Explainer: How a move to scrap responsible lending laws could impact you

Treasurer Josh Frydenberg announced the plan to scrap responsible lending laws in September. Picture: Sitthixay Ditthavong
Treasurer Josh Frydenberg announced the plan to scrap responsible lending laws in September. Picture: Sitthixay Ditthavong

A plan is in motion to make it easier for Australians to access credit and loans, in a move the federal government says will help boost the economy post-pandemic.

The removal of responsible lending obligations will be debated in parliament next month, but economists are wary and say now is not the time to be making debt easier to access.

What are responsible lending obligations?

Responsible lending laws were introduced in 2009, after the Global Financial Crisis.

The obligations mean lenders must undertake a series of checks before handing out credit or a loan to prevent people accessing money they can't afford to pay back.

Under the current laws, lenders must verify the borrower's financial situation and provide that to the person, as well as give them a quote setting out the maximum they may be required to pay back.

These rules are designed to prevent lenders from encouraging people to borrow money they can't afford.

If a person is deemed unsuitable for a particular loan or credit amount, the lender cannot give it to them.

What changes have been proposed?

The federal government wants to scrap those responsible lending obligations, so instead of lenders ensuring a customer can afford the loan they're getting - the accountability falls on the borrower.

The government says by removing those rules, it will make it easier and faster for people to get credit, create more competition in the market because it will be easier to switch lenders, and it will give small businesses easier access to loans.

The government argues these laws have led to "unduly restricting lending" because of the lengthy process to ensure a person is suitable.

By "removing red tape", the government says more people will have access to credit and that will help the economy recover from the pandemic.

The government maintains vulnerable borrowers would be protected through other regulations on banks.

The bill passed the House of Representatives in March and is set to be debated in the Senate on May 11.

Treasurer Josh Frydenberg first laid out this plan September 2020 and initially hoped the rule change would be in effect last month.

What does it mean for borrowers and lenders?

If the laws are changed, borrowers would be become responsible for providing accurate information to the lender about their financial situation.

Effectively, borrowers will be made more accountable.

The lender is still required to take "reasonable steps" to check whether a person can pay back their loan, but it doesn't require the same level of checks into a person's finances as is currently required.

Banks have welcomed the changes which they say will make credit more accessible to more people, but consumer groups have raised concerns at how the process would be regulated.

Financial Rights Legal Centre chief executive Karen Cox said the current obligations were necessary, a finding backed in the Banking Royal Commission.

"Providing people with unaffordable credit will do nothing to hasten the economic recovery from COVID-19," she said.

"It will only lead to vulnerable people suffering greater harm and distress in the long run. As Australia seeks a way out of the current economic crisis, now is when we should be doubling down on the lessons learned in the GFC and lend responsibly."

A CHOICE petition calling for the bill to be blocked has been signed by almost 35,000 people and organisations.

Banks have lauded the change as a win for consumers, arguing necessary checks would be conducted, but the process would be faster.

In a submission to a Senate inquiry Commonwealth Bank said lenders were currently required to ask "burdensome" information that wasn't useful to understand whether a customer could repay a loan.

Australian Banking Association chief executive Anna Bligh said: "They are required to produce months of spending information across the spectrum of their lives; from the most regular fixed expenses all the way through to discretionary spending."

What are the concerns?

Economists and consumer groups have raised several concerns over a lack of regulation, and the impact relaxing rules could have on low-income earners.

Monash University economist John Vaz said putting the responsibility on borrowers assumed a level of financial literacy which many people - particularly on lower incomes - may not have.

Dr Vaz said removing responsible lending laws could allow "predatory lending".

He said there was no "strong motivation" to change these laws to boost economic activity as the housing market is booming, and plenty of people are taking out loans thanks to record low interest rates.

Dr Vaz said the consequences of relaxing lending obligations would be "dire" for low-income earners.

"There's no protection for those people that [lack] financial literacy or need a loan out of desperation," he said.

"That allows for predatory lending to come into play, in other words, lending to people knowing they're unlikely to pay back."

"[Lenders'] incentives are to sell more loans, not necessarily to sell manageable loans."

Dr Vaz said targeted JobKeeper payments to struggling sectors would be more beneficial for consumers and the economy.


"Putting the onus on borrowers to borrow more and more money ... is not a good way to go," he said.

Dr Vaz warned making debt more accessible would push house prices up further by creating more competition and could force people to borrow more than they normally would.

Record house price rises have been spurred by low interest rates creating intense demand met by short supply of properties.

"To then relax the lending laws around that [would] further accelerate borrowing. People are borrowing more because it's cheap, they would be borrowing more because it's easy as well," Dr Vaz said.

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