Government's commercial lending regs could restrict business credit

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Draft legislation governing commercial loans has some worrisome elements, and could end up restricting access to business credit.
 
That's according to Gadens Lawyers' Jon Denovan, who told Australian Broker the proposed guidelines could hold pitfalls for brokers, borrowers and lenders.
 
One of the potential concerns, Denovan said, is the proposal to require a permit for commercial lending or broking. This permit would be in addition to an ACL. While Denovan said this could potentially weed out unscrupulous fringe lenders, he claimed it could have the side effect of shrinking the supply of business credit.
 
"There are around 10,000 brokers, and probably each one of them has occasionally done a loan for business purposes, even if it is secured by a home. They can do that at the moment," he said.
 
But with the additional impost of a permit, Denovan said some brokers and lenders may decide business deals aren't worth the effort.
 
"At the moment, they're saying you've got to get a permit to be a broker or lender on top of your ACL, and there will just be a whole lot of guys who won't bother," he said.
 
Perhaps more worrying, Denovan said, are the assessment requirements proposed for business lending and broking.
 
"The test is whether the borrower is prepared to lose their home. That's a pretty strange question to have to ask someone," he said.
 
The subjectivity of the question is cause for concern, he claimed.
 
"Because one's mind-reading ability is perhaps a bit fragmented, it can be a very difficult assessment to make. At the moment, you've got to assess whether they can afford the loan. That's an objective test. But if I've got to assess whether they're prepared to lose their home, that's a bit different."
 
In theory, Denovan said, the proposed regulation could lead to COSL complaints and court cases in which borrowers could argue that their preparedness to lose their home was not properly assessed.
 
In spite of some of the concerns, Denovan said the draft legislation was not cause for panic.
 
"It's going to be refined. It's early days yet," he said.
 
But he urged brokers to remain vigilant in following the development of the proposed legislation.
 
"It's important for brokers to watch this space."
  • Casey on 16/01/2013 3:44:22 PM

    I agree with Chris C. As an ex-business banker, I automatically recognize the gap between the quality of results when the same business transaction is handled by either a consumer or commercial broker. So i think there needs to be a distinguished mark at which an client can determine if the broker can handle their business lending needs.

    However requiring everyone in the chain to find out if the client understands they can lose their house is a little ridiculous. I think there needs to be a certain degree of onus back on the client to ensure they self educate of their commercial obligations. This is prevelant in all other areas of the law. If you hold an ABN it is your responsibility to ensure you are up to date with the legislative changes and your obligations. The same with taxation, registering and operating companies, and other areas of business. The government does not make you take a test to understand that the government can persue you to the extend of bankruptcy and loss of home. You are expected to be responsible for your business activities.

    Seems to consumerfied to be workable for real business. It will breed weak businesses, that in an open market would suffer of natural attrition, thereby strengthening the broader economy. I guess economics isn't the government's strong point. Some people just aren't meant to be in business.

  • Maria Rigoni on 16/01/2013 3:10:50 PM

    Some of the rules only apply to certain types of small business credit contracts, called “protected small business credit contracts”.
    Proving a quote is the main emphasis of the legislation for non protected small business loans and a "protected small business loan" is one where the facility is in default.
    The legislation is designed to stop equity stripping if a borrower who is in default wants to refinance.
    But the legislation has not considered the equity stripping that goes on through penalty interest rates, other fees and charges applied and administrator costs if appointed.
    The "protected" borrower is equity stripped if they can not refinance anyway.

  • iMac on 16/01/2013 2:39:24 PM

    Current 'duty of care' suggests that if Brokers are doing their job properly, at doc signing, they mention the fact that if borrower doesn't make all your repayments lender will sell your house/commercial property/chattels to recover the money. Brokers surely have an ethical, moral and legal obligation to highlight this now, if you are doing your job correctly. I am gobsmacked this is even a topic for discussion.

  • Lyn Turner on 16/01/2013 1:33:27 PM

    Sadly, the replacement for this government is even worse... It was Joe Hockey who 'did a deal' with Bill Shorten on the morning the bill went through, to let it go, without taking it to his party room meeting to discuss - even though he hadn't read it, because it wasn't in final draft! Do you really want someone like that to run the country's currently solid finances??? Think of the big picture - not just your own business - without a solid Australian economy, you won't have a business anyway. An Abbott/Hockey nightmare is just around the corner...

