Australians will soon find it easier to take out a mortgage under Federal Government plans to relax credit laws in a bid to get the economy moving amid the COVID-induced recession.

The changes will remove the burden on the banks to ensure people don't take out home loans they can't afford and shift the responsibility onto the borrower to be honest about their ability to service a loan

This means banks will need to rely on borrowers to be honest about their income and expense information provided and won't face penalties if borrowers lie on their mortgage application.

Mr Frydenberg said the changes will speed up the credit approval process and remove a lot of red tape.

"As Australia continues to recover from the COVID-19 pandemic, it is more important than ever that there are no unnecessary barriers to the flow of credit to households and small businesses," Frydenberg said.

"Maintaining the free flow of credit through the economy is critical to Australia's economic recovery plan."

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Important Information and Comparison Rate Warning

Base criteria of: a $400,000 loan amount, variable, fixed, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. However, the ‘Compare Home Loans’ table allows for calculations to be made on variables as selected and input by the user. Some products will be marked as promoted, featured or sponsored and may appear prominently in the tables regardless of their attributes. All products will list the LVR with the product and rate which are clearly published on the product provider’s website. Monthly repayments, once the base criteria are altered by the user, will be based on the selected products’ advertised rates and determined by the loan amount, repayment type, loan term and LVR as input by the user/you. *The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. Rates correct as of . View disclaimer.

The changes come off the back of Reserve Bank governor Philip Lowe telling a parliamentary committee last month that the responsible lending pendulum has swung too far.

“We can’t have a world in which, if a borrower can’t repay the loan, it’s always the bank’s fault,” Lowe said.

“On a portfolio basis, we want the banks to make some loans that actually go bad, because if a bank never makes a loan that goes bad, it means it’s not extending enough credit.

“The pendulum has swung a bit too far in blaming the bank if a loan goes bad because the bank didn’t understand the customer. [The mindset of some] is that if the bank had done proper due diligence, the bank would never had made the loan.”

Writing in The Australian, Mr Frydenberg said the banks have taken responsible lending obligations too far.

"It is common for a person applying for a mortgage to be asked to explain individual discretionary spending and to provide verification of Netflix and Spotify subscriptions, UberEats or MenuLog usage or other details — all for the lender to be confident that it cannot be held liable in the event the borrower cannot repay the loan," Mr Frydenberg said.

"It is no surprise that Australians have found it more difficult to obtain the credit they are seeking, with many giving up."

Consumer groups slam announcement

Already the response to the announcement has been mixed, with many consumer groups slamming the move to remove responsible lending laws.

Karen Cox, CEO of Financial Rights Legal Centre, said what people need right now is more income - not more debt.

"The problem people are having right now is too much debt and not enough income. The Government’s solution is to take on more debt with fewer protections. Unsustainable debt hurts real people and is a short-sighted fix for a flailing economy," Ms Cox said.
“Watering down credit protections will leave individuals and families at severe risk of being pushed into credit arrangements that will hurt in the long term.
“Our service helped thousands of Australians drowning in debt and we continue to see legacy debt that predates the Hayne Royal Commission. How can we have so quickly forgotten the hard lessons from the GFC and the Hayne Royal commission?”

CEO of Consumer Action Gerard Brody meanwhile said relaxing credit laws isn't the answer.

“The Commonwealth Bank recently said that the flow of credit is above pre-COVID levels and that lending is growing at a strong pace. And none of the big banks opposed the responsible lending laws at the recent House of Economics committee hearings," Mr Brody said.
“Leaving people with more debt they can afford is no way out of an economic crisis. Pushing too much credit that people can’t afford to repay creates hardship, stress, anxiety for individuals and families.”

Other groups including the Customer Owned Banking Association (COBA) have welcomed the announcement.

“We look forward to seeing the detail of the Government’s proposals but the objective of simplifying unnecessarily complex regulation has our strong support,” said COBA CEO Michael Lawrence.

"Customer owned banking institutions have always been responsible lenders – putting our customers first is part of our DNA. We certainly don’t need prescriptive and complex laws to make sure that we lend responsibly.

“The Government is right to take decisive action to promote lending at a time of great uncertainty and the biggest peacetime economic contraction since the 1930s."

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