Market update – Responsible lending changes – What this means for property, you, business owners, lenders and mortgage brokers (Ep. 74)

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In this week’s episode, Dave, Cate and Pete take you through:

What is responsible lending and when did it begin? Post the GFC there was a crackdown in high-risk lending, which led to responsible lending obligations being legislated by the Rudd Government in the National Consumer Credit Protection Act 2009 (Credit Act). The trio translate the complicated legalese of the current obligations to simple terms.
The reasoning behind the repeal. The Property Planner, Buyer and Professor delve into the purposes of the repeal and whether it is likely to be effective at meeting the government’s goals.
When did applying for credit get tough and what instigated it? Over the last 10 years a litany of cascading events have resulted in a gradual creep of lenders and borrowers being faced with overly prescriptive, complex and onerous processes, which really gained pace from 2014 when APRA started to put limits on lending and calls began for a Banking Royal Commission.
What are the changes in lender behaviour we’re likely to see? The reduction in red tape is likely to see many positive impacts in speeding up the process of approvals, but be warned, the model will switch from ‘lender beware’ with a ‘borrower responsibility’ principle. What does that mean for your loan application?
Borrowing capacity set to increase. Reduction in assessment rates could see borrowing capacity skyrocket, opening the door for prospective purchasers to up their limits.
Gazing into the property market crystal ball. The Planner and Professor make their predictions 2021 and 2022.
Consumer protections, who will be looking after you? With the litigious ASIC out the door, the APRA watchdog will be the sole enforcer of responsible lending obligations. But never fear, the freshly legislated best interest duty will be picking up the slack. The trio explain how.
How does this relate to mortgage brokers? Interestingly, a significant amount of paperwork that mortgage brokers are currently required to complete and provide to clients could be scrapped entirely. Watch this space.
What other areas are the government targeting? Key areas of reform that haven’t received as much media spotlight are business loans and non-bank lenders. We cover off on the planned evolutions to streamline business lending and further protect vulnerable consumers by raising standards for the second and third tier lenders.
And of course, our ‘gold nuggets’!

Resources:

Market update– the Property Planner, Buyer and Professor’s insights

Property values continue to climb. Despite the economic recession, property values have remained resilient. We expect strong activity to continue right up until the 24th of December and into the new year.
Beware the data lag. As property data is collected at settlement, we typically see markets shift faster than the data comes through. The increased time for approvals and many homes under ‘subject to’ clauses means that data received is even further behind the actual date of the sale.
Record number of first-time buyers and mortgage approvals. First home buyers have flocked into the market with more people than ever before getting their foot in the property door. Mortgage approvals have also hit high levels, creating the perfect storm for fervent market recovery. Supply is starting to come back on board, which could slow down the growth in property values, although with the rate of new market entrants and positive buyer sentiment, this is questionable.

Show notes:

