The Government’s proposed reversal of responsible lending laws will potentially mean big things for brokers, borrowers and lenders with the possibility of quicker and easier access to financing.
Treasurer Josh Frydenberg announced the rollback of Australian Securities and Investment Commission (ASIC) regulations last week, in a move that aims to simplify the lending process and stimulate Australia’s coronavirus-ravaged economy.
The regulations were established in 2009 in the wake of the Global Financial Crisis (GFC) and aimed to ensure borrowers weren’t receiving more credit than they could handle through the meticulous assessment of their finances.
The key concept of ASIC’S National Consumer Credit Protection Act is “credit licensees must not enter into a credit contract with a consumer, suggest a credit contract to a consumer or assist a consumer to apply for a credit contract if the credit contract is unsuitable for the consumer”.
By relaxing lending laws the Government hopes to encourage borrowing and spending – the lifeblood of a thriving economy.
In Mr Frydenberg’s announcement, he emphasised the importance of easier access to credit for Australia’s recovery from the COVID-19 pandemic.
“Now more than ever, it is critical that unnecessary barriers to accessing credit are removed so that consumers can continue to spend and businesses can invest and create jobs,” he said.
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If passed, the changes will come into effect in March 2021, removing the duplication of red tape in the credit application process and ultimately shifting responsibility from lender to borrower.
Appearing before the House of Representatives in August, governor of the Reserve Bank Philip Lowe supported the regulations overall but expressed his criticism for the responsibilities the banks were being forced to shoulder.
“We can’t have a world in which, if a borrower can’t repay the loan, it’s always the bank’s fault,” he said
In an interview on Sunrise, Mr Frydenberg echoed these sentiments, “We’re going to move that culture from the lender beware to a borrower’s responsibility”.
He eased concerns over a repeat of the GFC, stressing that lenders will still have to adhere to the Australian Prudential Regulation Authority’s guidelines.
Australian Banking Association’s (ABA) Chief Executive Officer Anna Bligh has welcomed the changes, assuring the ABA remains committed to strong protections for customers whilst providing credit to the economy in this critical time.
“Banks look forward to working with the Government to ensure the legislation works for both customers and the broader economy”, she said.
Broker or borrower – what the changes mean for you?
The responsible lending laws brought with them a complicated and heavily regulated path to finance, which saw a drawn-out, sometimes unsuccessful application process.
Here’s a breakdown of the changes:
- Some of the responsibility of the borrower’s capacity to repay a loan will shift to the borrower
- Borrowers need to have a thorough understanding of their finances to ensure the loan is right for them
- Loan applicants could see a possible increase in their borrowing power
- With a paired back application process, borrowers could potentially gain faster access to loans
- A less rigorous financial assessment could possibly mean less paperwork and an easier application process
- Borrowers will have to be honest with themselves and the bank about their ability to repay the loan
- Lenders must still adhere to the Australian Prudential Regulation Authority’s lending guidelines
- Applicants who have been rejected for financing in the past could potentially be approved with the removal of regulations
- Borrowers using a mortgage broker will still be protected by the ‘best interest duty’ from the 1st of January 2021
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For mortgage brokers, the changes could potentially ease access to financing for clients through the abolishment of the pedantic assessment of a borrower’s expenses, which included UberEats and streaming services.
Speaking to Mortgage Professional Australia 2018’s Top 100 Broker Mario Borg said, “I think everyone in our industry understands how complex and frustrating the process of organising a home loan has been over the last 12-18 months with the level of scrutiny that we have to undertake in terms of income and expenses.”
Borg said that end of ASIC’s lending laws could potentially allow mortgage brokers to work with greater efficiency, reducing the days-long searches for finances and shaving hours off each application.
It’s important to note that removal of regulations will not impact on a mortgage broker’s ‘best interest duty’, meaning they still need to ensure their recommendations are in the best interest of the client.
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Speaking with Domain.com.au Canstar Group Executive of Financial Services Steve Mickenbecker suggested that relaxing spending assessments could theoretically increase the average person’s borrowing power by $70,000.
“Based on an average income of about $80,000 and a 20% deposit, a would-be buyer might have the amount they could borrow increase from $440,000 to about $510,000”, he said.
The proposed relaxations might increase the likelihood of loan approval for borrowers with existing credit debt, and potentially create a more competitive market for current mortgage holders looking to refinance.
However, with the onus shifted from the lender, borrowers are being urged to have a thorough understanding of their current and future finances or engage with a mortgage broker to ensure they aren’t borrowing beyond their means.
Words by Nell Matzen