How will proposed “simpler credit” rules affect Australian borrowers?

The federal treasurer has announced plans to make it easier to get credit cards, home loans and personal loans. But it's borrower beware.

The federal government wants to keep credit flowing to Australian households and businesses in an effort to recover from COVID-19.

Credit is currently very cheap. Multiple cuts to the official cash rate have made home loan funding costs cheaper for lenders, in turn making interest rates on home loans lower.

The problem is not that money is cheap, according to the government, but that lenders are increasingly conservative due to a complex regulatory framework.

"The burden of regulation has been increasing and with it have come more obstacles for the consumer, making it harder to access credit," said federal treasurer Josh Frydenberg, writing in The Australian.

"What started a decade ago as a principles-based framework to regulate the provision of consumer credit has evolved into an overly prescriptive, complex, costly, one-size-fits-all regime known as responsible lending obligations."

The government plans to remove the responsible lending obligation to make credit flow.

How will these proposed changes affect borrowers?

These changes will affect home loans, credit cards and personal loans. Borrowers will still be expected to provide details about their income and expenses when applying for credit. But with these changes the lender is under a reduced obligation to investigate an applicant's income and expenses.

The expectation is on the borrower to have the right information.

Home loans

Under the proposed changes, verification of a borrower's income and expenses will be simplified. This will, in theory, make home loan approvals faster and make it easier to get a home loan.

Currently, some lenders scrutinise an applicant's spending very closely, examining individual spending items such as Netflix subscriptions or online purchases. Some lenders only accept regular income rather than assets, and require reassessments if an applicant's circumstances change during an application, even if it's a positive change (such as a promotion).

The government hopes that by removing the responsible lending obligation and simplifying lending regulations, lenders will be able to make fair assessments without being too strict.

Credit cards

The proposed changes will make it easier for customers to get credit cards, or increase their credit limits.

If you were applying for an increase in your credit limit under the new rules you might not have to submit lengthy paperwork to do so.

The changes also mean that it's up to the customer to ensure they provide the correct financial information.

Personal loans

The changes will also make it easier to get certain types of personal loan due to the same relaxation in lender obligations.

But some types of short term finance may be harder to obtain under the changes. Payday loans, for example, will see stronger protections in place, including restrictions on lending to customers who receive income from Centrelink.

Debt collection agencies will also need to be licensed.

Are these changes putting borrowers at risk?

We don't know all the details about the proposed changes and we don't know how lenders will interpret them when the time comes.

Making credit easier to obtain is good news for borrowers who are well informed and are borrowing money they can afford to repay. But the changes will put the burden of responsibility onto borrowers more than before, requiring everyone to know their financial situation and present lenders with accurate information.

It's easy to envision a situation where borrowers end up in trouble.

But some lender obligations will remain in place, including APRA's lending standards. And even the Reserve Bank Governor Philip Lowe said recently that "The way we've translated these [lending] principles into reality needs looking at again". Though perhaps he didn't mean it was time to remove the responsible lending obligation completely.

The Financial Services Royal Commission, which only concluded in 2019, had a lot to say about banking services. But his final report, commissioner Hayne said "I am not persuaded that the NCCP Act's framework for responsible lending to consumers needs change. The responsible lending issues identified during the Commission's hearings will be resolved by banks applying the law as it stands."

A simpler regulatory system doesn't have to mean a riskier one. Only time will tell. The proposed changes to the National Consumer Credit Protection Act 2009 have not yet made it through parliament. Assuming they do, the new credit rules will come into effect on 1 March 2021.