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Credit: Joshua Hoehne

Responsible lending law reforms to boost credit

The Federal Government has announced changes to responsible lending laws in the hopes of boosting Australia’s flow of credit. Under the changes, consumers will be able to access credit more easily and quickly.

Whilst responsible lending provisions do not apply to small business lending, these reforms have a large impact upon household credit.

“As Australia continues to recover from the COVID-19 pandemic, it is more important than ever that there are no unnecessary barriers to the flow of credit to households and small businesses,” said Treasurer Josh Frydenberg.

“By simplifying the loan application process for borrowers it will reduce barriers to switching between credit providers, encouraging consumers to seek out a better deal.”

Peter King, Westpac CEO, praised these changes and explained that they would drive business growth and economic recovery.

“[These changes] play an important role in ensuring access to credit for businesses wanting to invest and grow. SME businesses drive employment and this is very important for economic recovery.

“The Government proposal strikes a good balance between reducing regulatory burden on credit providers while ensuring we have rigorous credit processes in place.”

Responsible lending laws and financial regulation have been a hugely contentious global issue since the 2008-09 Global Financial Crisis.

Locally, tensions between bankers and lawyers flared again during the 2018-19 Hayne Royal Commission, which revealed a swathe of risky loans and structural weaknesses in responsible lending laws.

Legal obligations of lenders were scrutinised again this year in ASIC v Westpac. The regulator alleged that the bank failed to properly assess whether borrowers could meet their home loan repayment obligations. However the Federal Court found that Westpac had not breached responsible lending provisions of the National Consumer Credit Protection Act 2009.

What changes have been proposed?

The changes reflect a move from a “lender beware” approach back to a “borrower responsibility” principle.

ASIC will relax certain penalties for banks and mainstream lenders. This easing of responsible lending laws means that credit approval will be much faster.

These changes also include shorter verification procedures and reduced red tape.

Disputes with debt collectors will also be allowed to appear before the Australian Financial Complaints Authority.

Assistant Treasurer Michael Sukkar said these measures were vital for consumer protection.

“These reforms strike the right balance between protecting consumers while maintaining a viable sector to provide these products and build upon the successful implementation of ASIC’s product intervention powers which protect consumers from predatory lending behaviour.”

How will this affect the economy?

As Australia faces its worst economic contraction on record, the Government hopes these measures will improve access to credit.

“Maintaining the free flow of credit through the economy is critical to Australia’s economic recovery plan,” said Frydenberg.

This aligns with RBA warnings that overly conservative responsible lending laws may stymie economic activity.

“The pendulum has probably swung a bit too far to blaming the bank if a loan goes bad because the bank didn’t understand the customer. If it had done proper due diligence … the bank would never have made the loan,” said RBA governor Philip Lowe to a parliamentary committee last month.

Changes to lending laws may also ease cash flow issues that many households are experiencing and provide a boost for home ownership.

Data from Digital Finance Analytics revealed that in May 2020, approximately 1.4 million Australian households were in mortgage stress. There are fears that this will worsen when JobKeeper is reduced.

Denita Wawn, CEO of Master Builders Australia, said that these new lending laws will make it easier to take out a mortgage or refinance your home.

“It is good to see the Federal Government is giving banks flexibility to deal with applications on a case by case basis which should result in lenders providing mortgage finance to more people,” she said. 

Ms Wawn also urged states and territories to streamline HomeBuilder applications. 

“Access to finance, land titling and planning approvals can substantially delay building of new homes and measures are needed to remove these impediments and speed up processing of HomeBuilder applications. 

“While today’s announcement should open up access to mortgage finance, we now need state and territory governments to activate their option under the agreement with the Federal Government to extend the HomeBuilder construction deadline from three to six months, as has already occurred in Victoria. 

“This will ensure that the economic stimulus provided by HomeBuilder can be maximised to save more tradie jobs, and give more people access to the opportunity HomeBuilder provides.”

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