Is The Easing Of Lending Laws In Australia A Good Or Bad Thing?
The Australian Government has recently set about looking at easing lending laws in Australia in a bid to boost the economy after the recession that Covid-19 has caused. As I write this blog, and please remember, this is a blog, my personal opinion and should in no way be constituted as legal advice. As I was saying, my initial gut reaction is that we have just come through a royal banking commission, lending has adapted and moved forward, and at present, banks cannot keep up with the demand of lending activity that is happening this year. In a nutshell, my first response would be that yes, lending has tightened, but we have adapted, and it is for the better for consumer protections.
Unpacking the current status of lending, though, and looking at it from another perspective, there are some strong arguments for what the Government is trying to achieve. So let us start unpacking, shall we?
Post banking royal commission, it was found that lenders had used unscrupulous lending practices and preyed on the most vulnerable of society, putting them into loans that they could not afford by just chasing income. To counter this, the Government strengthened the consumer protections and put all the onis on lenders to fully verify that what a client was telling them with regards to spending habits and other critical info was true, instead of taking it on face value from what clients were saying. This has increased processing times with lenders ad brokers having to collect far more supporting information, to the extent that they sometimes have to go line by line through 6 months’ worth of transactions to corroborate what a client has said they spend. Here I tend to agree with the Government that it has stifled the flow of credit a bit because should we not be able to take a person’s word on their financial situation?
In my most humble opinion, the Royal banking commission had two aspects of “vulnerable” people in it. Those that were genuinely vulnerable and those that took advantage of the fact that they could be. I think there was a great outcome for those that are truly vulnerable and we should do everything in our power to make sure that they remain protected. In my day to day dealing with clients, I often come across the second tier of “vulnerable” client, the ones that choose to be after the fact. What happens here is they will be borderline with regards to their financial situation or just not qualify for a loan. The clients know this because they have already visited a lender or a broker and have been declined or told they could not get the loan because, let us say, for example, the private schooling fees they are paying has made the loan unaffordable. So they then move to the next lender and omit or doctor that information to qualify for the loan. Said clients have knowingly applied for a loan that they knew they could not afford, and after it has all gone pear-shaped, then start litigation saying the lender should have done more detective work to see that they could not afford the loan.
To put it all in perspective though the vast majority, I would say more than 90% of clients do the right thing and what they say is true, and their loan application is all legit as one would say. Of the 10 % that is left, I would say that 7% are knowingly lying or altering facts because they want the home and will do anything to get it. The other 3% are truly vulnerable and need all the help and support that they can get to make sure they are looked after, and protections are in place for them. Again these are stats based on my opinion and experience and are not to be relied on as data.
As they always say, it is the minority that ruins it for the rest of them. The increased focus on clients’ spending and living expenses have been overly scrutinised, and this has had a negative effect on the loan sizes amounts people can qualify for. First home buyers are one of the many categories that have been hit by this, living at home with mum and dad saving for a deposit. If you would go through their living expenses, they may be putting a bit away for a deposit, but they may spend on a lot of frivolous things in a month because they do not have any commitments. This does not mean they cannot wind this back once they have a mortgage commitment; however, after the commission, the bank or broker would need to take their living expenses art the elevated level, throwing the chances of a loan out the door.
Enter the landmark ruling known as the ‘wagyu and shiraz’ case. Australian Securities and Investments Commission took Westpac to court for granting a lot of loans using the HEM benchmark as the main mean of ascertaining clients living expenses.ASIC was basically saying that Westpac had not done there due diligence and gone through a client’s living expenses thoroughly but rather just applied the household expenditure mean test to come up with their living expense number. Long story short, ASIC lost the case, with the judge saying that one day he could be eating Wagyu Beef for dinner and washing it down with the finest shiraz. That does not mean that he could not get by on much more modest fare should he have to pay a home loan.
It makes sense, and people do not live like they have a home loan with regards to expenses until they have one, so why should their living expenses be ascertained on how they were living before. So the Government is saying after that that we should take what a client says as living expenses and not overly rely on HEM. The model will also shift from a current lender beware approach to shifting more of the responsibility of not lying onto the client. I personally think that there will be tougher penalties on a client that are found to have lied on an application.
As we have almost come full circle with regards to loosening credit again, the way to make sure that the truly vulnerable are not preyed upon is to penalise any party to a loan more heavily that has been found to have been dishonest in any way, be it client, lender, banker or broker.
For me personally, one of the biggest get out of jail free card for banking institutions was you would have an employee undertaking illegal activities, may be prompted to do that under the bank’s instructions, or maybe he was just trying to line his own pockets. What would happen when caught was he would be fired, and the bank would pay a fine. At no stage is he prosecuted. I think if that changed, anyone would think twice about putting anything forward that was not ridgy didge. This, in my opinion, would go a long way in protecting clients from rogue agents.
Fun fact coming out of the Royal Banking Commission, when all was said and done, the complaints about finance to the relevant ombudsmen were tallied up, and out of the tens of thousands that were made as a percentile, mortgage brokers had less than 1% the complaints tally. With mortgage brokers no writing 60% of all loans that are written in the residential space, this speaks volumes with regards to the integrity of the industry.
A mortgage broker from the 1st of January will also have to now legally comply with a Best Interest Duty, which means that they have to act within your best interests. This is another great reason why you should be talking to a mortgage broker.
If you are looking to have a chat to a good Mortgage Broker that is based in Adelaide, have a chat with Castle Mortgages Today!