The ABA said that if this legislation is rushed through in its current state, it will inevitably need to be fixed by future Governments, just as has happened with the Financial Services Reform (FSR) legislation.

While the ABA supports the Commonwealth Government assuming responsibility for the national regulation of consumer credit, the Government must urgently review its approach to the proposed regime.

The ABA has outlined its concerns in a submission on the National Consumer Protection Credit Bill 2009 and related Proposal Legislation. (See over: Attachment 1 Summary of ABA concerns).

The ABA supports the principle of responsible lending. Banks have set a high standard, providing credit to consumers in accordance with their needs for decades and their lending performance remains in marked contrast to overseas. (*See over for statistics in Notes for editors).

The target of these reforms was predatory lenders but some of these rules go much further and will impose a greater and unnecessary regulatory burden on mainstream lenders such as banks.

David Bell, Chief Executive of the ABA, said: “One problem with the draft legislation is it will adversely affect customers by requiring banks to artificially split their loan decision-making process into a preliminary application phase and a loan approval or decision phase.” (See Attachment 2)

“Customers will face a whole new pre-application process involving more red tape and a handful of new forms. After these tasks are complete, the customers will be surprised to learn the bank has still not approved the loan. Customers must then go through the formal loan application process which leads to the decision to lend.”

“To do this, banks will need to design new systems, documents and processes; and this comes at a cost. Those costs will potentially be passed on to consumers through higher costs of banking products and services or by consumers having to pay a fee to apply for a credit product,” Mr Bell said.

On top of this unnecessary additional process are disproportionate criminal and civil penalties if the process is not adhered to.

This is combined with an unrealistic timeframe for banks to re-engineer their lending processes, prepare new documents and train their staff. Lenders must be compliant by 1 January, 2010, which will be about three months after the final legislative regime is known.

The ABA suggested to the Government a more realistic implementation timeframe and transition period drawing on banks’ past experience in implementing regulatory changes of similar dimensions.     

It is particularly disappointing that the Government’s consultation process has failed to allow an open discussion of these issues.

Mr Bell said: “Consultation on these proposed laws has been rushed and up until this point, shrouded in confidentiality which does not lead to a transparent and properly informed policy development.”

“I urge the Government to consult further with the banks and other lenders. This will give it the opportunity to understand the implications of the current proposals and consider alternatives before concluding the final framework.”

Finally, the ABA notes the draft legislation does not deliver the objective of a single standard national regime for consumer credit regulation which is to replace the State-based legislation – the Uniform Consumer Credit Code (UCCC). States and Territories will retain the ability to initiate consumer credit laws, subject to any Intergovernmental Agreement that does not appear to exist as yet.   

Notes for editors:

The ABA submission is published on the ABA website – under Policies and Submissions under Market conduct and disclosure.

*Selected statistics on responsible lending

• The number of people with loans from banks who are behind in their home loan repayments remains extremely low by historical and international standards. Data for February 2009 released by Standard and Poors suggests that the 90+ days delinquencies for Residential Backed Mortgage Securities (RMBS) for banks is at 0.59%. By way of contrast, sub-prime loans were at 10.37%. Banks are not involved in sub-prime lending.
  
  
• On credit cards – growth rates in balances per card are at records lows, they grew by less than 1% over the past year, while the amount accruing interest per card and credit limit per card grew by under 3%.  Consumers are now ahead in their repayments (over the past year) by a record $3.5 billion.

Attachment 1 – Summary of ABA concerns

The ABA has the following concerns with the draft National Consumer Protection Credit Bill 2009 and related Proposal Legislation:

• More hassle to apply for credit
  There is now an additional pre-application process when a customer approaches the bank for credit.  The process has to be followed before the customer can make a formal application for credit (credit card, personal loan, home loan). This is a convoluted process which consumers will not appreciate. As there is more paperwork, delays will eventuate between the customer asking for credit and the bank being able to supply.  (See Attachment 2)
  
  
• More costs for banks
  The additional regulation will inevitably mean an increase in costs for banks in providing consumer credit. At least five new disclosure documents will have to be created – a credit guide, preliminary assessment of a customer's suitability for loan, a privacy consent form to conduct for the bank to make inquiries, a quote for providing credit assistance and an additional fees and commissions disclosure that can't be combined with normal UCCC pre-contractual disclosures.
  
  
• Costs to be borne by the consumer
  Banks will have to design new systems, documents and processes and this comes at a cost. Those costs will be potentially passed through to the consumer through higher cost of banking products and services or by consumers having to pay a fee to apply for a credit product.
  
  
• Barrier to switching
  The delay and additional cost will impose a barrier to switching lenders, running   contrary to the Government’s current policy objective.

Attachment 2