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From “lender beware” to “borrower responsibility” – let the credit flow…

Australia Publication September 2020

Hot on the heels of Thursday's announcement regarding changes to Australia’s insolvency laws (see here) Federal Treasurer Josh Frydenberg announced on Friday 25 September a simplification of Australia’s credit framework to encourage the flow of credit to consumers and businesses, with the intention of stimulating economic recovery following the COVID-19 crisis.

The Government will simplify the credit framework by: 

  • removing responsible lending obligations (RLOs) except for small amount credit contracts and consumer leases
  • ensuring that lenders continue to comply with the Australian Prudential Regulation Authority’s lending standards
  • allowing lenders to rely on information provided by borrowers.

Currently, lenders are required to make reasonable inquiries about a borrower’s requirements and objectives and the borrower’s financial situation and to take reasonable steps to verify the borrower’s financial information. This was to ensure lenders did not provide unsuitable loans to consumers. Over the 10 years that the law on RLOs has been in operation, lenders and borrowers alike have been faced with overly prescriptive, complex and onerous processes that create barriers to the flow of credit, thereby affecting credit and economic growth. 

In a post COVID-19 recovery mindset, the Government is seeking to remove barriers and facilitate a less restrictive process for obtaining credit.

Other changes include:

  • mortgage brokers will not be bound by RLOs
  • additional protections in relation to small amount credit contracts and consumer leases
  • an introduction of new Australian credit licensing requirements for debt management firms.

The Government has noted that significant changes in other areas of law have collectively strengthened protections for consumers, including:

  • the introduction of the product intervention power and the design and distribution obligation
  • the introduction of a best interests duty for mortgage brokers
  • increased civil and criminal penalties
  • enhanced protection for credit card customers
  • the establishment of the Australian Financial Complaints Authority
  • the updated, and Australian Securities & Investments Commission approved, Banking Code of Practice.

Arguably, the biggest change will be the shift away from “lender beware” to “borrower responsibility”. This means that lenders will be able to rely on information provided by borrowers without the need to interrogate that information (unless a lender suspects something is amiss). Accountability will rest with the borrower – it is up to the borrower to provide its lender with true and accurate information that supports the borrower’s credit application.

It is intended that the changes will commence from 1 March 2021. Consultation will be undertaken by the Government prior to the finalisation of any legislation.

To learn more about the recent significant reforms to Australia's insolvency framework, join us at our webinar, 'A DIP of the toe into US Chapter 11 waters for Australia', on Tuesday 29 September at 10.00am AEST.

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