Responsible lending law overhaul could leave people ‘drowning in debt’

Financial counsellors predict everyday consumers will feel the impact of debt and irresponsible lending for years if the Government goes ahead with plans to wind back responsible lending laws.

A report by peak body Financial Counselling Australia found the vast majority of counsellors surveyed want the laws to stay and have used them to get better outcomes for clients drowning in debt.

Financial counsellor Kane Johnson, who works on the National Debt Helpline, said the seriousness of the situation could not be clearer.

“It’s not uncommon for me to talk to people contemplating suicide because of the debt situation they’re in,” he said.

The Government wants to remove the obligation banks and financial institutions have to not extend credit to people who can not afford to pay it back.

The laws would switch it around, putting the onus on consumers to make the decision.

“The most important thing is this is people’s lives that are going to be impacted,” Mr Johnson said.

“With these laws in place we get calls on a daily basis from people so stressed they can’t sleep, their mental health exacerbated, a huge impact on their lives … and that’s with these protections in place.

‘Tore me apart from the inside’

Freelance worker Lauren* got her first credit card with a $500 limit at the age of 18.

Twenty years later, her personal debt had blown out to a combined $55,000, until she used the services of the debt helpline to improve her situation.

“It’s crushing. People say, ‘Oh, you’re drowning in debt’. It really feels like it,” she said.

“You’re suffocating in a lack of options, you can’t think of any way out … it was hard to see any perspective out of this figure that looms over your head.

“It tore me apart from the inside.”

Lauren’s situation isn’t uncommon — with cash flow issues caused by gaps in freelance contracts, she used credit cards and loans to bridge the gaps.

But the interest payments began to absorb all of her income, until she could not maintain the payments.

Even though protections against irresponsible lending failed her, she can not stomach the thought of them being removed and more people being in her shoes.

“It’s terrifying and it’ll be devastating for Australian families and people, particularly young people,” she said.

“At what point is it a smart idea to lend people money that they’re unable to pay?”

Grim situations even with current protections

The report, Save Safe Lending, examined the experiences of almost 1,000 financial counsellors.

In addition to the survey, interviews provided grim examples of how people have struggled with debt even with the current protections.

One financial counsellor helped an elderly couple who received the age pension, who had credit card debt of around $150,000.

“The couple were suicidal when I first met them,” the counsellor said, but responsible lending laws saw the amount waived.

Another helped an 18-year-old on youth allowance, with no other income, whose living expenses exceeded his income even before he was given an $18,000 car loan.

“Giving a personal loan to my client while she sat there with her partner,” one counsellor said, outlining another example of irresponsible lending.

“She had two black eyes from her partner and she never said a word through the interview.

“The partner spoke for her and told her to sign. It was all in her name.”

Hayne inquiry did not recommend changes

This week marks two years since the final report of the banking royal commission was presented to the Governor-General.

While the Government initially pledged to implement 75 of the 76 recommendations, winding back consumer protections by altering the National Consumer Credit Protection Act 2009 goes against that.

“The very first recommendation of the report said the Act should not be amended to alter the obligation to assess unsuitability,” Financial Counselling Australia chief executive Fiona Guthrie said.

“The Federal Government accepted this recommendation, but it now plans to axe the law, meaning vulnerable people will no longer be protected from getting into massive debt traps.”

*name changed for privacy reasons