New laws make it easier to borrow money but there's a catch
The scrapping of the responsible lending obligation will make it easier to get credit cards and home loans. It also puts a bigger burden on borrowers to make the right decision.
Last week, Treasurer Josh Frydenberg announced upcoming changes to lending laws, making it easier for Australians to borrow money.
These proposed changes are a response to the economic damage caused by the COVID-19 pandemic. The hope, according to Frydenberg, is to loosen lending rules to "restore balance to the system after 10 years of regulatory creep that has seen the pendulum swing too far away from borrower beware to lender beware".
In other words, the government feels the current lending regulations are too strict, making lenders overly cautious about who they lend to, how much they lend and the complexity of their application and vetting processes.
Easier access to credit should boost economic growth, at least in the short term. But the downside is that borrowers now have a greater responsibility to make sure they really understand the credit products that they're applying for and assess their risk carefully.
The government plans to remove the responsible lending obligation from the National Consumer Credit Protection Act (2009) for most lending situations. According to the Treasurer, responsible lending obligations "have given rise to almost 100 pages of Australian Securities and Investments Commission regulatory guidance."
Removing this obligation will lessen lenders' need to dig deeply into the financial situation of customers looking to borrow money.
The changes aren't just about cutting regulations back. The government is planning to keep APRA's lending standards and apply them to a wider range of lenders. Debt collectors will also be required to hold Australian credit licenses, offering some consumer protection against predatory debt collectors.
Benefits for borrowers
For some Australian borrowers, these new rules will actually make life easier. If you're applying for a home loan or you want to increase your credit card limit, the new rules should mean less scrutiny and easier access to credit. However it still pays to check your credit score to get a general idea of whether you'll be approved- you can do this for free online or through the Finder app.
If you're rushing to secure finance to buy a home, a speedy turnaround on a loan application can make all the difference. For investors looking for an investment loan, being able to borrow just a little more can help you secure the right property.
If your finances are in good shape, you have a good sense of what you can afford to borrow and you supply your lender with accurate information, then you should be in a strong position.
But what if you're not?
Risks for borrowers under these new rules
The Treasurer has said that the proposed reforms will replace "the current practice of 'lender beware' with a 'borrower responsibility' principle".
This means that it will be a borrower's responsibility to provide the correct information to their lender and make an informed decision about their choice of loan or credit card. Lenders are still obliged to scrutinise applications and vet prospective borrowers, but the extent to which they are legally responsible for a borrower ending up with an unsuitable credit product that they can't afford is lower.
Lenders can rely on the financial information that an applicant provides. It's up to the applicant to make sure the information is true and accurate.
We can't really say for certain yet just how much these new rules could put borrowers at risk. The changes haven't been revealed in detail and will need to pass parliament after a period of public consultation.
A lot will also depend on how lenders and the regulators interpret the new rules. But whatever the changes, one thing is clear. Borrowers applying for loans and credit cards need to do their homework and make sure they provide their lender with an accurate picture of their finances.