What is responsible lending and when did it begin?
Post the GFC there was a crackdown in lending – high risk lending was the primary cause of the GFC. Ninja loans – no income no job – as long as you had an asset, you could access lending.
In 2009 Responsible Lending Obligations were legislated by the Rudd Government in the National Consumer Credit Protection Act 2009 (Credit Act).
Put simply, Responsible lending “requires lenders to determine how much a potential borrower is earning and how much they’re spending and whether there’s enough left over to make their repayments without “substantial hardship”.
Lenders and mortgage brokers must do this by making ‘reasonable inquiries’ about the applicant’s requirements and objectives, taking steps to verify their financial situation.
Over the last 10 years this has resulted in a gradual creep of lenders and borrowers being faced with overly prescriptive complex and onerous processes, which really gained pace from around 2014 when APRA started to put limits on lending and calls began for a Banking Royal Commission.
Responsible lending guidelines in APRA jurisdiction, what’s planned is the responsible lending under ASIC jurisdiction, who are more litigious, are planned to be removed.
Allowing lenders to rely on the information provided by borrowers, replacing the current practice of ‘lender beware’ with a ‘borrower responsibility’ principle.
History of no doc loans with no scrutiny and 106% LVR with increased scrutiny – no longer available. The changes occurred at the right time as we were probably heading down the same path as the US.
The governments stated purpose is to reduce:
Cost & Time for Business and consumers to access credit by reducing red tape.
Improving competition (in theory)
Ensure stronger consumer protections for the most vulnerable Australian – heightening restrictions for small amount credit contracts and leases.
I think ensuring stronger competition is debatable because they are making it harder for non-banks to lend by meeting the same protocols as the banks.
As RL will be removed from the Credit Act, ASIC will be removed from enforcing responsible lending laws for banks.
APRA will be the sole enforcer for responsible and prudential lending practices.
But the Best Interests Duty for mortgage brokers that was a recommendation from the Royal Commission is due to come in from Jan 1 2020 and this includes the final point, the reasonable enquiries regarding needs, objectives and financial circumstances, but interestingly, not all the paperwork provided that does add a significant amount of time.
We’re already seeing lender assessment rates come down further, some lenders are at 5% and there are fixed rates at 1.99%.
This now means on an income of $100,000 your borrowing capacity has increased approx $170,000
- 5% – loan amount $722,586
- 7.24% – loan amount $551, 661
- Difference – $170,925
How does this relate to mortgage brokers?
The legislation for mortgage brokers within Responsible Lending in the Credit Act also includes obligations for quite a bit of regulatory paperwork to be given to borrowers that lenders direct do not need to provide such as:
- credit guide
- preliminary assessment
- credit quote
- credit proposal disclosure document
It will be interesting to see if the regulatory paperwork gets wound back quite a bit, it hasn’t been spoken to specifically but it’s within the scope.
The big one will be living expenses – you currently need to break them down within an inch of its life into separate categories.
- Clothing and personal care
- Groceries
- Medical and health
- Transport
- Insurance
- Telephone, internet, pay TV and media streaming subscriptions
- Recreation and entertainment
- Owner-occupied property utilities, rates and related costs
- Childcare
- Education
- Investment property utilities, rates and related costs
This might change to just ‘tell us your living expenses’.
When did credit get tough and what instigated it?
May 2014 – increasing concern from ABS and government that there was systemic risk building with debt levels of consumers, in particular with the record high number of interest only loans.
June 2014, pressure started building for a banking royal commission, after a Senate inquiry into a CBA fraud scandal that left thousands of financial planning customers millions of dollars out of pocket. The committee described the CBA financial planning division as ‘profit at all cost’.
2014 – APRA – Investment lending cap introduced to limit growth in lending for residential investment to 10%.
2015 – ASIC report – Interest-only home loans have grown substantially since 2012.
2015 – ASIC review of responsible lending practices of 11 lenders, including big four. The recommendations included ensuring:
- loans align with consumers’ requirements and objectives
- lenders use a consumers’ actual expenses rather than relying on a benchmark
- affordability assessments include buffers for future interest rate rises.
2015 – NAB was implicated with a series of scandals concerning financial planners where it was revealed that NAB quietly paid millions in compensation to hundreds of clients.
2016 –opposition leader Bill Shorten outlined his plans for a royal commission into the banking sector, should Labor win government at the 2016 federal election.
Oct 2016 – APRA advises banks they should use an assessment rate of at least 7%
March 2017 – Westpac and ANZ were implicated in rigging the bank bill swap rate and were sued under responsible lending laws – the first time responsible lending obligations were litigated by ASIC
- A Westpac banker was imprisoned for fraudulently lending millions of dollars to elderly pensioners.
March 2017 – APRA, the government and RBA were concerned that an asset bubble may have been forming in the property market. With RBA flagging in March 2017 that further pressure needed to be placed on banks to slow runaway house price growth in order to limit the chance of the property bubble bursting.
March 2017 – APRA introduced interest only lending cap at 30% of new loans and numbers fell from 36.26 per cent to 15.22 per cent over a 9 month period.
- the maximum LVR on interest only loans – to place strict liits on the value of interest-only lending above 80% and ensure strong scrutiny and justification for interest only lending at above 90%
- Requiring banks to conduct assessment on P&I loan repayments over remaining loan term if an applicant has selected interest only (For example if you apply for a 5 year I/O, you need to be able be approved to pay off the loan in 25 years rather than 30. This may impact your borrowing capacity by $50,000)
- Banks also responded by reducing the maximum interest only loan term for home loan and investment to 5 years, with investment loans having a possibility of extension for a further 5. Previously banks would offer interest only terms of up to 10 years and a few for 15 years.
- Some banks like CBA stopped accepting refinances for investment lending during 2017 to keep under the 10% growth threshold.
June 2017 – Higher rates for investment loans were implemented by banks to slow investment lending.
30 Nov 2017 – Royal commission announced by Government
March 2018 – RC First Public hearings beginning
April 2018 – APRA – Decision to remove investment lending cap to limit growth to 10% – however with the following requirements
- lending has been below the investor loan growth benchmark for at least the past 6 months;
- lending policies meet APRA’s guidance on serviceability; and
- lending practices will be strengthened where necessary.
Dec 2018 – Growth in housing loans to investors has fallen from a high of almost 11 per cent in the middle of 2015 to 1.5 per cent.
Jan 2019 – APRA – Decision to remove interest only cap on new loans at 30%
1 Feb 2019 – RC Final report delivered
Aug 2019 – Date Wagyu case Westpac won in Federal Court decision
6 Feb 2020 – First Legislation passed
July 2020 – Full Federal Court affirmed prior decision and ASIC said they would not challenge/appeal
What other areas are the government targeting?
Appropriately adopting key elements of APRA’s ADI lending standards and applying them to non ADIs; and
Removing the ambiguity regarding the application of consumer lending laws to small business lending – frees up the ability of banks to lend to small businesses which were being assessed on the much stricter consumer responsible lending laws if business debt was mixed with personal debt, which it is for many small business owners.

David Johnston- The Property Planner’s Golden nugget: job keeper and job seeker will be coming off at the same time as responsible lending will be repealed, but 2021 and 2022 will be strong periods for the property market. Less red tape equals more borrowers, more flexibility around assessment equals larger loan sizes, reducing barriers for investment loans equals more investors, which will increase property prices. For the tenants, it hopefully allows them to go and buy their own house.

Peter Koulizos – The Property Professor’s Golden nugget: get all your ducks in a row, do your tax, get your paperwork ready and be prepared so that when you go to your strategic mortgage broker in March you can jump into the property market. 2021 will be a lot better than 2020 in terms of property prices, and 2022 will be even better.

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