Under the National Consumer Credit Protection Act 2009, credit providers are required to lend responsibly.
This means that before lending, the credit provider must assess the suitability of a loan for a borrower, which involves an assessment of the borrower’s capacity to repay the loan as well as an assessment of the extent to which the loan will meet the objectives and requirements of the borrower.
A failure to undertake these assessments before lending will amount to a breach of the act, which should result in sanctions ranging from enforceable undertakings to the cancellation of a credit provider’s credit licence.
There is clearly a need for a robust and well-enforced responsible lending regime to curtail undesirable market practices and prevent increased financial stress on households in Australia.
The evidence that has come out of the Financial Services Royal Commission must lead to a serious re-assessment of the efficacy of the responsible lending regime, particularly in relation to its enforcement by ASIC. It also calls into question the efficacy of the prudential regulator, APRA.
It is now clear that the major banks have based many lending decisions on flawed information, leading to what have been labelled “liar loans”.
ANZ bank, in its submissions to the royal commission, acknowledged a lack of evidence that it had made genuine enquiries into customers’ living expenses.
William Rankin who was responsible for ANZ’s home loan portfolio stated that from October 2016 to September 2017 ANZ sold $67 billion in home loans and that 56 per cent of those ($38 billion) came from mortgage brokers.
Damningly, Mr Rankin confirmed that ANZ did not take steps to verify the information provided by brokers regarding customers’ expenses.
Gym owner among NAB ‘introducers’
In its submission to the inquiry, CBA acknowledged inaccuracies in calculations, insufficient documentation and verification, and deficiencies in controls around manual loan approval processing.
Daniel Huggins, who supervises the home buying division at CBA, gave evidence that while the bank had explicitly documented its recognition that volume based commissions to brokers (as opposed to flat fee payments) encouraged poor quality loans and poor customer outcomes, the bank had continued with volume based commissions and in fact “de-accredited” brokers who did not refer a sufficient volume of loans.
He also stated that CBA continued to rely on the customer information provided by mortgage brokers, notwithstanding an explicit acknowledgment by CBS that customer information provided by brokers could not be relied upon.
Anthony Waldron, the executive general manager for broker partnerships at NAB, gave evidence regarding NAB’s “introducer program”, which included a number of shocking admissions.
The program involved introducers who were not necessarily carrying on lending businesses (one introducer ran a gymnasium), who formed relationships with bankers employed by NAB.
Both bankers and introducers benefitted from the loan referrals (through bonuses and commissions), and introducers were required to meet minimum loan referral thresholds.
Mr Waldron acknowledged that the program led to unsuitable loans, false documentation, dishonest application of customers’ signatures on consent forms and misstatements of information in loan documentation.
He agreed that the bankers were more concerned with sales than keeping customers and the bank safe.
ASIC and APRA should be doing more
Westpac had acknowledged in its submission that it was the subject of ASIC enforcement action in relation to breach of the responsible lending obligations, for failure to properly assess whether borrowers could meet their repayment obligations before entering into home loan contracts.
Westpac had also acknowledged that in 2016 some of its authorised home lending bankers were not correctly verifying customer income and expenses.
There is now no doubt that the financial regulators, ASIC and APRA, should be doing more to ensure prudent lending standards by credit providers in Australia.
The prospective harm that could result to Australian households from elevated levels of indebtedness, and the adverse flow-on effects to the Australian economy, cannot be ignored.
The evidence at the royal commission has confirmed a current tendency of lenders to reduce lending standards to increase credit activity and profitability, but it will all come crashing down soon if it is allowed to continue.
For an increasing number of households, even small increases in the loan interest rates, a decline in real estate values, or a reduction in working hours or conditions may have grave consequences.
There are also more significant risks for borrowers which include unemployment, the removal of government benefits, rapid and significant increases in loan interest rates, a recession, a housing or equity market crash, or a financial crisis.
Therese Wilson is an associate professor at Griffith law School; Gill North is a professor at Deakin University Law School
Full Disclosure: Gill North is also a Principal at Digital Finance Analytics!
