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Here's a quick look at the issues the Federal Government's credit reform is trying to address and how it will impact the everyday borrower.
To infuse liquidity into the economy, the Scott Morrison government recently announced reforms to simplify credit access. The reform seeks to simplify credit access by abolishing 'Responsible Lending Obligations'. Let's look at what this means for the everyday Australian borrower.
The Current Situation
At present, the onus of verifying borrower information lies with the lender. There are two significant concerns with the current method.
- 'Lender Beware' verification approach: Since the entire responsibility for accuracy of 'borrower information' lies with the lender, they typically follow a very detailed and long drawn out processes to cover all bases. Not only does this requirement result in excessive 'Lender Risk Aversion' but also complicates the loan process and increases the turn-around time for the average borrower.
- 'One Size fits all' process: The circumstances of each borrower are unique. Lenders, however, follow the same verification process for all borrowers irrespective of their circumstances. For instance, existing mortgage holders with a strong credit history and savvy investors go through the same amount of scrutiny as a high-risk borrower applying for a payday loan. Using the same process for diverse loan applications once again leads to significant delays for experienced borrowers who may not require the same level of scrutiny.
What the reform aims at doing
The reform proposes the abolishing of the lender's obligation to verify borrower information by shifting this onus to the borrowers themselves. In other words, the borrowers will be responsible and accountable for the accuracy of the information they provide. Through these measures, the reform aims at achieving the following
- A reduction in excessive risk aversion shown by lenders
- A decrease in processing time and costs to issue loans
- Easier access to credit for small business, especially in cases where they use residential property equity to apply for loans
A possible downside of the reform
While many mortgage industry veterans view this move as a welcome step that will benefit the mortgage industry immensely, there are sections of that have voiced concerns about lenders becoming lax and approving loans to borrowers who can't afford the repayments. Experts in favour of the move oppose this view and point out that the reform only looks at shifting the onus of providing accurate customer information to the borrower. It does not absolve lenders of the required due diligence, credit analysis or the impact of credit losses due to defaults. They, therefore, state that this move will only streamline the process to access credit providing the Australian economy with a much-needed post-pandemic boost. Access the government release announcing the reforms HERE.
Seek professional help
The reform is yet to be passed, and the government is still working on the finer details of borrower accountability. However, once passed, if you are considering a home loan, it is best to seek professional advice from a mortgage broker to understand your responsibilities as a borrower.
Reach out to us to understand the best way forward for you as per your circumstances.
The information is a compilation from various sources for your benefit and should not be relied upon in lieu of appropriate professional advice.