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 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. 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 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 responsible lending laws brought with them a complicated and heavily regulated path to finance, which saw a drawn-out, sometimes unsuccessful application process.
Here’s a breakdown of the changes:
- Some of the responsibility of the borrower’s capacity to repay a loan will shift to the borrower
- Borrowers need to have a thorough understanding of their finances to ensure the loan is right for them
- Loan applicants could see a possible increase in their borrowing power
- With a paired back application process, borrowers could potentially gain faster access to loans
- A less rigorous financial assessment could possibly mean less paperwork and an easier application process
- Borrowers will have to be honest with themselves and the bank about their ability to repay the loan
- Lenders must still adhere to the Australian Prudential Regulation Authority’s lending guidelines
- Borrowers using a mortgage broker will still be protected by the ‘best interest duty’ from the 1st of January 2021
What is new responsible lending laws means for you going forward?
Most importantly, you’ll still want to make sure you’re not taking on debt that you can’t afford to pay back, and that’s where we can help you, just ask your Mortgage Broker.
We are here to guide you through the process as things change from 1 March 2021. And ensure you have a loan which you are comfortable with repaying, taking into account all of your earnings and expenses.
It simply reduces some of the red tape, and makes it easier for more Australians and small businesses to access credit. It is absolutely still about responsible borrowing with easier access to credit.