Responsible lending laws: what’s changing in Australia?

The government’s plans to reform responsible lending laws to reduce “the cost and time it takes consumers and businesses to access credit” have been met with a mixture of criticism and praise.

The proposals are part of the Federal Government’s economic recovery plan, but some industry groups are concerned they will lead to a surge in the number of consumers overborrowing.

Canstar explains what the changes could mean for people looking to get a loan and how experts have responded to the controversial plan.

What are Australia’s responsible lending laws?

The National Consumer Credit Protection Act 2009 sets out how lenders must currently act when they are assessing loan applications. Essentially, it means a lender must only give a loan if it is suitable for the borrower. Importantly, the existing rules put the responsibility on the lender to ensure the credit product is suitable.

The lender must do this by making “reasonable inquiries” about the applicant’s requirements and objectives, and taking steps to verify their financial situation.

These responsible lending rules were introduced to Australia in 2009, following the global financial crisis. Now, in the midst of the COVID-19 pandemic, with Australia officially in a recession, the government has decided it’s time to amend regulations again in a bid to reduce red tape, and get more credit moving to boost the economy.

How could responsible lending laws be changing?

A proposed change to the law announced by the Federal Government would see responsible lending obligations removed from the Act. If passed by Parliament, the changes would come into effect in March 2021.

The plan, according to the government, is to remove the obligation on lenders to ensure that loans they issue are suitable for their customers, with the exception of small amount credit contracts and consumer leases. Instead, we would see a move to a “borrower responsibility principle”, where lenders would be able to rely on the information provided by their customers.

However, the government has stressed that some of the other existing lending obligations on banks, such as Australian Prudential Regulation Authority’s lending standards, would remain and be expanded to cover other types of lenders. The government also plans to strengthen measures that protect consumers from the predatory lending practices of debt management companies from April 2021.

But it’s the proposed removal of responsible lending laws which has grabbed the most attention.

What could responsible lending law changes mean for home loan applicants?

The planned reforms could mean a fundamental change to how Australian borrowers are assessed, one mortgage broker told Canstar.

“The relaxation of responsible lending laws is being touted as a change in responsibility from the bank back to the consumer,” Rebecca Jarrett-Dalton of Two Red Shoes said.

Rebecca Jarrett-Dalton
Rebecca Jarrett-Dalton, founder of mortgage broker Two Red Shoes. Source: Supplied.

Rebecca explained that if the law change is enacted, it could mean a “moderation of the forensic investigation into borrowers’ living expenses” that currently see lenders and brokers “going through bank statements line by line.”

Ultimately, Rebecca said that in the future, borrowers would need to consider the affordability of the loan for themselves, but some aspects of the borrowing process are likely to remain intact.

“I doubt we will see banks or brokers step away entirely from the key outlines of responsible lending,” she said. If the application “doesn’t sound reasonable, there will be the same road blocks” for borrowers.

While it remains to be seen exactly how banks might adapt their policies based on the changes, Canstar’s money expert Effie Zahos said it could be dangerous if borrowers end up shouldering too much of the responsibility.

“We definitely don’t want to be going back to it being a self-assessment model,” she said. “It is hard for consumers to do that because we tend to underestimate our expenses, and not necessarily intentionally. We don’t like to think about how much we actually spend.”

Ms Zahos said that underestimating expenses would be a significant risk for borrowers, particularly on big-ticket products such as a home loan.

“The onus will be on the banks to ensure that we get the balance right and I suspect that they would still want to lend responsibly. No one wants to be in a situation where people are defaulting. It’s not good for the banks and it’s not good for consumers,” she said.

What has the reaction to the responsible lending changes been?

At a turbulent economic time, with many homeowners still deferring their loan repayments due to financial hardship and JobSeeker and JobKeeper payments being scaled back over the coming months, it’s not surprising that opinion is split on whether removing responsible lending obligations on banks is a good idea.

What are consumer groups saying?

Consumer advocacy organisations were quick to ‘slam’ the proposal to remove lending restrictions that they say “will cause harm to people and the economy”.

In a joint statement, CHOICE, Consumer Action Law Centre, Financial Counselling Australia and Financial Rights Legal Centre said the changes would open up “new opportunities for banks to aggressively sell debt”.

Karen Cox, CEO of the Financial Rights Legal Centre, said the real problem facing people is too much debt and not enough income. “The Government’s solution is to take on more debt with fewer protections,” she said.

“Unsustainable debt hurts real people and is a short-sighted fix for a flailing economy. Watering down credit protections will leave individuals and families at severe risk of being pushed into credit arrangements that will hurt in the long term.”

Financial Counselling Australia, whose members provide information, advice and advocacy to people in financial difficulty, said the planned removal of responsible lending laws suggested harsh lessons from the past had not been heeded.

“As we learnt to our cost during the GFC, weaker lending standards mean people will be loaded up with as much debt as possible,’’ the organisation’s CEO, Fiona Guthrie, said.

In criticising the changes, CEO of Consumer Action, Gerard Brody, said pushing credit on people who can’t afford to repay it “creates hardship, stress, anxiety for individuals and families”.

What are lenders saying?

Perhaps unsurprisingly, given the proposed law change could make it easier for lenders to sell their products, the banking industry has broadly reacted positively. The share prices of numerous banks also rose following the announcement.

In a statement welcoming the proposals, the Australian Banking Association (ABA) said the changes “will simplify lending rules while maintaining strong protections for borrowers and improving protections for those vulnerable consumers using debt management firms, small amount credit providers and consumer leases.”

ABA Chief Executive Officer Anna Bligh added a note of caution, however, stressing that it’s “important to ensure that these changes strike the right balance between maintaining strong consumer protections while providing credit into the economy at a critical time.”

Some individual banks have also welcomed the news. Westpac CEO, Peter King, said the changes would help speed up loan approval times and allow the bank to move away from a ‘one size fits all approach’ to assessing applications.

He said it is in his bank’s interest to “only lend to customers who are in a position to meet their financial obligations”.

Looking at smaller lenders, Police Bank CEO, Greg McKenna, tweeted that the easing of regulations would allow his bank to “make genuine risk-based decisions within our risk appetite” and that he didn’t anticipate the changes leading to a “free-for-all”.

This article was reviewed by our Sub Editor Jacqueline Belesky before it was published as part of our fact-checking process.

Main image source: Atstock Productions (Shutterstock)

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