Proposals to amend credit laws so that they remove responsible lending obligations (RLOs) are yet to be passed, but arguments for and against the move continue to heat up.
The National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 – which focuses on amending the credit laws so that they remove responsible lending obligations (RLOs) and extend the best interests duty to more credit assistance providers, among other changes – will not be debated in Senate until the next period of sittings (starting 11 May 2021).
While the finance and property industry have been largely supportive of the repeal of the responsible lending obligations – citing its ability to improve the flow of credit and reduce the amount of red tape in the loan writing process – some concerns have been raised by some non-bank lenders, as well as members of the Labor Party, senators and consumer groups.
Indeed, appearing before the economics standing committee hearing for the Review of the Four Major Banks and other Financial Institutions last week, ANZ chief executive Shayne Elliott and Westpac CEO Peter King, suggested that RLO changes could simplify loan processes and improve mortgage approval times.
However, the compliance manager for brokerage brand MoneyQuest, Tim Donahoo, has told Mortgage Business that there is no “sustainable argument that justifies why RLOs should be removed”.
Mr Donahoo said: “It escapes logic, in my view that it could be argued that it is no longer necessary for a credit licence holder to be responsible for ensuring that proposed credit is realistically affordable for the borrower and that the credit facility meets the borrower’s determined objectives and requirements.
“These obligations are not onerous and legally hold the credit licence holder to account for making sure the credit sought/granted is appropriate for the circumstances of the borrower. When did removing these obligations become a good idea?”
According to Mr Donahoo, the “perceived complexity around the verification obligations” does not come from the laws themselves.
He said: “[T]he legislation is quite plain: the credit licence holder needs to take reasonable steps to verify the applicant’s financial position. There is nothing there that requires a forensic, item by item analysis of an applicant’s every expenditure item.
“Secondly, any possible apprehension about what interpretation of the law that ASIC could apply in this area was removed by the decision in the Westpac case. If there was any doubt about whether close examination of expenses was needed, it was removed by that decision,”
As such, Mr Donahoo said it was “open now for all lenders to scale back their strict policies and adopt more reasonable, but still responsible approaches, such as Suncorp has recently done.
“The solution to greater efficiency lies directly within the control of the lenders and does not need any change to the legislation to achieve that outcome,” he concluded.
The compliance manager suggested that instead of removing legislation to free up the flow of credit and reduce approval delays, lenders could:
- Adopt more flexible approaches to living expense assessment that clearly distinguishes between core essential expenses and discretionary/lifestyle expenses. “If the latter needs to be reduced in order to meet servicing criteria, place the onus on the borrower to acknowledge this (if there is a push for greater borrower responsibility). Such changes to expenditure habits are within the control of the borrower and can be accepted as such. People do change their habits once they have a regular loan repayment obligation to meet,” he said.
- Adopt the industry agreed LIXI standard for living expense classification and stick to it. “Individual lender variations present avoidable headaches for the industry and are not necessary”, Mr Donahoo commented.
- Ensure that credit assessors are appropriately experienced, trained, and have individual discretion to approve applications that might not fall strictly within the ideal framework. He added that assessors should: “Read the comments included by brokers and be available to discuss applications directly with the submitting broker. A well qualified assessor should be able to fully assess and make a decision on most applications within one hour, assuming all relevant information and evidence is submitted. I speak from experience, having been involved in consumer credit for 36 years,” he said.
- Do not place over-reliance on automated assessments. “Such processes can be useful but there is no substitute for individual consideration of all aspects and making a decision based on experience and knowledge,” Mr Donahoo concluded.
He added that brokers also have “a key role to play” by ensuring that applications are fully complete, comprehensive, meet all the lender’s requirements and policies, check for obvious errors and explain the scenario in detail.
“An assessor should not be left with questions about the applicant, the outcome/s sought and the reason/s the proposal has been structured as it is. Brokers do themselves and their clients no favours by submitting applications that give the lender any obvious reason for not considering it at first instance,” he said.
“Having said that, all aggregator groups should be constantly agitating for improved service standards with lenders. The current discrepancies in turnaround times between different channels within the same lender have no justification. The broking sector heads need to be more vocal and even militant in demanding meaningful action, rather than just words.”
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Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.