As part of the covid recovery, the Australian Government has announced an improvement to the responsible lending obligations under the National Consumer Credit Protection Act 2009. Purpose being; reducing barriers for Australians to access credit, which helps stimulate economic recovery. When the announcement was made, the government released a factsheet to help consumers understand how improving the flow of credit will impact them. Click here to download the Government Factsheet. As a very brief introductory summarisation of the fact sheet, here are two core components that affect the purchasing of real estate:
An authorised deposit-taking institution (ADI) is a bank or mutual bank that offer deposit accounts to their consumers. ADI’s are regulated by the Australian Prudential Regulation Authority (APRA) which is separate to the responsible lending obligations in the Credit Act. No change in regulation will apply to ADI’s from APRA’s perspective.
A non-authorised deposit-taking institution (non-ADI) is a non-bank, managed investment funds or securitiser that do not offer deposit accounts to their consumers and are therefore not governed by APRA. However, non-ADI’s are required to follow the Australian Consumer Credit Code but with the impending relaxation on the Responsible lending obligations as part of that code, some key APRA regulations will apply. Will it help prospective property buyers? The benefit to prospective home buyers, whether they are owner-occupiers or investors, will trickle into lending criteria. The “reasonable inquiries” test as recommended as conduct for lenders, upheld by ASIC, will likely be changed. This means that the stringent and prescriptive standard that lenders had to adhere to when assessing new finance applications, will be relaxed. The degree to which a borrower's financial situation will be dissected to determine whether an application is suitable/unsuitable for credit will be reduced, allowing an easier flow of credit with faster approvals at a higher volume. For real estate and property professionals working with their clients around the current rigidity throughout the finance application process will be benefited by an increase in favourable lending criteria parameters and higher approval clearances. How much will it really change? Lenders will still be obligated to operate under various regulations from differing government bodies, however the one thing that won’t happen is a ‘free for all’ credit scenario, as touted by some industry commentators. What it will change in real terms is banks will no longer be sifting through bank statements and declining application based on Netflix subscriptions or a weekly Uber eats treat. The change also means that the self-employed, sub-contractor types of workers will now have better chances of obtaining finance, as will first home buyers with no tangible leverage. A summary of an example provided in the fact sheet says: If a first home buyer puts a deposit down after receiving pre-approval from a lender. Prior to settling on his house and land package, he receives a pay-rise. Under the current responsible lending obligations, this would mean that the first home buyer has experienced a change in circumstance and has to start the finance process over again, without a history of earning income at that level, usually resulting in the decline of a finance application. Following the changes, the bank can assess the change has not impacted the first home buyers' borrowing capacity. The Government is aiming for 1 April 2021 as a date for the reform to initiate.