Anyone who was hoping for a quiet, uneventful 2020 following the aftermath of the release of the banking royal commission final report would have been disappointed. The year has thrown everything in its power at brokers, the financial services industry and Australia as a whole, as Malavika Santhebennur recaps.
The coronavirus pandemic, lockdowns, economic shutdown, government survival and stimulus packages, a recession and a mammoth budget deficit all impacted us this year. Amid all this, the government made significant announcements around lending policies and regulations for mortgage brokers. Here, we (attempt to!) summarise the year that was 2020!
At the beginning of 2020, as many parts of Australia were grappling with extensive bushfires and the drought, particularly in the eastern parts of the country, nobody could have predicted what awaited them.
The country had only begun to hear rumblings of something called the coronavirus in other parts of the world. However, in March, these rumblings transformed into a roar, with the World Health Organization declaring COVID-19 a pandemic. By this time, COVID-19 had reached Australia’s shores.
In response, Prime Minister Scott Morrison in an address to the AFR Business Summit said the federal government would release a stimulus package to help offset the “hydra-headed” impact of the COVID-19 outbreak, and urged the business community to assist with combatting the crisis.
He issued a warning that the economic ramifications of the pandemic could be more damaging than the global financial crisis, particularly for Australia, which has strong trade links with China, where the coronavirus originated.
In fact, in September, data from the Australian Bureau of Statistics (ABS) revealed that the country’s gross domestic product (GDP) plummeted by 7 per cent in the three months to 30 June 2020, the sharpest contraction since records began in 1959. This followed a 0.3 per cent decline in the March quarter. With these two consecutive quarters of negative GDP growth meeting the definition of a technical recession, the economy was officially declared in recession.
Mr Morrison said the government’s response to the economic crisis would be based on seven key principles, including that the measures would be temporary, favour productivity, be in proportion with the impact on the economy, and adjusted as the economic status evolved.
And so it was that as the government enacted social distancing rules and shut down parts of the economy to curb the spread of COVID-19, it began rolling out various stimulus packages to keep the lights on and “cushion the blow” for small-to-medium enterprises (SME) and individuals. Here are just some of those measures.
COVID-19-related government measures
Coronavirus SME Guarantee Scheme
In March, the federal government announced the new scheme, which enabled SMEs to access working capital to survive the COVID-19 crisis.
The scheme supported up to $40 billion of lending to SMEs, with the government guaranteeing 50 per cent of new loans issued by eligible lenders to SMEs ($20 billion of unsecured loans) if they took out a loan through the approved lenders operating under the scheme. According to Treasury figures, as of 25 September 2020, only 20,611 loans worth $1.9 billion had been accepted by borrowers under phase one of the scheme.
In October, the Treasury launched phase two of the scheme to “help businesses move out of hibernation, successfully adapt to the new COVID-safe economy and invest for the future”.
From 1 October 2020 until 30 June 2021, the maximum loan size will quadruple from $250,000 per borrower to $1 million per borrower, with the maximum loan term also increasing from its current three-year limit to five years.
Several lenders, including all four major banks and some non-major banks, have been approved to participate in phase two of the scheme.
In June, the federal government announced a limited-time $688-millilon HomeBuilder package to breathe life into the residential property market, which risked a prolonged downturn amid the COVID-19 crisis.
Under the package, a $25,000 grant will be available to owner-occupiers “substantially renovating” or building a new home from 4 June to 31 December 2020. A national price cap of $750,000 has been set for new home builds, and a renovation price range of $150,000 to $750,000 will apply to renovating an existing home with a current value of no more than $1.5 million. Those building a new home must also commence construction within three months of the contract date.
The grants will also be means tested, with the government setting income caps of $125,000 for singles and $200,000 for couples. An applicant’s eligibility will be based on their latest assessable income.
All states and territories became signatories to the HomeBuilder National Partnership, and all states opened applications for the grants.
As at 9 October, the state and territory revenue offices had received 11,367 grant applications, with 8,884 applications having been applied for new build houses, while 2,483 applications were for rebuilds/renovations, according to Treasury figures.
There have been calls to extend the package into 2021 after ABS data showed that the number of approved dwellings rose 15.4 per cent in September (seasonally adjusted terms), which have been attributed to the stimulatory effects of the HomeBuilder package.
The scrapping of responsible lending laws
In September, the federal government revealed that it will move to simplify the credit process by scrapping responsible lending obligations from the National Consumer Credit Protection Act 2009 (NCCP Act), with the exception of small amount credit contracts and consumer leases.
The proposed reforms also involve a move from a “lender beware” model to a “borrower responsibility” model, allowing lenders to rely on the information provided by borrowers.
However, the government stressed that lenders would still be subject to regulation from the Australian Prudential Regulation Authority, which will continue to issue guidance regarding sound credit assessment and approval criteria.
The changes remove the Australian Securities and Investments Commission’s (ASIC) responsible lending remit, with the regulator no longer authorised to exercise its enforcement powers.
Consultation opened under the Consumer Credit Reforms on the changes to Australia’s consumer credit framework contained in the NCCP Act as well as updates to the National Consumer Credit Protection Regulations 2010, and the introduction of a new Ministerial Instrument.
The proposals, if passed, would take effect from 1 March 2021.
Conflicted remuneration defined in new regulations
The federal government released final regulations that define conflicted remuneration and when it cannot be accepted by mortgage brokers.
