Corporate watchdog moves to firm up ‘fuzzy’ responsible lending laws


Aussie Home Loans founder John Symond has said over-regulation in the wake of the royal commission was hurting consumers.

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Frydenberg has said he would instruct ASIC to waive the responsible lending standards for small business to ease the credit squeeze on SMEs.

Some senior bank executives have said ASIC’s focus on the laws has made front-line staff more cautious.

ASIC commissioner Sean Hughes, however, begged to differ and made the case, in a speech last week, that the reality of the impact of the laws is different to the perceptions.

The laws are relatively straightforward, requiring lenders to ensure that their loans are “not unsuitable” for the customer.

ASIC says this means gathering and taking reasonable steps to verify information about a customer’s financial situation and making reasonable inquiries about a consumer’s requirements and objectives when seeking a loan.

It is the question of what constitutes “reasonable inquiries” that is generating uncertainty. In effect, by prescribing what constitutes ”reasonable inquiries,” ASIC is trying to turn laws that are statements of principle – ”fuzzy” law – into black-letter law.

Hughes disputed claims that the laws and ASIC’s guidance had impacted approval times or rejection rates for loan approvals, citing information ASIC had sought and received from the Australian Banking Association and the major banks.

He said ASIC didn’t accept that a decision to update its guidance on the laws – ASIC is nearing the conclusion of that process – had had a negative impact on economic growth, blaming it instead on a decline in demand for credit rather than changes to the approvals process and standards.

He also noted loans to a company or individuals for predominantly business purposes (even if secured by a mortgage), weren’t subject to the laws.

The banks argue that ASIC’s actions and interpretation of the law have created uncertainty and risk-aversion that has added to the time and cost of processing loan applications.

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ASIC took Westpac to court for alleged breaches of the laws primarily because of its use of a benchmark (the Household Expenditure Measure) in assessing the capacity of some home loan borrowers to afford their loans, rather than the expenses declared by the borrowers.

That case was lost in the Federal Court, with Justice Nye Perram arguing that consumers could change their spending patterns after taking out a loan. The past spending habits of someone without a mortgage aren’t a particularly useful guide to what they might spend once they are encumbered with a mortgage.

“I may eat Wagyu beef every day washed down with the finest shiraz but, if I really want my new home, I can make do on much more modest fare,” Justice Perram said rather colourfully.

Had that decision been left unchallenged, banks would have had individual discretion in how they developed models and processes to evaluate the suitability of loans for borrowers and the borrowers’ capacity to repay.

ASIC’s decision to appeal and the decision to update its guidance ahead of the appeal’s outcome, have, however, sent a signal that it still wants lenders to gather and analyse those reams of less-than-useful data on past spending and use them to assess whether or not the loans are “not unsuitable” for the borrowers.

Hughes expressed it a little differently.

“If the (Perram) judgement is to be understood as standing for the proposition that a lender may do what it wants in the assessment process – as His Honour found – then we consider that to be inconsistent with the legislative intention of the responsible lending regime,” he said.

That begs the question of why the legislators themselves didn’t prescribe how those loan assessments should be made.

To the extent that ASIC’s actions have had an impact on lending, it is because they have generated uncertainty and risk for lenders in a post-royal commission environment where lenders are acutely risk averse and forced lenders into a time- and resource-intensive process of gathering and analysing a lot of less-than-useful data.

Hughes said ASIC decided to appeal the Westpac decision to the full Federal Court because it believes the judgment left it too unclear what steps were required of a lender to meet its obligation to make an assessment of whether a loan was “not unsuitable” for borrowers.

In the meantime, it will press ahead with the release of its updated guidance because it considers it already has all the “necessary ingredients” – judicial decisions relating to its own enforcement actions, “thematic” reviews, the royal commission and changes to technology – to build on the existing guidance.

Given ASIC’s new-found post-royal commission aggression, lenders won’t be able to ignore them – unless the appeals court affirms the Perram judgement, in which case the revised guidance might need revising.

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