While the world still grapples with the health and economic crisis caused by the pandemic, Australia has started to make its first steps in the pathway to economic recovery by unveiling a new lending proposal. In a media release published on the 25th of September, Treasurer Josh Frydenberg announced the plan, stating that the Government would be moving away from a “one-size-fits-all approach” with the intention of making it more facile for small businesses and consumers to access loans and credit. This comes with hopes that the change will make it attractive to consumers to spend during the upcoming Christmas period and for small businesses to move forward, investing and creating jobs, ultimately working towards rebuilding the Australian economy. While major institutions such as the banks and fintech challengers as well as mortgage brokers welcomed the proposal, the impending changes have caused great debate within consumer rights advocate groups. The consensus is that, by removing responsible lending obligations, it will grant banks the ability to aggressively push credit onto their consumers (Janda, 2020). In this issue, the new lending proposal will be explored along with the possible effects of such changes as well as the advantages and disadvantages on society of the proposed amendments to the current credit laws.
The Proposal
The proposed credit reforms aim to simplify Australia’s credit framework to make certain that consumers and small businesses will have the ability to access credit in a timely and more manageable manner in the current period of economic downturn. The amended changes complement the Government’s JobMaker plan, as the flow of credit is vital to the program, given it seeks to achieve a more ‘resilient and competitive economy’ by supporting business investment and the creation of jobs (Australian Treasury, 2020).
After the 2008 Global Financial Crisis, the Rudd Government passed the National Consumer Credit Protection Act (NCCPA), which worked to avoid the mistakes made by American banks who made it easy for unsuitable customers to access credit. The main objective of the NCCPA was to have responsible lending obligations in place to ensure that the credit contract or lease is deemed ‘not unsuitable’ for the respective customer. The NCCPA defines situations where a contract is unsuitable for the individual seeking credit when the consumer is unable to meet repayments or can only comply with substantial hardship or that the contract does not meet the consumer’s requirements and objectives. These measures were nicknamed the ‘red tape’, and have subsequently ensured that an event like the Global Financial Crisis experienced in 2008 does not happen again. So what do the proposed changes by the current Government entail?
Primarily the central amendments include the removal of responsible lending obligations from the 2009 NCCPA, with an exception for specific credit contracts. Not only this, the proposal aims to protect consumers from the predatory practices of debt management firms by requiring them to hold an Australian Credit Licence when they are paid to represent customers in dispute with financial institutions. Along with allowing lenders to rely on the information provided by borrowers, replacing the current practice or ‘lender beware’ with ‘borrower responsibility’ principle. Finally, removing the ambiguity regarding the application of consumer lending laws to small business lending*.
While the following proposals ultimately work towards increasing the ease of accessing loans and credit alike, they decrease the protection consumers receive from the 2009 NCCPA, as it is replaced with weaker lending standards and, thus, places borrowers at potential risk if they are deemed suitable to access credit, however in reality are unable to maintain the credit loan given to them. Moreover, while Frydenberg is adamant that the reform will improve the flow of credit to households and small businesses, it will do so at the expense of increasing household debt even further.
*This information has been directly sourced from Consumer Credit Reforms Fact-sheet provided by the Ministry of Treasury.
Expected effects of the proposal
The most straightforward expectation is that gaining access to credit will be much easier for Australians and small businesses who have been severely affected by the ongoing pandemic. As aforementioned, it will take less time to have loans approved, as well as be less costly to borrow. This, in turn, will allow consumers to continue to spend whilst, at the same time, enable businesses to continue investing and creating jobs for people. Thus, it seems as though it will be a win-win for everyone involved. Moreover, greater onus will be placed on the consumers and businesses to provide accurate information about their ability to borrow in the hope of shifting from the philosophy of “lender beware” to “borrower responsibility” (Crowe, 2020). While this might sound favourable to consumers at present, it is a move which will have long-term effects – including facing the predatory practices of debt collecting agencies, given banks would aggressively push credit onto their customers without even checking whether the customers would be able to afford such loans (Janda, 2020). According to Fiona Guthrie, CEO of Financial Counselling Australia, having helped thousands of Australians in financial difficulty every year, this change will have a negative impact as consumers would be loaded up with as much debt as possible.
On the other hand, others such as Master Builders Australia welcomed this proposal, arguing that this change will speed up decisions for Australians looking to buy their own homes (Opray, 2020). Therefore, it remains to be seen whether this proposal will have more positive long-term implications than negative.
The Good and the Bad
The lenient lending rules for home loans and credit present clear and distinct advantages for Australia in the short run, but could potentially be threatening in their long-run economic growth.
While Australia’s GDP shrank by 7% in the April-to-June quarter, they have plunged into their first recession since 1991. Inevitably, this reform aims to improve access to credit from March 2021 should the Parliament approve changes to the Credit Act. Josh Frydenberg correctly pointed out that maintaining the free flow of credit through the economy is critical in Australia’s economic recovery plan, that of which is necessitated by the current global pandemic. Finance will be more freely available as a result of these changes, and those buyers who were previously restricted from borrowing (due to them not meeting the banks’ criteria, and/or temporarily losing or dropping their income during the pandemic) will be back in the market. A product of this will be speedier decision making for Australians trying to buy their own homes. However, this all may pose a serious question on the broader economic problem of stimulating growth in the long-run. While it will be easier to obtain a loan, it will also facilitate increased borrowing (Janda, 2020). This translates into fiercer competition which will drive up house prices. This is seen as a credit binge that might possibly ‘bring families to their knees’ as a consequence of larger debt and higher interest repayments, given complex reforms could take time for banks and other lenders to implement..
