- The Morrison Government looks to ease lending laws
- Industry groups debate over the easing of the supply of credit
- Fears that easing lending laws would lead to fueling housing market
There has been heated debate these past few months over the federal government’s proposal to scrap responsible lending laws.
With ultra-low interest rates already fuelling the housing market, economists and consumer groups are concerned that easing lending standards will cause house prices to skyrocket out of control.
Originally introduced by the Rudd government in 2009 following the Global Financial Crisis (GFC), the Morrison government now looks to ease lending standards, arguing that in such an unprecedented time – where the nation faces weak economic conditions caused by the pandemic – that easier credit would help the economic recovery.
The new lending laws will aim to make it easier for Australians to access credit. This includes removing responsible lending obligations from the National Consumer Credit Protection Act 2009 (with the exception of small amount credit contracts and consumer leases), as well as reducing the burden on lenders and putting greater responsibility on borrowers to ensure the credit agreement is suitable.
Banks are also currently subject to standards by both the Australian Prudential Regulation Authority and Australian Securities and Investments Commission (ASIC) regarding responsible lending obligations.
But now the government will remove ASIC from those duties to end the duplication after the corporate regulator lost a Federal Court action against Westpac over home lending standards.
Treasurer, Josh Frydenberg has previously argued the proposed changes will simplify the credit framework and “reduce red tape”.
“The government’s reforms will remove the ‘one-size-fits-all’ approach, enabling the more efficient flow of credit to consumers and small businesses, while also strengthening protections for higher-risk products and vulnerable consumers using small amount credit contracts and consumer leases,” said Mr Frydenberg.
“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.”
The big four banks have backed the proposal, with Westpac‘s Chief Executive, Peter King echoing the Treasurer’s sentiments, “These enhancements would enable us to assess loan applications across specific lending products rather than a one-size-fits-all approach.”
Master Builders Australia has also supported the proposal, arguing that the banks were taking too long to approve loans for the government’s HomeBuilder scheme.
Karen Cox of the Financial Rights Legal Centre has argued against rolling back lending laws, saying that Australians currently need an income and not more debt. Allowing easy credit will simply exacerbate an unsustainable situation which is only a short-term fix to economic growth.
A survey of Australia’s Financial Councillors conducted by the Financial Counselling Australia (FCA) also found that an overwhelming majority believe the responsible lending laws should remain.
Independent economist, Saul Eslake also expressed his concerns about what the new laws would mean for the housing market.
“It’s not at all obvious to me that there’s a need for regulators to do anything to make credit more available. We’ve got 50 years of evidence that anything that allows Australians to pay more for housing results in more expensive housing.”
As reported previously, Governor of the Reserve Bank of Australia (RBA), Philip Lowe has consistently asserted the role of the central bank is to aim for full employment, not target house prices.
Although it is clear the RBA’s easy money policy is contributing to the rise in house prices, Dr Lowe said he is keeping a close eye on lending standards, with the Council of Financial Regulators (CFR) prepared to impose additional credit restrictions if necessary.
The bill has been referred to the Senate Economics Legislation Committee for inquiry with a report due by 12 March 2021.
The Government has stated it wants the new measures in place by this month.