Royal commissioner Hayne has drawn on a Treasury submission to argue that stricter lending standards are good for the economy and not likely to lead to a damaging tightening of the supply of credit.
The commission had highlighted what it saw as deficiencies in the processes that banks use to verify borrower expenses, including insufficient controls to verify information and a heavy reliance on benchmarks such as the Household Expenditure Measure.
The final report notes that since the first round of hearings, a number of banks have altered their lending processes by introducing additional inquiries about a borrower’s financial situation and by taking further steps to verify that situation.
Changes included more detailed expense breakdowns, more effort to identify commitments to other financial institutions and more extensive capture of customers’ spending.
Banks are reducing their reliance on HEM. “While HEM can have some utility when assessing serviceability, the measure should not be used as a substitute for inquiries or verification,” the report says.
In response to criticism that improving compliance with responsible lending rules may limit the availability of credit, the report points to a Treasury submission, which says: “There is little evidence to suggest that the recent tightening in credit standards, including through APRA’s prudential measures or the actions taken by ASIC in respect of responsible lending obligations, has materially affected the overall availability of credit.”
Treasury said the housing market had the capacity to absorb some adjustment in the application of lending standards necessary to meet the requirements of existing responsible lending obligations without imposing unwarranted risks to macroeconomic outcomes.
It said that to the contrary, ensuring the industry consistently meets the requirements of existing laws will likely enhance rather than detract from macroeconomic performance.
In other reflections of lending standards, Hayne rejected submissions from consumer groups that called for a change in the National Consumer Credit Protection Act so that lenders would be obliged to consider whether a loan was “suitable” rather than “not unsuitable”.
“The not unsuitable test may be described as directed at avoiding harm, while asking about suitability invites attention to whether there is a benefit to the borrower,” the report says.