How will responsible lending effect your bank?
In the last week of September, the Treasurer announced proposed changes to the Responsible Lending Legislation. The main reason for these proposed changes was to open up more lending opportunities for businesses and consumers once Covid-19 was under reasonable control, and the country was closer to economic normality.
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 (SACCs) and consumer leases where heightened obligations will be introduced.
- Protecting consumers from the predatory practices of debt management firms by requiring them to hold an Australian Credit Licence when they are paid to represent consumers in disputes with financial institutions.
- Allowing lenders to rely on the information provided by borrowers, replacing the current practice of ‘lender beware’ with a ‘borrower responsibility’ principle.
- Removing the ambiguity regarding the application of consumer lending laws to small business lending.
For those not in the lending industry, it appears the Treasurer made a major announcement. But once these changes are implemented, how does it impact your “borrowing power”?
In truth, as lending managers and mortgage brokers will tell you, it will probably have little effect on your “borrowing power”. Most analysts conclude the only real effect is that it will allow mortgage brokers to operate more efficiently and focus on the customer’s needs and requirements rather than worry about which lenders can or can’t approve their loan.
However, the main reason for these changes is to alleviate the tight rein lenders currently impose on customers regarding their expenses. Currently, lenders can decline an application because they do not like the way your expenses have been itemised. As part of the application process most lenders will ask for your last 3 to 6 months transaction statements of your main account, not only to confirm the itemised expenses you have declared but (behind the scenes and more likely), to forensically examine those expenses and highlight any discrepancies. If these discrepancies are major, then the loan can be declined without a reasonable explanation.
The proposed changes to the current regulations is meant to stop all of this and free up credit to stimulate the economy and households into spending. But with most current households watching their spending, and businesses struggling to keep afloat, will this stimulate the economy?
The lenders will have little reluctance in changing their current credit analysis of your loan mainly because the Australian Financial Complaints Authority (AFCA) is their governing body when it comes to rules and regulations about the approval of your loans. If AFCA fail to adopt these changes, then it will have little or no effect in the way a lender assesses an application. Therefore, how the AFCA incorporate these changes once they are ratified into law will be crucial in changing the lenders behaviour. Meanwhile, it is business as usual and although there has been a significant spike in pre-approvals in preparation for the Spring season, a pre-approval, although useful, is not a guarantee for a formal approval.
Next month we’ll address the possible side-effects of the proposed legislation, why most mainstream lenders will not relax their current lending guidelines and how to ensure your pre-approval takes the next step and secures your new purchase.
If you need more information about the above changes, please contact us here.