Responsible lending laws that fuelled a court fight between the corporate regulator ASIC and Westpac have been scrapped for banks, meaning less onerous credit rules aimed at encouraging the flow of loans to boost the economic recovery from the COVID-19 recession.
The responsible lending law was imposed by the Rudd Labor government back in 2009 following the American subprime loan crisis.
The simplification will remove red-tape for the banks, while bolstering ASIC’s oversight of payday lenders for vulnerable borrowers.
The deregulation responds to concerns of banks and Reserve Bank of Australia governor Philip Lowe, that following the Hayne banking royal commission and ASIC’s pursuit of Westpac in the “shiraz and wagyu” lending case, banks became too conservative and squeezed the flow of credit.
Greater emphasis on self-responsibility means lenders will not be penalised if borrowers mislead on their home loan applications, enabling banks to rely on income and expense information provided by borrowers and speeding up the credit approval process.
What does it mean for everyday borrowers?
By simplifying the loan application process for borrowers it will reduce barriers to switching between credit providers, encouraging consumers to seek out a better deal.
What on earth is the “shiraz and wagyu” case?
While the Hayne royal commission ultimately gave banks a reprieve in 2019 from a formal crackdown on responsible lending laws for consumers, it pressured banks to undertake more forensic investigation of loan applicants.
The scrutiny of banker conduct was exacerbated by the Westpac and ASIC responsible lending case.
The legal battle tested Westpac’s argument that the national credit act provides banks with discretion on using benchmarks when assessing whether loans are suitable for customers, and that customers can be expected to reduce historical levels of spending to meet repayment obligations.
In his judgment last year, Justice Perram found a customer’s current living expenses weren’t an important indicator of whether they could afford the loan, contending expenses could be cut if necessary.
“I may eat Wagyu beef everyday washed down with the finest shiraz but, if I really want my new home, I can make do on much more modest fare,” he wrote.
The judges agreed that even though the law requires the bank to make reasonable inquiries about a potential borrower’s circumstances, it does not need to take all that information into account when assessing if a home loan is unsuitable.
“Simply labelling an expenditure as a Declared Living Expense, and the fact that the consumer incurs that expense on their current lifestyle, does not necessarily change its nature from being discretionary,” Justice Lee wrote.
“It is plain that a consumer may choose to, and can be expected to, forgo particular living expenses in order to meet their financial obligations under a credit contract.”
Officially, small business borrowers are already exempt from the consumer-focused responsible lending law, but in practice many sole traders and self-employed people have been affected because they use their mortgages or personal homes as collateral to secure loans.
What rules apply to the banks now?
APRA’s prudential lending standards will become the main line of defence for authorised deposit-taking institutions, governing more than 90 per cent of credit extended to non-business borrowers.
Lenders will continue to be subject to standards for credit risk management and expectations of sound lending practices.
For recognised non-bank lenders, they will be bound by APRA’s prudential lending standards, but these will be policed by ASIC.
Borrowers will continue to be able to raise concerns and seek external dispute resolution via the Australian Financial Complaints Authority.
If you have any specific questions on the reform of the Responsible Lending rules and what the new decision means for you and your home loan, don’t hesitate to get in touch.
All lending subject to status and lenders criteria. Terms & conditions apply. This document contains general information only. Your own personal circumstances have not been considered and you should seek independent financial advice prior to making any decision on a financial product.
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