The Financial Sector Reform (Hayne Royal Commission Response – Protecting Consumers) (Mortgage Brokers) Regulations 2020 included several changes and amendments around net of offsets, including modifying how the maximum commission payable to the broker on the amount drawn down by the borrower is calculated, and excluding line of credit facilities, reverse mortgages and credit facilities, which are mostly for construction or renovation purposes from this calculation.
As expected, campaign and volume-based benefits have officially been banned, with the regulations providing further definitions of what constitutes these types of benefits.
Final clawback regulations released
Along with definitions of conflicted remuneration, the final regulations also focused on new clawback requirements for mortgage brokers, as recommended in the final report of the banking royal commission. While the final regulations include updates following both public and “targeted” consultation, they do not include material changes to the draft clawback provisions.
Among other specifications, the regulations bank clawback arrangements if they apply for more than two years from the beginning of the contract, with the two years generally counted from the first day on which an amount of credit is drawn down by the consumer under the credit contract.
The regulations also stipulate that the repayment obligation “must not require repayment of an amount greater than the benefit given to the licensee or representative”.
Best interests duty
ASIC published guidance concerning the application of the best interests duty (BID) on mortgage brokers. The Regulatory Guide 273 Mortgage brokers: Best interests duty aimed to guide mortgage brokers on how to apply the new BID, which is set to take effect in January 2021.
AFG-Connective merger gets green light
Aggregation groups Australian Finance Group (AFG) and Connective, who announced that they were going to merge to create a company comprising over 6,500 brokers, were told by the Australian Competition and Consumer Commission (ACCC) in June that the merger would not be opposed.
The ACCC had initially expressed concerns that a merged entity would reduce competition in the supply of mortgage aggregation services to brokers, reduce competition in the supply of mortgage distribution services, lead to non-major lender foreclosure and reduced competition for the supply of home loans.
However, the ACCC ultimately decided that while the proposed acquisition would result in a “major structural change” and “will have an impact on competition”, the impact will be “unlikely to substantially lessen competition in any relevant market due to existing competitive constraints”.
Budget 2020-21 released
The old adage “man proposes, God disposes” rang true with the 2020-21 federal budget. The COVID-19 crisis dashed the federal government’s hopes of delivering a budget surplus in May.
Instead, the government handed down its budget in October, which will see a record deficit of $213 billion this year, $112 billion next year and $87 billion the year after that.
Among the several measures announced by federal Treasurer Josh Frydenberg, including a range of tax cuts, concessions and payments to encourage spending and rebuild the economy following the impacts of the COVID-19 crisis and its associated recession, was the commitment to make available an additional 10,000 places under the First Home Loan Deposit Scheme (FHLDS).
The National Housing Finance and Investment Corporation released further details of the second round of the scheme, including a new name: FHLDS (New Homes).
The additional scheme allocations are available to first home buyers (FHB) who are Australian citizens, at least 18 years old and wish to buy a new dwelling or purchase a newly built dwelling with a deposit of between 5 and 20 per cent of the property’s value.
Eligible properties include newly constructed dwellings (e.g. whether a freestanding house, townhouse or apartment), off-the-plan dwellings, house and land packages, and a separate contract to build a new home.
The FHLDS (New Homes) is only available to FHBs who have a taxable income of up to $125,000 per annum for the previous financial year (if applying as a single applicant) or a combined taxable income of up to $200,000 per annum (if applying as a couple). Like the original FHLDS, the second round is means tested.
According to Assistant Treasurer Michael Sukkar, almost 20,000 buyers have accessed the FHLDS to buy a home in 2020.
Several lenders began accepting applications for the extended scheme from 3 November, including the Commonwealth Bank of Australia (CBA) and National Australia Bank (NAB).
Loan Market announces NABreggator acquisition
The major brokerage announced that it had entered into an agreement to acquire 100 per cent of NAB’s broker aggregation businesses – PLAN Australia, Choice and FAST.
The move comes as NAB continues its “simplification” strategy, which focuses on its core banking business.
According to Loan Market, under the purchase, the four businesses – Loan Market, PLAN Australia, Choice and FAST – will run independently of one another. They will continue to have their own respective aggregation agreements, leadership, and corporate sales and marketing teams.
Completion is subject to satisfactory customer obligations and, should all requirements be met, is expected to occur in early calendar year 2021.
Other measures included:
The $70-billion JobKeeper payment scheme, which subsidises wages with a flat fortnightly payment of $1,500 per employee. This was extended by six months to 28 March 2021, while the temporary coronavirus supplement for those on income support will be extended until 31 December 2020.
The $15-billion Structured Finance Support Fund, which aims to enable smaller lenders to continue lending to SMEs and individual customers throughout the COVID-19 pandemic.
In March, the Reserve Bank of Australia (RBA) pulled its emergency lever, pre-emptively cutting the official cash rate to a record low of 0.25 per cent in response to the economic fallout from the COVID-19 crisis, and commenced quantitative easing. In November, on Melbourne Cup Day, the central bank cut the cash rate to a new record low of 0.10 per cent.
The RBA’s $90-billion term funding facility for authorised deposit-taking institutions that will also support lending to SMEs.
Appointments and resignations of 2020
Malavika Santhebennur is the features editor on the mortgages titles at Momentum Media.
Before joining the team in 2019, Malavika held roles with Money Management and Benchmark Media. She has been writing about financial services for the past six years.
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