What are responsible lending laws?
The Rudd Labor government tightened the responsible lending law in 2009 following the GFC. The laws required lenders to make more of an effort to figure out whether would-be borrowers can afford to repay their debt.
The responsible lending obligations had three steps:
- Make reasonable enquiries about the borrower.
- Make a preliminary assessment to check whether the proposed credit contract is not unsuitable for the consumer.
- Provide a written assessment that the credit contract is not unsuitable.
There has always been a requirement for lenders to make sure customers could afford a loan. The tightening of responsible lending guidelines meant lenders were required to take a much closer look at an applicants actual living expenses instead of using standard industry benchmarks.
Banks took longer to process the home loans as they had to assess pay slips, bank and credit card statements to get the full picture of the borrower’s expense situation.
The winding back of these lending obligations may mean it is easier and quicker to get a loan, once it comes into effect in March 2021.
What does this mean to the borrower?
- Lenders may not be required to take a forensic look at an applicant’s living expenses.
- Banks may not complete a forensic examination such as bank statements, and there will be much requirement of paperwork.
- There may be more flexibility for lenders to approve good customers who in the past may have been declined because the lender didn’t believe they could afford the loan.
- You will have faster and easier access to take out mortgages and refinance home loans.
- If you work with a mortgage broker, you will still be protected by the best interest duty that comes into effect from January 1 2021.
- You will have to continue to provide accurate information about their ability to repay a loan.
- It all puts the responsibility right back on you to be safe and sensible with how much you borrow.
- There are still many unknowns.
Why are responsible lending laws being wound back?
The responsible lending laws are being reviewed because maintaining the free flow of credit through the economy is critical to Australia’s economic recovery plan to rise out of the COVID-19 recessions.
By winding back the regulations it does mean ASIC will not have oversight over lenders and APRA will be solely responsible for ensuring lenders maintain standards.
These changes are being recommended as a response to on-going concerns over the interpretation of responsible lending laws. It is believed lenders are being too restrictive in offering new credit out of concern for action by regulators.
The industry is backing the lending changes as it may speed up decisions for Australians trying to obtain a new loan.
There’s a suspect that the principles behind responsible lending will not change rather the manner in which lenders assess an applicant will.
Whilst responsible lending regulations have been in operation since 2009, over the last couple of years with the Royal Commission, ASIC case against Westpac we have seen lenders effectively conduct a forensic audit of applicants living expenses, with no room for applicants changing their lifestyle if they do get a loan.
There will be an ongoing requirement for consumers to provide information for an application, it may just be the level of detail and amount of information required will reduce. The major change is that the lender will no longer be solely responsible in the transaction.
There will be a stronger requirement for consumers to understand the implications of taking out any new finance, if you take out a mortgage, the consumer will have to understand that they may have to change their lifestyle (the mechanics behind this are yet to be determined).
There are still many unknowns, hopefully some clarity will be given over the coming months.
Whilst these changes are being discussed it should not be forgotten that if a consumer uses a broker they will be protected by the Best Interest Duty that comes into effect from 1 January 2021.
Is the change in responsible lending law already in practice?
No, at this stage it has just been announced by the Government, it is open for further discussion to implement changes by March 2021.
The complete information on what it means to lenders, borrowers or new home loan customers is still to be determined.
Are you looking to get a home loan?
Any changes to responsible lending regulations will not change the way we deal with customers, we will always make sure any loan we recommended is right for the customer and that they can afford any new loan. If anything any changes may speed up the process.
Get started on your homeownership journey with Home Loan Experts.
Our award-winning mortgage brokers are here to help. Call us on 1300 889 743 or fill in our free assessment form.