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Originally Posted On: 3 Critical Conclusions from COVID-19’s Impact on Lenders – Legal Reader
COVID-19 has transformed how people live and how businesses operate in just a matter of months, and it’s likely to continue impacting countries for a long time to come. From total lockdowns and work-from-home arrangements to growing unemployment and business shutdowns, the pandemic has tested societies and economies in unforeseen ways.
Given its disastrous consequences for economies around the world, it’s no wonder Australian banks and non-bank lenders have also been confronted with major upheavals. In turn, this has implications for how consumers and businesses access lending products and services. In light of this, it’s useful to consider how Australian lenders have been impacted and what general lessons emerge from these impacts.
The pandemic certainly started impacting lenders in March, which was a very busy period as far as the property market was concerned. Low-interest rates combined with borrowers rushing to complete transactions before the shutdown led to the higher levels of activity, which was up 33% over the same period in 2019.
This increased activity applied across all states and occurred even though the third quarter of the financial year is typically a quieter quarter. Second, the major banks recovered some of their lost market share from non-majors, with the majors claiming 60% of the market, which is the highest level since 2018. Non-majors like Macquarie and ING have seen their market shares decline from 11.34% to 8.78% and from 3.45% to 2.48%, respectively.
The growing risk for homebuyers
Another clear trend is the growing risk for homebuyers seeking to purchase in a slowing market. Banks are tightening their lending rules, and this can have major implications for property transactions depending on which stage the buyer and seller are at.
For example, one risk for homebuyers is the possibility of sudden withdrawal of previously approved loans. Banks already stretched (by as much as $160 billion in loan repayment deferrals) could be more likely to impose strict employment checks up until the settlement date.
These checks are occurring one or two days before loan release, to verify the mortgagee is still employed or hasn’t had their working hours reduced. Similar eleventh-hour checks could apply for other products like credit cards and car loans.
The rules are changing
Given how quickly rules are changing, buyers could be facing the prospect of losing their deposit, especially in the case of a buyer who commits to a purchase without the final loan approval. Don’t take it for granted your bank will honor pre-approval if you commit to a purchase before the final approval stage.
The property team at Portico suggests that borrowers double-check with their employer before proceeding with a property purchase. As a borrower, you’ll want to make sure your employment is stable and avoid running the risk of failing employment checks and subsequently losing your deposit. Some experts are recommending homebuyers defer their purchase until after the pandemic is over. If you’re buying at auction, you could be at extra risk because there’s no cooling-off period. However, generally speaking, purchasers with a large deposit, stable employment, and income might be in a better position when it comes to withstanding the risks of buying at auction.
This is true even with the protection of a standard subject-to-finance clause. One way to address the risk could be to consult with a property lawyer about adding a clause that gives you the right to exit the deal without cost if the lender decides to revoke their approval.
Increased financial hardship
Lenders and credit providers are dealing with high volumes of requests for financial hardship assistance, from both businesses and consumers. Providing effective and personalized assistance is a significant challenge for lenders who are already taxed by the fallout from the pandemic.
However, in this area technology tools have come the rescue by allowing banks to set up personalized and well-managed customer assistance journeys. Rather than setting and forgetting or using a one-size-fits-all approach, lenders can use real-time data to develop personalized hardship programs and payment plans for each customer.
For example, these tools are already enabling lenders to quickly confirm lost income, verify government support payments, and analyze changes in fixed and variable expenses to help customers get back on track and avoid default.
Customer support staff can track shifts in income, expenses, and liabilities with any initial hardship request and at review intervals, once assistance has been granted. Further, these tools can identify customers who are likely to be nearing hardship so the lender can take proactive measures to assist.
The rush to complete transactions in March shows lenders and borrowers have been quick to react to the impact of the pandemic, and this could be useful to keep in mind when forecasting consumer or business sentiment in the coming months.
The increasing market share of the major banks could have ramifications for government policy, such as the need to address competition and choice for borrowers. Rapidly tightening lending rules suggest borrowers need to be better educated and lenders might need to proactively engage prospective borrowers to boost transparency on rules.
Finally, technology could be an invaluable partner for lenders through the ongoing crises, not simply in helping manage hardship programs but across all the functions involved in lending and banking services.