The responsible lending changes and what they mean for your clients

As Treasurer, Josh Frydenberg said, “What started a decade ago as a principles-based framework to regulate the provision of consumer credit has now evolved into a regime that is overly prescriptive, complex and unnecessarily onerous on consumers.” 

With a process of consultation to be now undertaken, the intent is to introduce the new laws in March 2021 that will simplify access to credit for consumers and small business and remove barriers to the provision of credit.

The restrictive and prescriptive nature of the current ‘one size fits all’ laws has been replacing common sense decision making that takes into account the clients overall situation, with endless checklists and verifications, as assessors follow 100 pages of box ticking compliance.

Credit decisions are ‘one size fits all’ where for example a simple refinance of a client with a strong credit history, strong servicing, and clearly benefiting from the lower rates is going through the same assessment process as a new home buyer with a 90 per cent LVR with no credit history. As a result, credit is getting delayed in compliance, verifications, pages and pages of assessment criteria, where it can take months to get applications assessed then weeks to verify information – as assessors and brokers get bogged down in reams of bank statements, verifying the monthly cost of Netflix accounts, gym memberships and coffee bills – leaving consumers, assessors and brokers dismayed at the process.

Rather than effectively policing individually the specific cases where more strict guidelines need to be applied, the ‘one size fits all’ approach has meant that every borrower has had to jump through the same protracted, intrusive and at times – time wasting hoops – in many cases making no contribution to lessening risk, or protecting clients.

In fact, in an opinion piece, Mr Frydenberg said, “Lenders have become increasingly risk-averse and overly conservative. As a consequence, borrowers, irrespective of their financial circumstances, have faced an ever more intrusive, difficult and drawn-out approval process.”

A key outcome needs to be moving away from this ‘one size fits all’ approach – replacing the current practice of ‘lender beware’ (which saw lenders retreat behind a safety fence), with a ‘borrower responsibility’ principle. This change will hopefully help address the excessive risk aversion that has progressively entered the system, restricting the flow of credit.

Importantly consumer protection remains in place with changes in other areas of the law impacting ASIC, APRA and Brokers with BID, to ensure the most vulnerable are protected. With retail banks not required to comply with Best interest duty, it will be important to see them take a responsible position to support good outcomes for customers.

Key elements of the reforms include:

- Removing responsible lending obligations from the National Consumer Credit Protection Act 2009, with the exception of small amount credit contracts and consumer leases;

- Ensuring that authorised deposit-taking institutions (ADIs) will continue to comply with APRA’s lending standards requiring sound credit assessment and approval criteria;

- Protecting consumers from the predatory practices of debt management firms by requiring them to hold an ACL when they are paid to represent consumers in disputes;

- Allowing lenders to rely on the information provided by borrowers, replacing the current practice of ‘lender beware’ with a ‘borrower responsibility’ principle; and

- Removing the ambiguity regarding the application of consumer lending laws to small business lending.

What this means for your clients and access to credit

The intent of the changes is to make it easier for the majority of Australians and small businesses to access credit. The changes will ensure credit assessment is attuned to the needs of the borrower and the credit product – the shift being the obligations of the lender will now become aligned with the credit risk – enabling lenders to simplify their credit assessment criteria and extend credit in a more timely and efficient manner.

Additionally, it should reduce red tape, improve competition, and ensure that the strongest consumer protections are targeted at the most vulnerable Australians.

It should make it simpler for the “mortgage prisoners”, stuck in high cost loans, wishing to refinance with good credit history and where they clearly benefit to access credit. It should make it easier for sophisticated, asset rich consumers to access credit, and for every consumer it should make the process quicker, less intrusive and create a more tailored and considered and flexible approach for those seeking new credit facilities.

What we should see is lenders acknowledging what the vast majority of Australian borrowers have proven over many decades and economic climates. That is, they will continue to exercise good judgement and adapt their lifestyle and spending to prioritise their commitments.

For small business where credit assessment was creeping into consumer law, we should also see a shift to business being assessed on their history, strength, and character in unison with their financials and ability to repay.

What advisers can do to assist their clients who may now qualify for credit

With rates at record lows and homebuyers and investors finding opportunities in the market, the change from the current ‘one size fits all’ approach will make it easier and less protracted for your clients looking to restructure existing facilities, purchase a home or seek investment opportunities as part of their overall wealth management strategy to access credit.

In saying this, when preparing your clients to be finance ready the core fundamentals of presenting stability and a strong application will remain, including:
1. Demonstrating a guaranteed and stable income;
2. Demonstrating an ability to manage your budget and living expenses;
3. Assessment and inclusion of other liabilities loans and credit cards;
4. For purchases the ability to build savings; and
5. A strong credit history.

In practice
Our client was a self-employed builder, with a strong trading history, strong profit and a strong credit history. They had never missed a repayment, in fact had a history of additional repayments, with the proposed restructure saving them $350/month. We presented the application and positive servicing for assessment. It joined the queue of homebuyer, investor applications. The file was picked up after six weeks, at which time the assessor asked for updated documents.

Additionally, the assessment process came back with questions on the client’s business depreciation schedule and how the company was depreciating their assets – we then got the accountant involved. Essentially, the assessment became bogged down in verification and box ticking, rather than a common sense approach - where under the proposed laws the assessor would rely on the information presented, see the strong serviceability, the clear benefit to the client and their credit history and the assessment would be completed and approved within an hour.

Anthony Landahl, managing director, Equilibria Finance