Responsible Lending Laws To be Scrapped
To give the Australian economy a boost, the Morrison government have proposed that they will axe responsible lending laws.
What Is Responsible Lending?
The intention of responsible lending guidelines is to prevent consumers from signing up to unaffordable and unsuitable credit products. Credit licensees must not enter into a credit contract, suggest such a contract, nor assist to apply for a credit contract if deemed unsuitable for the client.
The responsible lending obligations involve:
Making reasonable inquiries about the consumer’s financial situation, and their requirements and objectives;
Taking reasonable steps to verify the consumer’s financial situation; and
Making a preliminary assessment (if you are providing credit assistance) or final assessment (if you are the credit provider) about whether the credit contract is ‘not unsuitable’ for the consumer.
To break down the above points, it is up to the lender to assess and determine whether a credit contract meets their requirements and objectives, and that there is affordability with any existing expenses and proposed contract.
In other words, if one of the above criteria are not met, the loan is deemed “unsuitable” for the client and therefore the credit contract cannot proceed.
As credit licensees, lenders are at discretion as to how they will meet the responsible lending obligations. This brings upon their own policies to uphold that certain standard. As every lender is different this brings upon different rules and guidelines based on the individual lenders themselves.
So Why Scrap Responsible Lending?
With economies across the globe facing difficulty due to the effects of COVID-19, Australia’s economy has been impacted in turn. So much to the point that Australia has declared its first recession for nearly 30 years after the plummet of its GDP after two consecutive quarters.
Ultimately, the main objective is economic recovery to ensure there are less strict credit rules. This in turn will feed additional credit to consumers and in turn help jump start the economy:
“Maintaining the free flow of credit through the economy is critical to Australia’s economic recovery plan.” - Josh Frydenberg, Treasurer
As responsible lending places additional obligations onto the lender, scrapping it will shift the burden of responsibility back to borrowers. This will shift the current obligation back to consumers, simplifying the loan application process and reducing barriers to lend.
What Does This Mean For Borrowers?
From March 2021, the lending process is expected to become more simplified and easier to access credit. In other words, the chances of finance approval for consumer finance to increase. This may lead to lenders increasing their flexibility to deal with finance applications on a more case by case basis instead of a “one size fits all” regulatory approach.
Borrowers may be able to switch between credit providers by refinancing due to reduced barriers. As the chances are expected to bring upon increase competition among lenders, there is ample opportunity to consider a switch between providers given an all-time record low interest rates.
Given the relaxing of responsible lending, what guidelines lenders will change is still pending. Whilst there is speculation that there will be a shift back to pre-2009 assessment standards, the current additional checks and introduction of comprehensive credit reporting will remain in place to ensure appropriate lending standards are met.
In A Nutshell
The prospect of a simplier, less drawn out application process is intended to make credit easier to access. This means a process focused on obtaining credit easier.
Nevertheless, the financial obligation upon taking out finance and making contracted payments still stays the same. The basic rules of budgeting and ensuring that you are not overextending still applies. It is still important to review your existing financial position to determine the right financial solution for you.
It is still important to know the importance of entering into any financial contract and what it means for your financial future. If you are unsure about affordability on an individual level and suitability of finance, we recommending chatting to an expert finance broker.