It’s been more than two years since the banking royal commission handed down its recommendations for reforms across financial service industries in Australia.
The maintenance of responsible lending laws was part of the package, but in the economic wake COVID-19, this is being reconsidered by the Federal Government. In March 2021, a bill to repeal parts of these laws was put forward and is awaiting final legislation.
These changes could be important for anyone looking to finance a property purchase with a home loan, other significant spending using a personal loan, or anyone wanting to start up a small business venture with a business loan.
If you are looking for a line of credit and don’t know what’s happening with responsible lending laws right now, wrap your head around it with this guide and be better prepared when approaching banks and lenders.
Here are answers to some of the key questions about the changes to responsible lending laws:
What are responsible lending laws?
These are currently part of the process banks and lenders go through to ensure they’re only offering loans which can be repaid. The aim is to make sure borrowers don’t miss repayments and see interest and fees accrue which could result in significant financial hardship.
These laws were introduced federally in 2009 under the National Consumer Credit Protection (NCCP) Act in response to problematic lending practices revealed during the global financial crisis.
The recommendation from the 2019 banking royal commission was that the NCCP Act not be amended when it came to lenders’ obligations in assessing the suitability of borrowers applying for credit.
Responsible lending laws to be axed? The government’s proposition
In September of 2020, treasurer Josh Frydenberg announced the government would be stripping responsible lending laws out of the NCCP Act. The aim was to make borrowers responsible for assessing their own suitability to take on debt and to remove this additional lender oversight, except in the case of smaller creditors and debt management firms.
Frydenberg said the changes would “make it easier for the majority of Australians and small businesses to access credit, reduce red tape, improve competition, and ensure that the strongest consumer protections are targeted at the most vulnerable Australians.”
Mozo banking expert Peter Marshall explains responsible lending laws are in general terms, and how they’ve been interpreted and implemented can vary from lender to lender. Over time, he says, some came to see the practices as unnecessarily onerous.
“What was happening was when you were going to ask for a loan, lenders were having a look at every single thing you had been spending money on and assuming that, if you were successful in getting a loan, you would keep spending exactly the same amount of money on all those things,” Marshall says.
“It didn’t take into account the fact that people will often adjust their behaviour in order to reach a financial goal.”
Now, the Senate committee is backing the plan to roll back responsible lending laws. A report detailing the proposed changes was officially agreed to on 16 March.
Why is there opposition to changing responsible lending laws?
Many disagree with the principles behind the proposition to scrap these laws. More than 34,000 individuals, charities, unions, financial counsellors and consumer groups have now signed a CHOICE petition to keep safe lending laws in place.
In a statement connected to the petition, CHOICE chief executive Alan Kirkland said the number of people who have benefited from safe lending laws demonstrates their necessity. He noted more than 590,000 people had collectively received over $350 million between 2010 and 2018, according to the royal commission.
“When lenders don’t do basic checks, borrowers and their families ultimately bear the cost. If anything, safe lending laws need to be strengthened,” Kirkland said.
Marshall says the move to completely abolish safe lending laws is an overreaction to the previous situation.“
We’ve swung the pendulum to be too conservative for a while, and now we’re completely removing those guidelines and it’s possibly going to swing back too far the other way,” he says. “
This could be to the point where some lenders may be more keen on lending money to a customer than ensuring, years down the track, the borrower is still able to keep up their repayments.”
When will changes to responsible lending come into effect?
There currently isn’t a date set for when these proposed changes will become legally binding, as committee backing isn’t the final step in this process.
In the March report, the committee provided reasoning for supporting the move, saying it was “… of the view that these regulatory changes will not undermine consumer protections and that the principal of ‘responsible lending’ is deeply embedded in Australia’s broader regulatory framework, which credit providers and credit assistance providers must still operate within and comply with.”
Labor and Greens senators opposed the decision and will vote against the changes, which means it will need to be voted on by the crossbench before the Bill can be passed into law. The date for the final sitting has now been pushed back until 11 May.
What does this mean for borrowers?
The Senate committee and other advocates argue the axing of responsible lending laws won’t impact borrowers due to the strength of remaining regulation. Marshall, however, says making borrowing even easier in the current climate is ill advised, especially when it comes to taking on larger sums like you would through a mortgage.
“If you can’t afford a loan under the old regime at the kind of rates we’re seeing now, like home loan rates under 2.00%, then perhaps you should consider not taking a loan out,” he says.
National data also suggests responsible lending laws haven’t necessarily inhibited the lending market, even during the pandemic.
The most recent research on lending data from the Australian Bureau of Statistics shows lending for housing rose 10.5% in January alone. This is part of a massive increase of 44.3% over the year.
While lenders have fairness and borrower assessment rules they must adhere to, Marshall says losing these broader guidelines entirely will put consumers at risk of financial hardship.
“It’s all very well to say, ‘people should take responsibility for their own financial decisions’, but for the everyday person who might not be as educated around these financial questions, these changes open them up to a lot of risk.”
If you want to learn more about borrowing money, head to Mozo’s dedicated loans hub.