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Removal of Safe Lending Laws and Potential Impact on Consumers

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Almost 600,000 Australians thus far have sought protection under safe lending laws. However, the federal government has proposed scrapping the laws, which can have repercussions on many consumers and borrowers in Australia.

The proposal is still moving through the Senate under the purview of the Senate Economics Committee. Following a number of committee hearings in February 2021, more than 20,000 Australians called on the Senators to not only refrain from removing safe lending laws but to strengthen them instead.

Consumer advocates warned that a repeal of the laws could expose thousands of Australians to irresponsible, unaffordable loans and credit card offers. Many of them could, in a moment of desperation, end up with debts that they cannot possibly repay. More than 120 community groups also joined consumers in their plea to leave the laws alone, Get My Refund also joined to stop this.

What Are Safe Lending Laws?

Australia’s safe lending laws were enacted in 2009 as a response to the 2008 GFC (Global Financial Crisis).

Irresponsible lending is widely regarded as the primary cause and accelerant of the GFC. In the aftermath, numerous scandals came to light, revealing how banks and financial institutions were highly irresponsible in putting customers into loans, especially housing loans, that they could not possibly afford or would have severe trouble servicing.

While it is true that the offending financial institutions were tempted by the opportunity to pad their books, the reality is that a number of factors contributed to it. The federal government took action and passed the National Consumer Credit Protection Act (NCCPA) 2009.

The titular safe lending laws are part of the much larger NCCPA. The current proposal is to remove those safe lending laws, not the NCCPA itself.

Among the collection of laws, a significant part explicitly puts the burden on the banks and licensed lenders to make sure that clients won’t end up defaulting or declaring bankruptcy as a result of taking out a loan. The laws impose an array of conservative conditions for lenders to evaluate borrowers’ serviceability before approving a loan.

The result is that credit got tighter, and it became harder to qualify for a loan, so much so that it is much easier for the well-to-do and big businesses to get access to credit than small businesses and regular Australians. The effects of safe lending laws are complex, and they are not all good or all bad.

How Would a Repeal of Safe Lending Laws Impacts Consumers?

First and foremost, the removal of safe lending laws will make it much harder for consumers to redress irresponsible lending on the part of financial institutions.

The risk of winding up in bad loans would increase for vulnerable groups such as the mentally challenged, the financially illiterate, and domestic abuse victims. There will no longer be any legal grounds to prevent lenders from taking advantage of the vulnerable. Banks will face no criminal or civil penalties for approving outwardly irresponsible loans.

Rather than any federal guidelines, each financial institution can have its criteria for assessing borrowing capacity. This means that they can approve a credit card limit that is likely to cause unsuspecting consumers to overextend their credit and face potential financial ruins.

At the core of the repeal, the proposal is the government’s push for “Twin Peaks” regulation, Twin Peaks being APRA (Australian Prudential Regulation Authority) and ASIC (Australian Securities and Investments).

APRA would reprise its traditional role of keeping the system stable, though this could be carried out without regard to individual Australians. ASIC would focus more on ensuring that all stakeholders are responsible and fair in preventing harm to the general public. As usual, these government bodies can enforce laws and regulations and take financial institutions to court if necessary.

Continued Safe Lending

As of now, it remains to be seen if the federal government will proceed with a repeal of the laws. It has yet to pass committee at the Senate, and it is not a given for the proposal to receive the blessings of the Senate Economics Committee.

Those who are for the repeal argue that looser lending is necessary to fuel economic recovery after the pandemic. There are certainly valid arguments for and against it.

What can Australians expect if the laws are to be removed?

Banks and lenders are certain to be more aggressive in marketing and approving new loans and credit cards. It could become much easier for individuals and businesses to get credit. The flip side is that, without safe lending laws, more people may overextend themselves and face insolvency.

One way or the other, Australians can protect themselves by being responsible with their personal finance and not get into more debt than they can handle. Better borrowing facilities can be beneficial if used judiciously.

How can we help?

Our specialists can help you if you think you have ever fallen victim to irresponsible lending, we can discuss and question your financiers to establish if you were lent the correct amounts responsibly. This means that they truthfully assess your financial ability to make the contracted payments. If you have fallen short of your payments or have been in hardship, and you think the information they may have submitted was incorrect, be sure to get in contact with us!