Lenders face jail for giving loans that can't be paid

By The Australian, 28 April 2009

MORTGAGE brokers and lenders face jail or hefty fines if they place borrowers in unsuitable loans they cannot repay, and for the first time they will be forced to obtain a credit licence, under a planned government crackdown.

The changes are part of a credit industry overhaul that will establish a single national law to regulate mortgages, credit cards, pay-day lending and consumer credit products, The Australian reports.

The proposed laws, which were largely welcomed by consumer groups, sparked immediate concern from the banks, which warned they would increase costs, slow down loan applications and make lenders overly cautious in issuing credit.

Corporate Law Minister Nick Sherry said yesterday tough measures on responsible lending were necessary to protect consumers and ensure they were not saddled with unmanageable debts.

"The Rudd Labor Government intends to crack down on irresponsible lending, and we intend to weed out dodgy providers of credit finance and dodgy advisers from this industry," Senator Sherry said.

Due to start on November 1, the laws include fines of up to $220,000 for individuals and $1.1 million for corporations and five-year jail terms for brokers and lenders who suggest products unsuitable for a consumer's needs and financial capacity.

The laws will allow borrowers to sue for damages as a result of being put into loans they cannot repay, and to seek court injunctions to stop interest accruing.

The Australian Securities and Investments Commission, which is charged with enforcing the scheme, will get $66 million over four years and 200 extra full-time staff to cope with the workload.

Credit providers will be forced to disclose fees and commissions upfront and join a dispute resolution scheme such as the Financial Ombudsman Service, to make it easier for borrowers to seek relief from lenders.

Calling for a Senate inquiry into the draft scheme, Opposition corporate law spokesman Chris Pearce said: "We hope it doesn't needlessly tie up credit when credit is sorely needed at this difficult time."

Australian Banking Association retail regulatory policy director Ian Gilbert welcomed the Government's move to reduce red tape by replacing the patchwork of state and territory laws with a single national scheme.

But he said the laws were too heavy-handed, given that local banks had been lending responsibly for decades, and would slow down loan applications and restrict the flow of credit.

"The slightest slip-up by someone leading to some criminal sanction is totally out of proportion to what's going on here," Mr Gilbert said.

"There are some very onerous search and verification obligations being put on banks, and the bottom line is it's almost certain these additional and unnecessarily onerous obligations will increase the cost of credit."