CHANGES TO RESPONSIBLE LENDING OBLIGATIONS ON BANKS TO MAKE IT EASIER FOR BORROWERS TO ACCESS HOME LOANS
In a recent Federal Government announcement there are plans underway to loosen the responsible lending obligations on Banks and other credit providers to make it easier for everyday Australians to access credit products, such as Home loans, Credit Cards and Business Loans. So, what are these changes and what does this mean for everyday Australians trying to buy their first home, upsize into a bigger home or refinance their current loan and get a better deal?
What are the Responsible Lending Obligations?
When the Global Financial Crisis hit in the late 2000s the Australian Government at the time introduced the National Consumer Credit Protection Act, which was designed to make the lenders responsible for verifying whether a person applying for finance could afford to borrow. This would protect households from providing false information, from taking on loans they had no chance of repaying, and from predatory lending practices.
The responsible lending obligations involve:
- making reasonable enquiries 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
- if a consumer requests it, being able to provide the consumer with a written copy of the preliminary assessment or final assessment (as relevant).
During the Royal Commission into Banking it was determined that these rules needed tightening, so in fear of legal action the lenders introduced further hurdles that borrowers needed to overcome before they would be deemed to be eligible for finance. These hurdles were primarily around the first rule: making reasonable enquiries about a consumer’s financial situation.
For example, lenders would conduct meticulous examinations of an applicants spending habits to determine what their actual living expenses were, rather than relying on the standard Household Expenditure Measure (HEM). This resulted in a higher percentage of applications being declined for credit assistance, as it was assumed that an applicant’s current living expenses would continue unchanged when a new loan commitment was added, so the new repayment would be unaffordable.
Why are they being relaxed?
After a recent court ruling where it was deemed that borrowers could change their spending habits depending on their circumstances, and using current living expenses as a way of determining affordability was flawed, the Government now wants to reduce the “red tape” involved in accessing credit to stimulate the economy and get people spending.
This will result in reductions in the amount of paperwork an applicant for a loan needs to provide, as well as lenders taking much less time to process an application by removing the need to scour over account statements to see what is being spent on Netflix or Uber Eats.
Who will benefit from these changes?
Theoretically all potential borrowers will benefit from these changes to the rules around the treatment of living expenses. However the major beneficiary could be first home buyers.
Previously they were treated harshly as they may have been living at home, with a significant disposable income but did not need to adhere to a budget. So typically they would spend more on recreation and entertainment than on utilities or general insurance. Lenders would not make any allowance for their ability to adjust their spending habits once they owned a home.
With these changes lenders will not need to verify a borrower’s financial situation to the same extent, so the impact on current spending habits on the loan decision may no longer be a deciding factor.
Another sector that should benefit are self-employed consumers. This sector generally declares a lower than standard level of living expenses, as a number of these costs are claimed through their business. With lenders able to use this information to determine finance eligibility these types of applicants should be able to access credit more freely.
When do these changes take effect?
The proposed changes are not legislated to come into effect until March 2021. We are currently operating under the same tight lending rules and regulations, and the lender has the onus of responsibility for ensuring the credit is affordable and ‘not unsuitable’ to the borrower.
Once these changes are made and the onus of responsibility falls to the borrower, it is important to note that significant regulation will remain in place to ensure lenders operate in a prudent fashion.
Lenders will still be required to ensure reasonable enquiries are made to determine an applicant’s income, estimated living expenses will still need to be declared as part of the application process and an applicant’s current credit exposure will also need to be verified.
It will be interesting to see whether these changes remain in place in the long term, given they are being introduced as an economic stimulus. Should we see economic recovery built on these types of measures, this relaxation of responsible lending obligations may only be a short term measure.
A mortgage broker can help borrowers navigate the way through the options to ensure they get the best outcome under the circumstances. At SHL Finance we are working with first home buyers, helping our clients negotiate a better rate with their current lender, reviewing their existing loans and discussing ways to potentially save thousands of dollars. We would love the opportunity to help you too.
Please call Reece Droscher on 0478 021 757 should you want to discuss your options.