Last week the Reserve Bank warned lenders against dropping lending standards, stressing there will be no tolerance for predatory lending.
RBA’s head of financial stability, Luci Ellis, emphasised the importance of regulation as a line of defence against an extreme easing in lending standards, especially if some lenders are not prudentially supervised, pointing out examples of where the Australian legal system has saved borrowers from predatory lending.
“In Australia, household borrowers have recourse to arbitrators and the courts if they believe they have fallen victim to predatory lending,” Ms Ellis said.
“There are certainly cases in Australia where the courts have struck down or reduced loans that the lender should not have made.
“That is a powerful incentive not to engage in various kinds of abuses, such as lending based on fictional incomes.”
Ms Ellis opened her speech to the University of Adelaide, 'Why Financial Stability Matters, and What We Can Do About It', with an anecdote of how she started in her role “just a few weeks after Lehman Brothers – and a string of other institutions – had failed”, before going on to reflect on lessons learnt since the crisis.
But while Australian lenders agree the US credit crisis has damaged the image of specialist or non-conforming loans in Australia, they have been quick to point out the key differences between the US credit crunch and domestic specialist lending.
“Australian non-conforming loans have unfortunately been tarnished by what happened in the US,” Bluestone’s Asia-Pacific general manager, Peter Wood, told Mortgage Business.
“If you drill down to what happened in the US, they gave loans to people who had no income whatsoever and they never thought property prices would fall,” Mr Wood said.
“Our take is much more conservative,” he said. “We have ebbs and flows of property prices; the latest figures show property prices have actually fallen a little bit.”
“There probably has been a tarnishing of those types of products stemming from the backlash of the US, but that sort of practice is far removed from the product styles in this country,” Finsure managing director John Kolenda told Mortgage Business.
“There are still consumers out there who need solutions,” he said.
A greater focus on lending standards comes after APRA chairman Dr John Laker flagged credit standards in residential mortgage lending as a “major focus of APRA’s prudential supervision of ADIs”.
“In this environment, APRA is seeing increasing evidence of lending with higher risk characteristics and it does not want this trend to continue,” Mr Laker warned.
Bluestone’s Peter Wood said that prior to the GFC, major lenders were “playing in the low-doc space”, but have since tightened up after the implementation of greater capital liquidity requirements under Basel II and Basel III.
“The specialist, non-conforming piece has really been left alone to a certain degree, and that is where we see the opportunity,” he said.