New Responsible Lending Reforms – what you need to know

There will be a consultation period on these proposed changes to the National Consumer Credit Protection Regulations, and we urge all lenders to engage in this process.

The reason for the reform include:

• the responsible lending obligations risk slowing economic recovery by restricting ability to credit,
• lenders have put in place detailed and lengthy credit approval process to meet the legal requirements, without them necessarily improving a lenders ability to understand if the loan is suitable and obtaining credit has become more burdensome for borrowers and lead to delays and increased cost.
• there is a double-up for ADIs, having to comply with APRA's standards including expectations of sound lending practices, as well as the responsible lending obligations.

In summary, the proposed reforms are:

• APRA's lending standards will apply: ADIs (ie. licensed Banks) will continue to need to comply with APRA's lending standards. Key elements of those lending standards will be applied to non-ADIs. APRA will regulate ADIs in relation to those standards and ASIC will regulate the non-ADIs, which may give rise to some consistency challenges.
• Borrower accountability and verification: Lenders will be able to rely on information provided by borrowers, unless there are reasonable grounds to suspect it is unreliable. A critical issue therefore, that will no doubt be the subject of much conjecture,  will be the circumstances in which a lender might have reasonable grounds to suspect that borrower provided information is unreliable.   Borrowers will, nonetheless, be made more accountable for providing accurate information to inform lending decisions. That means the need for extensive verification process procedures will reduce, as lenders will have greater capacity to rely on information provided by borrowers. That will simplify the loan application process, avoiding the need for borrowers to have to provide extensive information to lenders.
• Proportionality: Obligations on the lender will be proportionate with the risk. So, for example, lenders will be able to scale their inquiries and verification having regard to matters such as the type of loan product and the borrower. This will allow credit assessment processes to be simplified to facilitate the more timely and efficient extension of credit.
• Business lending exempt: Where any proportion of the credit application is for a business purpose, the new rules won't apply. This is irrespective of the proportion. This is to, amongst other things, streamline small business lending and avoid delays in credit processing, and delays investment and business growth.
• Mortgage brokers will no longer be subject to responsible lending obligations. They will however remain subject to the best interests duty.
• Small amount credit contracts and consumer leases: The responsible lending obligations will remain for these products and the following introduced:
  • a cap on total payments that can be made under a consumer lease;
  • new "protected earnings amounts".

  Those reforms are intended to have a 6 month transition period.

• Debt management firms (being firms who represent consumers in disputes with lenders) will need to hold an Australian Credit Licence, which means, in addition to them meeting the ongoing licensee obligations, they will also be members of AFCA. These changes will commence on 1 April 2021.

The proposed reforms should simplify the credit assessment process particularly by reducing the amount of information borrowers need to provide and lenders need to collect, verify and assess, and reduce barriers to switching between credit providers. However, much remains to be seen as to the detail of the changes and we await with interest the proposed legislation. It will also obviously need to be passed – and any proposed legislation may not emerge unscathed from the Senate. However, reforms to streamline the credit process and reduce costs are welcome developments.