This change is closely connected to the Federal Government’s attempt to tackle the bracket creep, a process by which people, as they enjoy a wage rise, find more of their income taxed at a higher marginal rate. Reducing tax rates gives households greater disposable income and this tax system would arguably be less progressive than it’s ever been since the 1950s. Over half of the benefits will flow to the top 10% of earners as those on high incomes will pay less tax as a proportion of their individual income. In addition, the cash rate (the cost of borrowing) is 25 basis points, while the conservative federal government also rolled out stimulus packages worth about 314 billion Australian dollars to fuel recovery. As such, banks and other lending institutions have been forced to become overly conservative as more emphasis will be placed on scrutinising the credibility of borrowers with an increased ability to take on more debt.
At a time when many Australians are praying they will have a job at the end of COVID-19, the end goal is to trigger employment. Increased consumer confidence, propelled by relaxation in lending rules, would clear the economic picture in the future. This would encourage growing employment. However, strong consumer protections would be maintained under the law changes and credit providers would still need to comply with their existing licensing obligations to act efficiently, honestly and fairly. Overall, Australia will begin to return back from the financially calamitous pandemic.
References
Janda, M. (2020, September 25). Josh Frydenberg’s planned responsible lending changes defy Hayne’s banking royal commission. ABC News. Retrieved from https://www.abc.net.au/news/2020-09-25/government-responsible-lending-changes-home-loan-credit-cards/12702260
Frydenberg, J., & Sukkar, M. (2020, September 25) Simplifying access to credit for consumers and small business. Treasurer of the Commonwealth of Australia. Retrieved from https://ministers.treasury.gov.au/ministers/josh-frydenberg-2018/media-releases/simplifying-access-credit-consumers-and-small
Australian Government. (2020). Consumer Credit Reforms. Retrieved from https://ministers.treasury.gov.au/sites/ministers.treasury.gov.au/files/2020-09/Consumer-credit-reforms-fact-sheet.pdf
Crowe, D. (2020, September 24). Simpler lending rules for home loans and credit to free up the economy. Sydney Morning Herald. Retrieved from https://www.smh.com.au/politics/federal/simpler-lending-rules-for-home-loans-and-credit-to-free-up-the-economy-20200924-p55yz9.html
Eyers, J., & Vickovich, A. (2020, September 25). Banks surge on responsible lending wind-back. Australian Financial Review. Retrieved from https://www.afr.com/companies/financial-services/banks-surge-on-responsible-lending-wind-back-20200925-p55z6k
Australia in first recession for nearly 30 years. (2020, September 2nd). Retrieved from https://www.bbc.com/news/business-53994318
Crowe, D. (2020, September 24th). Simpler lending rules for home loans and credit to free up the economy. The Sydney Morning Herald. Retrieved from https://www.smh.com.au/politics/federal/simpler-lending-rules-for-home-loans-and-credit-to-free-up-the-economy-20200924-p55yz9.html
Janda, M. (2020, September 25th). Josh Frydenberg’s planned responsible lending changes defy Hayne’s banking royal commission. ABC News. Retrieved from https://www.abc.net.au/news/2020-09-25/government-responsible-lending-changes-home-loan-credit-cards/12702260
Duke, J. (2020, October 2nd). What are the government’s tax cuts and will they be good for the economy? The Sydney Morning Herald. Retrieved from https://www.smh.com.au/politics/federal/what-are-the-government-s-tax-cuts-and-will-they-be-good-for-the-economy-20201001-p560wl.html
Yardney, M. (2020, September 29th). New lending laws will be a ‘game changer’. Yahoo! Finance. Retrieved from https://au.finance.yahoo.com/news/lending-laws-game-changer-050417612.html
Australia’s latest economic stimulus: Easing bank lending rules. (2020, 25th September). Retrieved from https://www.aljazeera.com/economy/2020/9/25/australias-latest-economic-stimulus-easing-bank-lending-rules
Dalzell, S. (2020, September 24th). The Government wants to make it easier for you to get a mortgage amid the coronavirus recession — but there’s a catch. ABC News. Retrieved from https://www.abc.net.au/news/2020-09-24/government-looks-to-relax-lending-rules-mortgage-coronavirus/12700136
Crowe, D. (2020, September 24). Simpler lending rules for home loans and credit to free up the economy. Brisbane Times. Retrieved from https://www.brisbanetimes.com.au/politics/federal/simpler-lending-rules-for-home-loans-and-credit-to-free-up-the-economy-20200924-p55yz9.html
Janda, M. (2020, September 25). Josh Frydenberg’s planned responsible lending changes defy Hayne’s banking royal commission. ABC News. Retrieved from https://www.abc.net.au/news/2020-09-25/government-responsible-lending-changes-home-loan-credit-cards/12702260
Opray, M. (2020, September 25). Treasurer to relax lending laws. The Saturday Paper. Retrieved from https://www.thesaturdaypaper.com.au/thebriefing/max-opray/2020/09/25/treasurer-relax-lending-laws
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