The Balance of Power – where should it lie?

In Australia, we have a great ethos - “everyone is entitled to get a fair go.” Recently, I attended the 18th Annual DBA International Conference in the USA, which brings together all the key participants in the debt buying industry to learn about the latest international trends impacting the industry.

by David Mond – Managing Director & CEO, recoveriescorp

One of the most important things I learned from this conference was that the balance of power in America has shifted from the lender to the borrower. This shift started when the housing and loans disaster occurred in America in the 1970s and led to strong consumer protection laws. These debt recovery restrictions were enhanced as a result of the GFC in 2008. The resulting shifts in regulation and the changes in consumer law, together with changes in technology, increased mobility and the prevailing economic conditions have all influenced this shift in the balance of power to the borrower.

So, what does this mean for us in Australia?

We need to make sure that the balance of rights is fair between the lender and the borrower. Over regulation can lead to people searching for more expensive classes of borrowing, with less governance.  This is an undesirable outcome for the borrower and the community at large. What is needed is a balance in regulation so that people can look for less onerous forms of credit. The regulators in America reacted to the housing and loans disaster in the 70s with more consumer protection laws. Therefore, pre- GFC more people could apply for Low Documentation (Low Doc) Home Loans. This led to an expansion of household debt that was financed with mortgage-backed securities (MBS) and collateralized debt obligations (CDO), which initially offered attractive rates of return to lenders and brokers due to the higher interest rates on the mortgages.  However, the low credit quality ultimately caused massive defaults. The reaction of the regulators then was to initiate protection for the consumers after they entered into a contract. For example, today, if the lender wants to communicate with a consumer borrower, they may be required to seek permission to communicate with them (remembering that there are 52 states in the USA, each with their own laws). Also, if a lender enters into an agreement with a borrower, they have to inform them that they can opt-out of that agreement at any time! In one of the seminars I attended during the conference, the regulator advised that in the next six months, there will be even more regulation which will impact negatively on the ability of credit providers to recover debt.

Have they gone too far in America in terms of regulation? Will Australia follow suit in the way that credit is being regulated and how will that impact on financial institutions, on lending criteria and ultimately how they will provide for doubtful debts?

Another issue lies with increasing consumer awareness. As consumers become more aware of their enhanced rights under the law, they look for barriers to minimise their obligations to repay debt. The shift in the balance of power impacts consumer behaviour and may not have a positive outcome for the intended recipient. Another USA regulation is that the consumer may advise the lender that they do not want to receive any further correspondence from them and the lender must comply with that request. Similar laws apply in Australia. As a result, lenders in both the USA and Australia are forced to issue legal proceedings as this is the only way they can communicate with the debtor. Is this a desirable outcome? In this case, we might have a perception that we moved a certain element of that power to the consumer, but are we really shifting power to the consumer or are we creating a greater level of adversity, adding unnecessary costs for all parties and clogging up the court system?

In America, it appears the pendulum is moving too far in favour of the consumer, which makes for a far more adversarial system and this is an unsatisfactory situation. I would contend that to achieve a true balance of power we need to have balance in the exercise of power. While in certain circumstances one side may appear to have the power, I think it’s all about having a rational view about the process, how decisions are made and the impact of those decisions on the parties involved.

In Australia, to a large extent, I believe we’ve got it right in terms of where the power sits in the relationship between the lender and the borrower. There is always room for improvement, but at present we can reasonably be satisfied that power is fairly balanced between both parties. Off course, there will always be unique situations where one party feels aggrieved because of the current administration of due process under the law. However, in the main we have as a society, processes in place for genuine hardship cases. Conversely, we also have processes for people who are recalcitrant and do not want to repay their debts.

In Australia, we believe that everyone should get a ‘fair go’ and we should never take that for granted. If we apply this broad Australian ethos, we will continue to improve the system as circumstances change, but only on the basis that the balance of power is fair for everyone.