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How the Responsible Lending Laws are About to Change
●March 15, 2021●4 minute read
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The government has proposed to change the responsible lending laws to ‘reduce red tape’ and boost the economy. These changes are in line with the ‘economic recovery plan’ which was created to help Australia’s economy recover from the impacts of COVID-19. These proposed changes have been met with both criticism and praise. This article will outline how the responsible lending laws are about to change and what this could mean for you as a borrower.
What are the current responsible lending laws?
The National Consumer Credit Protection Act 2009 was introduced after the global financial crisis (GFC) of 2009; the act was created to patrol how lenders must assess their loan applications. It essentially requires that lenders only provide loans to suitable, risk-appropriate borrowers, and places the responsibility on the lender to verify whether the credit product is suitable for the applicant. Australian Securities and Investments Commission (ASIC) currently regulates responsible lending in Australia, requiring that credit licensees comply with the responsible lending conduct obligations set out in Chapter 3 of the National Consumer Credit Protection Act 2009.
How are these laws changing?
Australia is entering a recession for the first time in 29 years. The Australian government has decided that the current lending laws are no longer applicable and should be changed to better support the flow of credit. These amendments to regulations will relax the responsibility placed on lenders, particularly around the accuracy of information consumers provide on their loan applications. It is the hope that, in doing so, the struggling economy will be boosted with struggling households and small businesses more easily able to secure loans.
Treasurer John Frydenburg has been outspoken about these changes, and says that “maintaining the free flow of credit through the economy is critical to Australia’s economic recovery plan.”
He also proposed, on behalf of the federal government, that the responsibility for consumer lending be transferred from ASIC to the Australian Prudential Regulation Authority (APRA)’s lending standards. By doing so, lenders will still be held to laws that ensure they are assessing a borrower’s capacity to repay their loan as well as other lending laws.
These new lending laws are scheduled to be introduced in April 2021, and are set to reduce “the cost and time it takes consumers and businesses to access credit.”
What does this mean for borrowers?
These changes will impact many Australians, especially those wishing to purchase a home or investment property in the near future. The liability over bad loans will be shifted from the lender more towards the responsibility of the borrower, meaning that it may become easier for people to secure a home loan.
This does not mean that banks and lenders will approve every single loan application. Vulnerable borrowers that are considered to be at risk of agreeing to unreasonable loan conditions have been pledged ‘stronger protection’ by the Australian government. Debt collectors are also required to hold an Australian credit licence.
With the ease of the old lending laws, loan applications will be simplified, subsequently reducing approval times and lengthy inquiry processes. It will also become easier for consumers to switch between credit providers/lenders if they find a credit solution that better suits their needs.
What do the experts have to say?
At such a turbulent time globally, it is no surprise that there have been differing opinions on these changes and whether it’s all a good idea.
Consumer advocacy organisations including CHOICE, Consumer Action Law Centre, Financial Counselling Australia and Financial Rights Legal Centre said, in a joint statement, that the changes would open up “new opportunities for banks to aggressively sell debt.”
On the other hand, the banking industry has widely reacted positively. The Australian Banking Association (ABA) said that 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 that it is “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.”
The reduced red tape will make home buyers feel better supported to purchase assets, which promotes business with infrastructure and investment. These actions are clearly geared towards and should directly positively stimulate the economy. It also makes funds more easily available for households and small businesses in need of credit solutions.
Will this change the way we access credit?
These new laws will change the way that borrowers access credit as responsibility is falling less on the lender and more on the applicant. This means that it is now more important to act cautiously and responsibly when entering home loan and other loan agreements.
Borrowers will need to become more accountable for declaring their living expenses to ensure that they are able to afford their repayments on a new loan. They must understand their expenses, how they are spending their money, and what expenses they may have to forego to afford their loan repayments.
Essentially, these changes will make borrowers more in control of the debts they take on. While they should always ensure that they can afford their debt repayments regardless of borrowing laws, the implications of not doing so without ASIC’s responsible lending guidelines may create hardship for irresponsible borrowers.
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Written by Jacaranda Team