Government Proposes Changes to Smooth the Path for Borrowers
The government has announced reforms to facilitate an increased flow of credit to households and businesses.
A key change will be that banks and other lenders will be able to rely on the information provided by borrowers, unless there are reasonable grounds for doubting it.
The current practice of “lender beware” will be replaced with a “borrower responsibility” principle, under which borrowers will be made more accountable for providing accurate information to inform lending decisions.
The new arrangements will be designed to ensure credit assessment is more attuned to the borrower’s needs and the credit product.
At present lenders have to obtain and verify extensive information about the expenses of borrowers, regardless of the loan product involved. Under the new system the obligations on the lender will be proportionate to the risk. This will simplify the assessment and speed up the process.
The government says the reform should reduce the “excessive risk aversion” that had been restricting the flow of credit.
Reserve Bank Governor Philip Lowe said recently: “We can’t have a world in which, if a borrower can’t repay the loan, it’s always the bank’s fault. On a portfolio basis, we want banks to make some loans that actually go bad, because if a bank never makes a loan that goes bad it means it’s not extending enough credit. The pendulum has probably swung a bit too far to blaming the bank if a loan goes bad.”
The changes would wind back the Labor government’s “responsible lending obligations” put in place after the global financial crisis, which banks have complained are too onerous.
The move was welcomed by banks on Friday but is controversial. Strong criticism immediately came from the Consumer Action Law Centre, Financial Counselling Australia and the Financial Rights Legal Centre. The groups said in a statement the proposed reforms “will remove bank responsibility to customers, opening up new opportunities for banks to aggressively sell debt”.
The government says its cutting of red tape under the new regime will reduce the cost and time it takes consumers and businesses to access credit.
It says the changes are also aimed at strengthening consumer protection for those who need it. This will include protection from predatory behaviour by debt management firms.
The announcement of the new credit regime follows the government earlier this week outlining proposed changes to the insolvency provisions, to give distressed businesses their best chance of pulling through the recession.
Treasurer Josh Frydenberg said that as the country recovered from the pandemic, “it is more important than ever that there are no unnecessary barriers to the flow of credit to households and small businesses.”
“With billions of dollars extended to borrowers each month, credit underpins the Australian dream of home ownership while allowing businesses to invest, grow and create jobs,” he said.
“By simplifying the loan application process for borrowers it will reduce barriers to switching between credit providers, encouraging consumers to seek out a better deal.”
The government says these will be the most significant changes to the credit regime in a decade.
The opposition has not declared a position on the changes, which require legislation and are not due to start until March.
Shadow treasurer Jim Chalmers said on Friday: “We want to make sure the new lending standards … don’t make it too easy for people to get in over their heads, or tip the balance too far in favour of the banks and loan sharks at the expense of ordinary working Australians”.