A leading bank analyst has questioned the Morrison Government’s rationale for suspending responsible lending laws, saying the move is unlikely to increase the flow of credit in the economy.
Treasurer Josh Frydenberg last month described Australia’s credit laws as “unfit for purpose” when he announced the government’s plan to unwind responsible lending obligations to free-up access to credit for small businesses and homebuyers.
The decision shocked consumer groups and many economists who argue that there is no data to support the government’s contention that responsible lending obligations have tightened access to credit.
Australia’s top-ranked bank analyst - Jonathan Mott of UBS – this week joined the list of government critics after publishing a 34-page research report on the likely impact of the government’s policy reform.
In the report, Mott argues that the obligation on lenders to assess the suitability of home loan products has had little impact on credit flows in the last 12 months.
He also warns that repeal of the responsible lending laws could threaten the stability of the financial system in the medium term.
“We have found little evidence that responsible lending obligations have constrained housing lending in Australia, given the rebound in credit flow over the last year,” Mott told clients in the report.
“ As a result, rescinding RLOs is unlikely to materially stimulate housing credit further in our view, but is likely to speed up the approval process.
“We believe these changes are more a message to the banks that 'it's OK to lend', reducing litigation risk.
“That said repealing RLOs has the potential to increase financial stability risk over the medium term given very highly leveraged Australian households and record low rates.”
Mott noted that the impact of the reforms would be small on lending activity because the local household sector was already among the most highly leveraged in the world.
The UBS report questions whether policies aimed at further leveraging the Australian consumer are “prudent” in the current environment.
Surveys of home borrowers conducted by UBS indicate that the level of factually inaccurate mortgages remains at high levels in Australia despite efforts by regulators to improve lender assessments since the 2017.
Around 38 per cent of home borrowers surveyed by UBS this year admitted to underestimating their living costs to lenders in order to secure funding. In 2016 the percentage admitting to the practice was 27 per cent.
Mott expressed concern at the increasing tendency of borrowers to overstate their income to qualify for bigger loans.
“One observation which has caused us concern is that not only are people more frequently misstating their mortgages, but the amount by which they are overstating is also rising,” Mott stated in the report.
“For example, for customers who acknowledged they overstated their income, the mean amount of their income overstatement rose to 16 per cent from 12 per cent in 2018.”
While the UBS research provides evidence for retention of responsible lending obligations, Frydenberg maintains they have caused lenders to become increasingly risk averse and overly conservative.
“As a consequence, borrowers, irrespective of their financial circumstances, have faced an ever more intrusive, difficult and drawn-out approval process,” Frydenberg said last month.
“It is no surprise that Australians have found it more difficult to obtain the credit they are seeking, with many giving up.”