  • D'Arcy - Qld on 16/01/2013 12:58:33 PM

    Typical Joolia govt regulations - MORE of them. But is no different really than a standard residential loan - if you don't/can't afford to pay in the future for whatever reason then you stand to lose your home. All that said the govt wants to hold everyone's hand in the lending process - can't people stand up to their own decisons anymore(financial or otherwise)?
    C'Mon the election!

  • Edgar on 16/01/2013 12:40:22 PM

    I don't see a problem with asking a borrower if they are prepared to lose their home by putting it up as collateral for business purposes, it's simply a reality of the situation and it they haven't considered this possibility already they need to be made aware of it. If you aren't making the borrower aware that this is a possibility then you really aren't doing your job.

    As for funds drying up. Simply not going to happen, there might be a short term drought much like during the GFC but demand will see lenders, and if necessary the government, respond accordingly.

  • Damien on 16/01/2013 12:35:42 PM

    Just more stupidity from the stupidist Governemnt in my lifetime, I can't wait till November rolls along..

    Thinking of having a Don's Party!

  • Chris C on 16/01/2013 12:30:55 PM

    I don't always agree with all the red tape but I do agree with this one's pemise; if mortgage brokers want to do business and commercial lending, they should be qualified and licensed to do so. Commercial credit is more complex and is submitted and assessed differently from that of consumer credit and therefore should require a broker to have better training and qualifications. The majors for many years have required their Commercial Managers to have completed consumer training for a term before they promote them to Business and Commercial lending portfolios and each of these portfolios are generally graded on its complexity and training them up to the next levels over a number of years because it is more complex. Their approving Credit Managers are also ranked similarly against their training levels and qualifications. I would want a Broker and a Bank Manager who were properly trained and qualified if just to know that they properly understand and support my business - financials, cashflow, structures, business plans and credit reviews etc; sounds similar to the basics of a home loan yes, but can be much more complex. I am a commercial lending broker and I have quite a few new approved funded clients on my books who have been previsouly declined finance via mortgage brokers simply because the deal and structures were not properly understood, planned out and /or submitted correctly.

  • Old Broker on 16/01/2013 12:17:59 PM

    Perhaps the government is planning for the Unions to lend for commercial purposes because they of course would not be giving advice as they are exempt when they run super funds so will be for lending as well??

  • Mark on 16/01/2013 12:00:50 PM

    The entire concept of these proposals beggars belief and all it will do is create additional costs for brokers. At what point do these people preparing these proposals realise that the borrower must accept responsibility for borrowing and then using the money rather than create all these opportunities /avenues for them to try and blame someone else for their actions after they have enjoyed the benefits of it.
    Get rid of this government ASAP.

  • Dean on 16/01/2013 11:59:41 AM

    "The test is whether the borrower is prepared to lose their home"....Are you kidding me???...The test is already there it is called taking out a loan making a legal financial comitment under the contract and signing a mortgage as supporting security. They must be prepared to lose their home because IF you don't pay your loan the financier will sell your property to get their money back. Simple as that - this is nothing new.

  • Peter Glenwood on 16/01/2013 11:54:15 AM

    I presume that the "permit" will be issued annually at a cost. Why isn't the fear of loss question asked at the wedding ceremony?

  • Wes on 16/01/2013 11:31:58 AM

    Hopefully this Govt wont see out the year and this legislation will be assigned to the dust bin where it belongs!

  • Dean on 16/01/2013 11:31:40 AM

    Surely they cannot be serious in asking us ,the broker, to do a test to determine if the borrower is prepared to lose their home if the business goes wrong. If that stays in the legislation I can see every broker and lender demanding a commercial borrower seek professional legal advice.

  • Keith of the west on 16/01/2013 11:16:10 AM

    I think it time the Goverment clean up its own back yard before they destroy ours.

    Just reading this brief indicates further the involvement of goverment regulation and intervention gone mad!

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