The Axing of Responsible Lending Laws and What Does it Really Mean for You?

So, let’s start with what is Responsible Lending?

Responsible lending laws were introduced as part of the National Consumer Credit Protection Act, in response to the GFC.

These laws put the onus on the lender (and Mortgage Broker) to determine whether or not a loan is not unsuitable for the borrower and that you can repay the loan without going into substantial financial hardship.

The responsible lending obligations involve:

• making reasonable inquiries about a consumer’s financial situation, and their requirements and objectives

• taking reasonable steps to verify a consumer’s financial situation

• 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

Now, if you have recently applied for a loan you will know firsthand how much info you need to provide that the bank scrutinises to be comfortable on your ability to repay the loan.

When we are looking at how much a client can borrow we now have to spend so much time analysing a clients budget and then comparing the clients stated budget against their bank and credit card statements to see how realistic it is.

Ordered coffee from your local café a little too often? It does have an impact on your borrowing capacity.

Why is the government considering axing responsible lending laws?

So back in September last year, the Government announced a simplification of Australia's consumer credit regulatory regime to improve the speed of Australia's post-COVID economic recovery. This initiative has been widely reported as a 'wind back' or 'axing' of the responsible lending obligations.

By scrapping the laws, the federal government hopes to reduce the cost and time it will take you to access credit.

“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.” says Mr Frydenberg.

What are the chances of the government axing (or watering down) responsible lending?

The government will face a challenge to pass the legislation through the Senate, as Labor and the Greens are expected to oppose it.

The government would need support from three of the five other crossbench senators.

Centre Alliance senator Stirling Griff said he would consider whether "additional safeguards" were required. "But on the surface, we understand the need for changes to free up the availability of finance for less risky lending," he said.

If the changes are adopted what does it mean to you, the borrower?

If the suggested changes are removed the responsibility is put back onto the borrower.

It is not expected that it will be open slather for lenders, as lenders are still required to comply with APRA’s lending standards, which requires sound credit assessment and approval criteria.

So in short, we don’t think a lot will change in the sort term, but it will be interesting to see how things progress over the next few months.