Government proposes changes to smooth the path for borrowers

The government has announced reforms to facilitate an increased flow of credit to households and businesses.

A key change will be that banks and other lenders will be able to rely on the information provided by borrowers, unless there are reasonable grounds for doubting it.

The current practice of “lender beware” will be replaced with a “borrower responsibility” principle, under which borrowers will be made more accountable for providing accurate information to inform lending decisions.

The new arrangements will be designed to ensure credit assessment is more attuned to the borrower’s needs and the credit product.

At present lenders have to obtain and verify extensive information about the expenses of borrowers, regardless of the loan product involved. Under the new system the obligations on the lender will be proportionate to the risk. This will simplify the assessment and speed up the process.

The government says the reform should reduce the “excessive risk aversion” that had been restricting the flow of credit.

Reserve Bank Governor Philip Lowe said recently: “We can’t have a world in which, if a borrower can’t repay the loan, it’s always the bank’s fault. On a portfolio basis, we want 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 probably swung a bit too far to blaming the bank if a loan goes bad.”

The government says its cutting of red tape under the new regime will reduce the cost and time it takes consumers and businesses to access credit.

The changes are also aimed at strengthening consumer protection for those who need it. This will include protection from predatory behaviour by debt management firms.

The announcement of the new credit regime follows the government earlier this week outlining proposed changes to the insolvency provisions, to give distressed businesses their best chance of pulling through the recession.

Treasurer Josh Frydenberg said that as the country recovered from the pandemic, “it is more important than ever that there are no unnecessary barriers to the flow of credit to households and small businesses.”

“With billions of dollars extended to borrowers each month, credit underpins the Australian dream of home ownership while allowing businesses to invest, grow and create jobs,” he said.

“By simplifying the loan application process for borrowers it will reduce barriers to switching between credit providers, encouraging consumers to seek out a better deal.”

The government says these will be the most significant changes to the credit regime in a decade.