'Responsible lending' threatens to choke off supply of funds

TIGHT: Stricter rules are making the borrowing market much harder to negotiate.

TIGHT: Stricter rules are making the borrowing market much harder to negotiate.

RIGHT now Australians are focused on the aftermath of the bushfires and the threat of the coronavirus. Bad as these are, their economic effects are likely to be relatively short-term. Rebuilding after the fires will stimulate sections of the economy, even as it has stifled others. Medical advances have been able to prevent potential pandemics like SARS, MERS, EBOLA and ZIKA - we are highly likely to also contain the coronavirus.

However, other issues that are not getting much publicity have the potential to severely affect our economy over the long-term. One is the after-effects of the Hayne Royal Commission. Right now, to put it simply, our lending institutions have retreated behind a wall of compliance and red tape and are avoiding making decisions in case they suffer more bad publicity.

Just this week, AMP chairman David Murray, one of our most experienced bankers, called on Treasurer Josh Frydenberg to convene a meeting between the corporate regulator, consumer groups and the banks in order to reduce the confusion surrounding "responsible lending" which is choking off the supply of credit to the economy. He also warned there was a risk financial advice could become unaffordable for many Australians.

The catalyst for today's column was a phone call I received from a long-term friend, now in his 70s, who was a founding partner of a major Australian professional services business. He's been happily retired for years, and has been living under the illusion that the lending and financial situation is humming along as it was when he was in business.

He was telling me about his son seeking a loan, and needing a guarantee from his parents to make the deal work. My friend is a man of substantial means, was happy to go guarantor, and has got the assets to back it, but the bank's response was: "You are retired and have zero taxable income; therefore, we must decline."

He pointed out that the reason he had minimal taxable income was because he was drawing a tax-free pension from his superannuation fund. This did not help the application, leaving him astounded that he had been refused a loan for the first time in his life.

Subsequent inquiries revealed that the current interpretation of "responsible lending" takes a very hard line on guarantors when the income of the principal borrower is insufficient on its own to get the deal over the line.

I discussed this with an ex-banker friend, now a mortgage broker, who told me that the whole culture in banks has changed. When he was a banker, they followed the 3Cs - character, capacity, collateral - and bent over backwards to get a deal approved if those three pillars of credit lending stacked up. He tells me the wheel has now turned, and the focus now is on finding trivial reasons to reject an application, not approve it.

This means it has become particularly difficult for small business borrowers, whose financials now suffer greater scrutiny than ever before.

Another challenge for potential borrowers is that lenders do not have a uniform policy: an application refused by one lender may be approved by another. But if you apply to a lender who declines it, and then approach another lender, who also refuses it, your chances of approval by any other lenders are virtually zero, because you will have two recently declined applications on your credit file.

In the current climate it may be better to use a mortgage broker from the start if your application is in any way marginal, or even unusual.

The regulators need to keep in mind that credit is the grease that keeps the wheels of commerce turning. Turn off credit, and you turn off the economy. At this stage in the economic cycle, that's something Australia cannot afford.

  • Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. noel@noelwhittaker.com.au