Responsible Lending Obligations to be Wound Back
By Maxim Oppy, Law Clerk and Alicia Hill, Principal, MST Lawyers
On Friday 25 September, the Federal Government announced a plan to simplify access to consumer and small business credit by removing the Responsible Lending Obligations (Obligations) introduced in the National Consumer Credit Protection Act 2009 (Credit Act). The Government hopes that removing barriers to credit will encourage consumer spending and investment by small businesses to boost Australia’s COVID-hit economy.
What are the changes?
Currently, credit providers are regulated by a complicated combination of legislation, regulations by ASIC and APRA, and industry standards. As last week’s announcement did not provide much detail as to the proposed changes, it is difficult to predict exactly how the different elements of the current regime will be altered.
However, the Government’s Consumer credit reforms fact sheet signalled a broad shift from the current ‘lender beware’ practices to ‘borrower responsibility’. This will entail lenders being allowed to rely on information provided by borrowers, and relaxing the requirements to obtain extensive financial information about the borrowers for some loans.
Additionally, the Credit Act currently prohibits lenders from entering a credit contract with a consumer if it is unsuitable for the consumer. Removing this obligation shifts the burden of assessing suitability to the borrower.
The Government hopes that this will reduce the regulatory burden on lenders and lessen lender risk aversion caused by the current ‘prescriptive, complex and onerous’ regulatory regime. In effect these reforms are attempting to make borrowing money more accessible /easier than the current framework permits.
While some consumer protection advocates have raised concerns about the proposed changes, there are several safeguards which will remain.
What protections will remain
Firstly, APRA’s regulations will continue to apply.
These include requirements on lenders to make reasonable inquiries into the borrower’s ability to repay a residential mortgage. Further, most banks are also signatories to the Banking Code of Practice, which requires them to exercise the care and skill of a prudent banker when considering whether to provide a loan, this standard likely requires a lender to consider the suitability of a credit arrangement for a borrower as well as their ability to repay it.
Additionally, from 1 January 2021, mortgage brokers will be required to prioritise the interests of borrowers when providing credit assistance under the Credit Act.
Before the changes come into force on March 1 2021, the Government has stated it will consult with stakeholders and provide draft legislation, but has not yet provided a timeline for this. As the precise nature of the changes becomes clearer, MST Lawyers will provide further updates and analysis.
However, consumers and small business must be aware of the broad shift toward ‘borrower responsibility’ and take greater care when applying for and assessing whether a credit arrangement is suitable for them.