the regulatory burden on credit providers while ensuring that we have rigorous credit processes in place.”

He further noted that “it is in Westpac’s best interests to lend only to customers who are able to meet their financial obligations”.

His views are supported by other banking executives, including NAB chief executive Ross McEwan, who noted that the reforms were not about “lending to people who can’t afford it.” NAB will continue to lend responsibly and diligently.

This is not the case for all lenders, however. The CEO of digital lender Tic: Toc has publicly opposed the impending repeal of responsible lending laws, noting that the supply of credit in the economy is currently strong.

His views have been supported by a number of consumer groups who fear the changes will lead to an increase in predatory lending.

The Managing Director of the Financial Rights Legal Center, Karen Cox, noted that, if approved, the reforms “would roll back consumer protection by a decade and expose ordinary Australians to more debt.”


The role of technology

The problem is the time it takes for financial institutions to assess credit applications.

Legacy technology means that verifying application information can be a lengthy process, increasing costs for lenders and slowing down approval of credit to borrowers.

Removing these requirements would solve this problem. However, rather than removing responsible lending requirements and risking unintended consequences, the financial sector and government should seek technological solutions.

Today, FinTechs in Australia offeraggregation and enrichment products that give financial institutions the ability to facilitate near-instant verification of borrowers’ financial data.

These tools give financial organizations a complete and accurate view of a consumer’s financial situation, enabling them to speed up lending processes while adhering to existing responsible lending guidelines.

In short, the answer lies in technological innovation, without reducing the need for responsible lending protocols.

Australian financial institutions can respond quickly to our country’s responsible lending guidelines today.

We just have to innovate.


Photo by Jon Moore on Unsplash

The entire market was not taken into account in the selection of the above products. Instead, a smaller part of the market has been envisioned, which includes the retail products of at least the Big Four Banks, the Top 10 Customer-Owned Institutions and Australia’s largest non-banks:

Products from some vendors may not be available in all states. To be taken into account, the product and the price must be clearly published on the website of the supplier of the product.

In the interest of full disclosure, Savings.com.au, Performance Drive, and Loans.com.au are part of the Firstmac group of companies. To learn more about how Savings.com.au handles potential conflicts of interest, as well as how we are paid, please click on the links on the website.

*Comparison rate is based on a loan of $ 150,000 over 25 years. Please note that the comparison rate only applies to the examples given. Different loan amounts and terms will result in different comparison rates. Costs such as drawing charges and cost savings, such as fee waivers, are not included in the comparison rate but may in fl uence the cost of the loan.



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