Loosen lending rules – Oyez!

Oct 1, 2020

Treasurer Josh Frydenburg is very foolish. Like Treasurers Joe Hockey and Scott Morrison before him. And dangerous. Not content with the  idea to further cut taxes (while worshiping the dual deities of Reagan and Thatcher), Frydenburg fronts a new scheme to loosen bank lending rules to speed up economic recovery.

David Crowe’s explanation in the Sydney Morning Herald reads like a press release from the Treasurer’s office:

The changes respond to growing concerns over court disputes and the duplication of regulators in home and personal lending, sparking fears that restrictive rules on credit would curb economic growth.’

Which court disputes? Growing concerns from whom? Sparking fears from whom? Crowe again:

The objective is to replace a philosophy of “lender beware” with a “borrower responsibility” principle to make sure credit is available.’

Don’t look for sense in this illogical sentence, but the implications are clear. A comment on Crowe’s article supports the drift:

‘People go to their bank with a dream of buying a home or a business or expanding their business. It is their right to do with their lives and their money what they see fit. They don’t need a government to protect them from themselves, they need a government who will support them in achieving what they want to achieve.’

Those imbued with this mentality understand nothing of the credit relationship. And they understand nothing, or care less, about potential borrower vulnerability. Which is precisely why consumer protection regulations have been developed, albeit always belatedly and incompletely.

One despairs to confront how little regarded by our authorities is the experience of credit counsellors on the front line with struggling casualties, of which the Financial Rights Legal Centre, the Consumer Action Law Centre, etc.

The fantasists who dominate the economics ‘profession’ have long nurtured the fairy story of ‘the rational consumer’ (who is always attended by full information!). In the real world, consumers regularly have to be protected against themselves.

The vulnerability of people is recently reflected in the victims of shysters operating in the thoroughly corrupted VET sector, in which massive debt has been ascribed to the unsuspecting for no educational services rendered whatsoever.

Debt is perennially inviting – an area where rationality is scarce. Perhaps out of necessity for lack of means. Frankly, the predatory after pay’ sector should be shut down completely.

Then there’s investment housing. At some stage in the 1990s, housing became a fully blown commodity. The novelty was that everybody was invited to get in the act of housing investment, with the presumption that there would be no downside. The atmosphere was facilitated by negative gearing, by the cutting of the capital gains tax rate, by the elimination of higher investment-linked interest rates. Options of secure investment in government securities had disappeared off the table, ditto corporate debentures. High returns were claimed as uniformly and universally possible. A very comfortable retirement package was there for the asking. The game was also adding to the fuel of uncontrolled apartment complex development.

Some have pulled it off, others have been casualties (as with the contemporary scam that was supposedly high return financial investments, via dodgy financial advisers). The authorities have been implicitly supportive of the entire affair, with no cautionary voices from officialdom.

Then there’s owner-occupied housing. It’s a defensible urge to seek security in home ownership, but affordability is not god-given. Especially when house/apartment prices are at historically unprecedented multiples of average earnings.

Crowe notes:

‘The lending changes are being backed by industry ahead of the formal announcement on Friday, with Master Builders Australia saying it could speed up decisions for Australians trying to buy their own homes.’

Well they would say that. Speeding up the home loan process is not necessarily a good thing. Taking out a 25 – 30 year home loan is the biggest financial decision a person or couple will ever make. It demands caution and level headedness, precisely when contrary emotions are prominent. Relative long term job security is a necessity, but who can count on such a halcyon future? Interest rates are historically low, and they can only go up. More, one can’t guarantee that a bad decision can be offset by forced sale of one’s precious home without loss.

Here’s the point. Lenders do not care about borrower affordability. Housing loans, by definition, come secured. Housing investment loans will be not merely secured by the investment property/ies but probably by the borrowers’ residential home as well. The lender cares only about security on the loan.

Apart from loan officer laziness, ill-training and incompetence, additional borrower assets appear as a magnet to officers under pressure to perform – providing the basis for what could become conscious predatory asset-based lending.

The last thing any loan officer wants to see is a potential borrower turned away, on sound principles, who then acquires a loan from another lender who gives less of a damn. A good example of this phenomenon is that of the NAB during the 1980s. Directives came down from the top that foreign currency loans (then fashionably hawked by the other Big 3) were dangerous facilities and were not to be pushed. NAB loan officers nevertheless sold such loans to some existing customers to keep them on board (and sold them up afterwards!).

This is what ‘competition’ look like in banking, and it’s bad news for the public interest. Economists wouldn’t know, because competition inevitably works for the best by construction.

Potential borrowers en masse have yet to understand that you are not dealing with people who carry professional obligations in their dealings. Following comprehensive financial deregulation, to which the entire political class has since been bound by blood oath, bankers ceased to embody professionalism and became money lenders. The Code of Banking Practice is a gigantic lie. Loan officer status is tied to the quantity not the quality of the loan book.

Behind the same outward appearance, the inner cultural transformation has been immense. Many community-focused Building Societies followed suit, feeling the compunction to obtain a banking license which subsequently saw them assimilate the new banking culture, and for most of them to be swallowed up (c/f Sydney’s St George).

Misplaced trust by potential borrowers in the competence and integrity of banking personnel has been the source of much subsequent pain.

Crowe also notes:

‘This will place a greater onus on customers to provide accurate information about their ability to repay a loan.’

Some borrowers might attempt to fudge their figures. But the predominant figure-fudgers are the bank loan officers themselves. (Ditto for small business loan proposals.) The Hayne Royal Commission curiously missed this practice. This is why borrowers engaged in conflict regarding their loans with bank lenders find it near impossible to extract crucial loan documents from the banks. The fudged figures and accompanying documentation incriminating bank personnel will come to light.

The banks are complaining that the regulatory apparatus is hydra-headed and cumbersome. This is a joke. The then private trading banks haven’t ceased whingeing since the Chifley government finally brought the banks under proper control with the banking Acts of 1945. The banks decline to confront that because their sector provides an essential public service they should be subject to some form of regulation in return. The possession of a banking license (i.e. ultimately a creature of the state) grants banks an enormous privilege – literally the right to print money.

At present, the banks are confronted with APRA (the supervision unit pulled out of the Reserve Bank in 1998), ASIC and the ombudsman AFCA. You couldn’t get a pack of regulators more complicit with the banks if you tried.

True, ASIC took on Westpac’s formula-driven lending process. In principle, this was a good idea, but the court wasn’t the place to improve lending rules. ASIC’s move was ham-fisted and counter-productive. Strangely, it was completely at odds with ASIC’s ongoing acquiescence in the face of bank malpractice.

Liberalising lending rules will merely enhance the number of foreclosures down the track, with their attendant significant human costs. Default and foreclosure is a resource-consuming activity for bank lenders, but it seems to be a process that they (and their lawyers, etc.) take pleasure in.

If one wants to hasten economic recovery, there are more straightforward routes. Build social housing. Make child care free. Then up the post-Covid Newstart allowance to allow unemployed people to live with dignity and to more effectively seek employment. The resulting income generation and spending will more readily feed into businesses recovering, and will return taxes to public finances. Banks anxious to lend will be presented with more viable propositions. It’s a lay down misère.

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