The Assistant Treasurer has acknowledged that borrowers currently bear “limited responsibility” for providing incorrect information on loans, highlighting the need to change lending laws.
Speaking in the opening address to the Informa Responsible Lending Summit earlier this week, Assistant Treasurer and MP for Deakin, Michael Sukkar, emphasised the need for lending law changes to help make loan writing more efficient and increase borrower responsibility.
Mr Sukkar, who is also Minister for Housing and Minister for Homelessness, Social and Community Housing, told delegates that the repeal of responsible lending obligations (RLOs) under the proposed credit reforms would not only reduce the “prescription of the principles and obligations on lenders and borrowers alike” but also help raise consumer awareness around their own obligations when taking out loans and make them more accountable.
Current regime is ‘a rigid and inflexible system’ with ‘unreasonable wait times’
Providing context for the changes, Mr Sukkar said that while the RLOs were “originally intended to be a risk-based principles framework that was scalable relative to the individual and product”, over time the principles have “been layered with increased guidance from regulators” to culminate in a regime “that many would say is overly prescriptive, complex and onerous on consumers seeking timely access to credit”, he said.
“The National Consumer Credit Protection Act 2009 introduced a requirement that all lenders must not provide unsuitable loans. However, what has developed in practice since then is a rigid and inflexible system that has frustrated many consumers and lenders alike, impeding prospective and good borrowers from much-needed credit because of their granular spending habits rather than their ability to service a loan,” Mr Sukkar said.
“This is clearly visible in the prescriptive RLO guidance and the response by lenders to be overly cautious in their credit assessments.”
Mr Sukkar continued: “To meet their obligations under the act, lenders have adopted a standardised credit assessment approach for most consumers and credit products, irrespective of individual circumstances.
“The unintended consequence is a one-size-fits-all regime... The question for lenders has become: ‘Can I lend?’ not ‘Should I lend?’
“Ultimately, these processes do not necessarily improve a lender’s ability to make an assessment on the suitability of credit for the customer,” he said.
The Assistant Treasurer went out to outline that the current regime had also resulted in “significant delays in credit assessments”, “unreasonable wait times” and “increasing borrowing costs”.
“Even existing mortgag[ors] face delays – avoidable delays – to refinance existing loans despite having a strong credit record.
“This rigid and inflexible system risks impeding our economic recovery of COVID-19 and is no longer fit for purpose,” the Assistant Treasurer offered.
Stating that credit is “the lifeblood of our economy”, he went on to outline that the government was therefore hoping to “simplify Australia’s credit framework”.
“We are seeking a more efficient flow. And we are doing that by reducing the cost and time it takes consumers and businesses to access credit while ensuring that the right consumer protections are in place.”
Borrower responsibility and accountability
The Assistant Treasurer also acknowledged that borrowers currently bear “limited responsibility” for providing incorrect information on loans, highlighting the need to change lending laws and increase accountability.
He elaborated: “Now, the onus is on lenders to verify information provided by borrowers who bear limited responsibility for providing incorrect or misleading information to lenders.
“The result is a detailed and lengthy credit approval process aimed solely at ensuring the lender doesn’t breach the responsible lending obligations.”
The Assistant Treasurer told the Responsible Lending Summit that he believed that, as lenders streamline and improve their credit assessment processes, they would be able to rely on information provided by borrowers “unless there are reasonable grounds to suspect it is unreliable”.
“This means borrowers will be more accountable for providing accurate information to inform lending decisions,” he said.
“After all, borrowers have the best insight and understanding of their information, and lenders should be able to trust borrowers and rely on upon those disclosures.”
“This does not override the need for a lender’s normal checks and balances, such as verifying debt information from third parties,” he continued, “but recognises that the borrower knows the most about their own circumstances”.
Mr Sukkar went on to suggest that this would also be “an important step in reducing the time for credit assessments to be conducted”.
Improving financial literacy and protecting consumers
However, Mr Sukkar acknowledged that consumers cannot be expected to take greater responsibility if they are not fully informed of their own obligations.
As such, he said that financial literacy education – highlighting public resources such as ASIC’s MoneySmart website – could help provide “objective advice for consumers making important financial decisions”.
“Since the new framework will make it clear that lenders can rely on information provided by borrowers, the information provided will also be considered by AFCA in its assessment of cases.
“More generally, it will be even more important for consumers to increase their financial literacy and be empowered to make informed decisions,” he said.
However, Mr Sukkar also told delegates that it was important to balance “access to credit with ensuring lending standards remain strong in order to protect the most vulnerable consumers”.
Indeed, some of the major concerns raised by consumer groups has been the potential reduction of recourse for individual consumers against lenders.
He therefore emphasised his belief that the financial complaints body, AFCA, would “still be empowered to facilitate a fast, free and fair resolution for borrowers” and credit providers would still be obliged to be AFCA members and comply with their existing licensing obligations to act efficiently, honestly and fairly.
“The government understands that unnecessary barriers to accessing credit should be removed so consumers can continue to spend, businesses can invest, jobs can be created and our economy can continue its strong recovery from the COVID-19 recession,” Mr Sukkar said.
“That is why the Morrison government is moving to simplify the process, to reduce waiting times and the costs of accessing credit and ensure lenders continue to lend,” he said.
“These reforms are about providing more timely and less costly credit to those Australians who can afford it.
“The fact is removing burdensome, unnecessary obligations on lenders to make it easier and faster to lend money or extend credit limits is in the best interests of consumers, small businesses and the broader economy. We all benefit from economic growth.”
He concluded: “Now more than ever, it is critical that unnecessary barriers to accessing credit are removed so that consumers can continue to invest in their future and businesses can fund their growth and create jobs.”
[Related: SME responsible lending exemption extended]
Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.
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