September, 2020

Axing Responsible Lending Laws: What You Need to Know

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The Australian Government is planning to roll back responsible lending laws in an effort to boost economic recovery. While this will ease access to credit, consumer groups warn it may push people to take on more debt than they can afford to repay.

Introduced in 2010 as part of the National Consumer Credit Protection Act 2009, responsible lending laws require banks and other mainstream lenders to check rigorously if applicants can afford to pay back their loans. The laws aim to better protect financial consumers and were strengthened as a result of the banking royal commission. The commission recommended that banks tighten their investigation of loan applicants.

Once the government revokes the laws, banks will no longer have a legal obligation to make sure a loan is ‘not unsuitable’ for a consumer. If a would-be borrower provides misleading information in their application, the lender won’t be penalised. Responsibility for bad loans will shift from the lender to the borrower.

Generally, this is expected to boost lending activity, but how will it benefit consumers and small businesses?

Faster approval process

For consumers, this could mean faster approval of credit applications. Lenders can simply rely on the expense and income information an applicant provides instead of more thoroughly investigating the person’s ability to service a loan, which takes longer. This will make it easier for many people to access credit.

“This is going to make it much better for consumers, whether they are getting their first home loan, or increasing their mortgage, or extending their overdraft, or receiving a credit card,” Treasurer Josh Frydenberg said when announcing Australia’s 2020 budget outcome.

But for payday credit borrowers, it may no longer be that easy and quick to access small loans. Under the proposed change, the Australian Securities and Investments Commission (ASIC) will have greater oversight of lenders offering these loans and consumer leases, to protect vulnerable borrowers.

Benefit for small businesses

Small businesses may also find it easier to borrow. Although the responsible lending framework doesn’t cover this segment, some banks have been concerned that the rules also apply to small business owners. That’s because many of these borrowers use the equity in their homes as collateral when applying for a loan.

Revoking the responsible lending rules will remove this grey area, according to Frydenberg.

“Our changes will make it very clear that the prudential framework that’s in place is not to apply to small business lending.”

A short-sighted fix?

Banks have welcomed the government’s move. Some had complained that adhering to responsible lending rules and dealing with two regulators was adding to their cost of doing business.

Under current rules, banks and other authorised deposit-taking institutions must comply with the Australian Prudential Regulation Authority’s lending standards. At the same time, they must follow the responsible lending rules administered by ASIC.

“What’s happened over time is the penalty regime has increased. We’ve seen banks being hauled in front of the royal commission, quite rightly, questioned about their actions,” ANZ chief executive Shayne Elliott said in an interview.

“So yes, we have become more and more cautious. The more the line can turn from grey to black the better, the closer we can get to the original intent,” he added.

Consumer advocates have rejected the proposed change to credit laws, calling it a short-sighted fix for a flailing economy.

“Leaving people with more debt than they can afford is no way out of an economic crisis,” Consumer Action CEO Gerard Brody said in a statement.

Many people are already dealing with having too much debt and not enough income, according to Karen Cox, CEO of the Financial Rights Legal Centre.

“The government’s solution is to [encourage them to] take on more debt with fewer protections.”

Cox warns that removing bank responsibility to borrowers could eventually harm consumers.

“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,” she says.