RESPONSIBLE LENDING LAWS: ESSENTIAL DEVELOPMENT OR OVERREACTION?

Abstract

This article considers the recent National Consumer Credit Protection Bill 2009, which will impose responsible lending obligations on all credit providers and most intermediaries who assist in the provision of credit to consumers. This article argues that the introduction of these laws is a necessary development, as irresponsible lending is a current market failure that has led to harm, both to consumers and to the economy. Current consumer protection laws are inadequate to prevent irresponsible lending or to provide redress for consumers who are victims of such lending. Alternative methods of consumer protection, such as greater disclosure requirements, consumer education or counselling initiatives and lender self-regulation, have also proven ineffectual. The proposed legislation, containing an explicit, ex-ante requirement to assess suitability prior to approving credit, is an appropriate and necessary form of regulation. However, the implementation of the legislation must find an appropriate balance between a number of factors, including protecting consumers while still allowing safe access to credit. This is a difficult task, but is essential if the legislation is to be fully effective as a consumer protection instrument.