The government’s move to trash lending rules during a recession is a recipe for disaster

It was pitched as an “adrenalin shot into the economy” but the Morrison Government’s decision to trash responsible lending laws will inevitably result in a return to the bad old days of loose credit and a debt binge.

At a time when many Australians are praying they will have a job at the end of COVID-19, and are struggling to pay rents or mortgages, the government’s grand plan is to ease credit.

Carolyn Flanagan, a blind pensioner, appeared at the banking royal commission after she was left homeless because of a Westpac loan.
Carolyn Flanagan, a blind pensioner, appeared at the banking royal commission after she was left homeless because of a Westpac loan. Credit:Elke Meitzel

That it eased them on the same day that Westpac copped the biggest fine in corporate history beggars belief.

The underlying assumption is the banks will do the right thing and the regulators will be waiting in the wings if they’re not. Good luck with that.


At the heart of the backflip, led by Treasurer Josh Frydenberg, is the ideology of caveat emptor or buyer beware. It is the belief that light tough regulation works best and that banks and non-banks will do the right thing, leaving the onus on customers to make sure that they do.

But these laws on credit protection were introduced for a reason: the global financial crisis. Irresponsible lending played a massive role in the subprime debt crisis that tore economies apart.

Treasurer Josh Frydenberg
Treasurer Josh FrydenbergCredit:Alex Ellinghausen

They also played a role in the property bubble in Australian cities and in the country’s addiction to debt.

For years there have been attempts to water them down. Now they have under the guise that easing credit flows will stimulate the economy.

Little wonder bank shares opened higher on the ASX. Not only will the easing boost credit growth, it will reduce costs due to less details required on expenses and income.

Analysts are now busy recasting their profit forecasts to take into account the likely increases to credit growth, which have been flatlining at around 3 per cent.

It might seem like a quick fix to inject credit into property developments and bolster flagging house prices but to do so during a recession when so many people are desperate for money could become a recipe for disaster.

Since the royal commission was announced there has been a lot of talk about the responsible lending pendulum swinging too far and spooking the banks into adhering to the letter of the responsible lending laws.

That may well have been the case, but the announcement on Thursday will swing it too far the other way.

The royal commission highlighted a litany of poor behaviour when the banks run rampant with irresponsible lending.

There was Carolyn Flanagan, a 67-year-old woman on a disability pension, who appeared as a witness during the third round of the royal commission’s hearings in Melbourne. She was the guarantor on a bank loan she’d taken out on behalf of her daughter. She couldn’t read or write due to blindness and had trouble speaking due to cancer, suffered memory loss and other medical problems. A lot of details were left out of the documentation.

Westpac tried to take Flanagan’s home after her daughter got into trouble but thanks to Legal Aid stepping in to help her, she managed to stave off what could have been devastating.

The royal commission also addressed the issue with mortgage brokers, driven by commissions, pushing borrowers into taking out bigger loans than they could afford, to bolster their commissions. In some cases there was fraud.

Then there were the insidious introducer loans, were bank staff were given sales targets, which encouraged some to turn to criminal behaviour including NAB branch managers caught accepting white envelopes stuffed with cash as part of an alleged bribery ring, which involved bank staff selling loans based on fake documents.

Immoral practices continue. Take Henry Dolphin, who will take another three years to pay off tens of thousands of dollars in debt he amassed over the past seven years including personal loans and credit cards with CBA, ANZ, NAB and HSBC.

Now the restrictions have been releaxed, more and more people desperate to pay their debts, will dig themselves into even deeper holes.

Dolphin worked in a factory but his income wasn’t fixed. He started racking up debt in debt in 2011 and got deeper and deeper by taking on more loans to pay it off. “Some of the loans were unsolicited,” he said. “I needed the money and one of the institutions made up figures to lend me the money,” he said. “There were hidden fees, which really hurt.”

Dolphin said most of his wages went on repaying the interest. He eventually turned to the Consumer Action Law Centre, when his debt reached $66,000. CALC said it after examining the paperwork it found that Dolphins creditors had based their assessments on incomplete information. In some cases, Dolphin’s living expenses had been undervalued and in all cases, his existing credit contracts had not been considered at all.

Dolphin’s creditors eventually agreed to waive the interest and fees charged on his accounts and refund those it already paid. In one case the bank owed Dolphin $1000.

Now the restrictions have been relaxed, more and more people desperate to pay their debts, will dig themselves into even deeper holes.

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