While responsible lending has been the primary focus of regulatory and media scrutiny this year, the industry has been increasingly calling for improved financial education to encourage responsible borrowing and spending. Tas Bindi explores further.
Breaches of responsible lending laws have been at the centre of scrutiny in recent years, with ASIC, APRA and the financial services royal commission questioning the banks for their reliance on benchmarks to assess borrowers’ capacity to repay loans even when they have more granular information available.
There has been a lot of finger-pointing during the royal commission, with some suggesting that expense checking is the responsibility of brokers, and others arguing that the buck should stop with the lender actually approving the loan.
However, as many in the mortgage industry have stressed, banks and brokers are not the only parties involved in loan transactions. And as the royal commission aims to understand whether any systemic issues are at hand, one question that seems to have played second fiddle is: “How responsible is a borrower?”
Speaking to The Adviser in the first episode of its webcast series, Responsible lending: Has the game changed?, Kym Dalton, the co-founder and COO of Australian Mortgage Marketplace (AMM), highlighted the importance of responsible borrowing and spending, which he said need to be facilitated through context-driven financial literacy.
“Seemingly, every time we have a commission or a report, there’s a general clamour for increased financial literacy... That’s quite often like a faith-based mission or a conscience sale because it’s my opinion that generalised financial literacy really doesn’t have much impact,” Mr Dalton said.
“I would endorse increased levels of financial literacy, but I am a passionate believer that it has to be approximate to purchases and it has to have context.
“It has to be related to the product that’s being sought or required to have real meaningful impact.”
The COO argued that the need for context-driven financial literacy is further supported by a phenomenon called “the optimism bias”, where borrowers apply for loans without factoring in potential risks.
“People actually apply for loans [with] the expectation that things won’t go wrong or things will get better,” Mr Dalton said, adding that the onus has been upon lenders and brokers to manage optimism bias and encourage people to borrow responsibly.
In agreement with Mr Dalton, the chairman of Opica Group, Brett Spencer, emphasised that customers should also be responsible about the debts they take on, warning that the current generation of Australians — or what he called “Generation Now” and “Generation Me” — has a different mindset when it comes to borrowing and spending.
“Quite often people want to [buy property] in an area where they’re renting. So, say you want to live in Richmond in Melbourne and you’re paying $600 a week for a nice two-bedroom apartment. But if you want to buy a two-bedroom house in Richmond, [it’s going to be] in the million-dollar range,” Mr Spencer said.
“In comparative speak, you’re spending $2,500 on rent [per month, but you’re] not going to make the same amount in mortgage repayment on a principal and interest basis.”
A study by ME Bank earlier this year showed that the majority of first home buyers (FHBs) were “clueless” about property buying, with 61 per cent of the 1,000 Australians that were tested on the basics of property buying failing, compared to 27 per cent of owner-occupiers and 25 per cent of investors.
Specifically, the study found that 88 per cent of FHBs did not understand that lenders mortgage insurance covers lenders, not borrowers; 85 per cent were unaware that there is no cooling-off period when purchasing at an auction; 78 per cent lacked the knowledge that deposits need to be paid on auction day; 66 per cent were unfamiliar with conveyancing; and 63 per cent didn’t know what an offset account is.
This is where brokers come in, according to Brendan Wright, the CEO of finance aggregator FAST. In the panel discussion with Mr Dalton and Mr Spencer, Mr Wright said that the onus is on brokers to ask borrowers “the right type of questions to understand what their living expenses and debts are [and] make sure everything is disclosed”.
“It’s in their best interests that there [are] no surprises down the track,” Mr Wright added. “I think those conversations have always been had, but they need to be had in an even more genuine, authentic way... [you need to] demonstrate to the customer that you’re putting their interests first.
“I acknowledge that means some tough conversations, but that’s the reality of the game we’re in.”
However, Mr Spencer warned that consumers “will always find a way to get what they want”.
For example, the Opica Group chairman suggested that while borrowers might be transparent with the first broker they consult, if they find out that they don’t qualify for a mortgage, they might then visit a different broker or go straight to a bank branch and disclose less information in order to get the loan approved.
“They’ve learnt from their mistakes on what they should and shouldn’t disclose and then they’ll disclose something different,” Mr Spencer said.
“One thing that we can never fail to underestimate is the persistence of someone who wants that end goal.”
Mr Dalton expressed his belief that there should be consequences for fraud and irresponsible borrowing (especially for “serial offenders”), as there are consequences for irresponsible lending.
“Right now, there is no particular sanction against irresponsible borrowing. You don’t get the loan, but there’s no real sanction,” the AMM chief operating officer said. “I think as we explore the world of responsible lending further, there should be.”
Mr Spencer added that lenders never go back to the customer who might have lied in their home loan application and ask for their money back.
“In 26 years, I’ve never heard of a case of a lender going back to a borrower after they’ve taken their loan… [saying], ‘You lied about your expenses in your application; I want my money back’,” the Opica Group chairman said.
“There is no recourse back for the lie and in the event that there is a problem down the track.”
While brokers have had to bear the brunt of evolving credit policies that require them to conduct more comprehensive income and expense checks, Mr Spencer noted that as long as brokers diligently go through the responsible lending process with their customers, the blame should not fall on the broker or aggregator if the customer is found to have lied to get a loan across the line.
“The backlash can’t come back to a broker or an aggregator who’s done their responsible lending process if that consumer [has] then gone to another person [or] a branch and not disclosed their two credit cards,” Mr Spencer said.
Tas Bindi is the features editor for The Adviser magazine. She writes about the mortgage industry, macroeconomics, fintech, financial regulation, and market trends.
Prior to joining Momentum Media, Tas wrote for business and technology titles such as ZDNet, TechRepublic, Startup Daily, and Dynamic Business.
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