Australia

Assessing loans is not 'one size fits all'

ASIC has published public submissions and will hold public hearings before updating its responsible lending guidance to spell out what it expects of lenders.

Australia's banks argue adopting a "one-size-fits-all" approach to assessing credit applications will lead to delays and potentially higher costs for consumers.

The major banks and peak industry body back the financial regulator's move to clearly spell out what it expects of lenders when someone applies for a mortgage, personal loan or credit card.

But they do not want the Australian Securities and Investments Commission to set minimum rules for inquiries into and verification of a customer's financial situation, arguing they should still be able to scale up or down the tasks.

The Australian Banking Association said it would not be in customers' interests for ASIC to take a highly prescriptive approach to setting minimum standards for inquiry and verification.

"An attempt to impose a 'one size fits all' minimum approach is not appropriate - there is a danger this becomes a 'check list' approach," the ABA said in a submission to ASIC.

The ABA said lenders may become overly cautious and would inevitably request more documentation and follow-up information from customers, who would face delays in having their credit applications processed.

In submissions released by ASIC on Monday, the banks said they would face additional costs to review applications and change their systems and processes, which would potentially impact the cost of credit for consumers.

"It could be expected that a large and detailed list of steps and greater document review requirements would result in increases to customer waiting times for approval, delays in the availability of credit and increased customer costs," Westpac said.

The ABA was also concerned ASIC's proposal to take a more prescriptive approach to some aspects of its responsible lending guidance may negatively affect competition, including by discouraging customers from switching products or financial institutions.

The banks argued customers may be pushed to higher-cost credit products or unregulated providers such as 'buy now, pay later' lenders.

While banks have strengthened their lending standards and are asking more detailed questions about an applicant's financial position, ASIC plans to make it clear they must take steps to actually verify a consumer's income and expenses.

Financial Counselling Australia said lending standards had improved as a result of the banking royal commission, but ASIC's guidance needed to be prescriptive enough to ensure credit providers lend responsibly in the future.

"Our concern is that people will forget about the lessons learnt in the push to lend as much as possible (again)," its submission said.

Consumer group Choice said credit providers had for too long hidden behind the ambiguity of both the law and regulations to justify providing inappropriate credit to their customers.

"The conflict that ASIC must resolve is that the less scrutiny a lender undertakes to verify an application, the greater the profit the lender often stands to make. It is imperative that credit providers are held to account."

ASIC will hold public hearings in August before updating its guidance about responsible lending obligations, which require lenders to make reasonable inquiries and take reasonable steps to verify a customer's financial situation.

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