What are the implications with changes to responsible lending?

Updated: Nov 20, 2020

The Federal Government recently announced that it would be axing responsible lending laws in a bid to help free up credit and boost the economy.

Responsible lending laws are a product of the last financial crisis, which was bought about by overzealous lenders and banks, effectively handing out money knowing full well, that the borrowers would not be able to pay it back.

While this was more prevalent in the US, the ripple effect and impact on credit markets were felt worldwide, which led the Rudd Government to introduce the National Consumer Credit Protection Act 2009.

What occurred was that lenders were ultimately deemed to be the ones that would be held responsible should a borrower not be able to meet their mortgage repayments. That leads to an overly pedantic application process, whereby banks would scrutinise every spending habit of a potential borrower to ensure they could make their repayments.

At the height of the ease coast housing boom in mid-2017, we started to hear stories about banks declining loans because a borrower had too many subscriptions on their credit card or spent money on a weekly coffee.

Clearly, the interpretation had changed and things had shifted too far. This was leading to a very slow application process and a backlog at many lenders. This was once again highlighted when the RBA slashed interest rates two times earlier this year and a swarm of new loan applications caused times to drift out longer and longer, putting pressure on buyers trying to meet settlement.

The Federal Government has realised that this is now an issue and Treasurer Josh Frydenberg has set about making credit quicker easier to obtain.

“What started a decade ago as a principles-based framework to regulate the provision of consumer credit has now evolved into a regime that is overly prescriptive, complex and unnecessarily onerous on consumers,” said Mr Frydenberg.

“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.”

While the Government is ultimately interested in stimulating the economy and creating jobs, what do these changes actually mean for borrowers?

Fortunately, things won’t be going back to how they were prior to the GFC. Lenders will still be required to meet APRA’s lending standards which outline that an applicant must meet a sound credit assessment and approval criteria.

Much of the responsibility will increasingly fall onto the mortgage brokers as well, who in most instances are the middleman between lender and borrower.

However, it is hoped that for most people, finance will be easier to obtain. That means that the onus will fall back onto the borrower and it will be up to them to ensure they will be able to meet their mortgage payments.

For the most part, this is what we do see anyway. People will move heaven and earth and cut back on unnecessary expenses and even take second jobs if it means they will be able to meet their mortgage payments.

It’s highly unlikely that any lenders will risk lending to a borrower who simply cannot show how they would be able to service a loan as it is generally in their best interest to have people making their payments.

The cost involved and overall process with repossessing property as the mortgagee is not one that lenders are generally wanting to take on.

At this stage, talk of axing responsible lending laws is just that. A bill will still need to make its way through both houses of parliament and at this stage, we have already heard that both Labor and Greens won’t be supporting it in the Senate.

That means for this bill to pass, it will need to get support from three of the five other cross-bench senators.

Regardless of the outcome, the intent is still clear. With the RBA already slashing the official cash rate to 0.1 per cent and the introducing QE and with the Federal Government doing all it can to encourage lending, it’s clear that all involved want banks to lend freely again.

Once again, the big winners here could well be property investors and homeowners as sentiment and house prices are already rapidly increasing.

Rowan Crosby is a Research Contributor at Wealthi. He is a published Australian journalist with opinions on Australian real estate, worldwide stock markets and commodities. Rowan has a particular interest in small-scale property development and investing.