Last week marked the beginning of the Federal Government’s consultation period on proposed Consumer Credit reforms. While the proposed changes are not expected to take effect until 1 March 2021, it’s arguable that the effects of the changes could boost consumer confidence earlier.
In our role as a private lending manager, TierONE Capital is constantly assessing the risks and overall viability of lending applications. One of the key risks we assess, in relation to construction in particular, is the marketability of the end product. Given the proposed changes are largely aimed at reducing the complexity of the existing credit framework, we expect the risks associated with end product marketability of residential properties to be somewhat diminished, providing greater comfort to both us and our investors.
In September, Treasurer Josh Frydenberg announced plans for the removal of responsible lending obligations from the National Consumer Credit Protection Act 2009 (NCCP). The initiative is in line with economic stimulus measures introduced by the Government and seeks to simplify the credit approval process, resulting in an increased flow of credit through the economy thus:
- Reducing the time and cost of credit assessments for consumers and businesses;
- Reducing red tape for consumers;
- Improving competition by making it easier for consumers to refinance between lenders; and
- Enhancing access to credit for small businesses.
Current regulations were largely implemented a decade ago in response to the effects of the Global Financial Crisis. In announcing the reforms, the Treasurer labelled the current obligations as “overly prescriptive, complex and unnecessarily onerous”. This statement rings true through the ‘one size fits all’ approach which has arguably forced banks into being overly diligent in the assessment of credit applications regardless of the level of risk. Low levels of credit loss and defaults are indicative of the increasingly risk-averse nature the banks have adopted over recent years in their effort to meet responsible lending obligations.
The overhaul of responsible lending obligations will switch the focus from ‘lender beware’ to a ‘borrower responsibility’ principle. The onus will move back to borrowers, with banks being able to rely on information provided by the borrower, unless they have reasonable grounds to suspect it is unreliable.
There are some assertions by consumer groups that the changes will lead to a credit ‘free for all’. However, some current measures will be retained and new measures adopted to ensure a more level playing field is in place for stakeholders. These include:
- Ensuring that Authorised Deposit-taking Institutions (ADIs) continue to comply with the Australian Prudential Regulation Authority’s (APRA) lending standards;
- Applying key elements of APRA’s ADI lending standards to non-ADIs; and
- Maintaining, and in some cases strengthening, the responsible lending obligations for lenders providing high risk products such as Small Amount Credit Contracts (SACCs) and consumer leases.
The proposed changes will strengthen the mortgage broking and lending sectors and have been largely welcomed by the Mortgage & Finance Association of Australia (MFAA), an industry body representing over 13,000 brokers Australia wide.
The team at TierONE Capital awaits the rollout of the amendments and looks forward to offering our clients opportunities to invest in a newly stimulated market.
Feedback on the planned reforms can be submitted by stakeholders and interested parties until 20 November 2020. More information can be found at https://treasury.gov.au/consultation/c2020-124502.
If you would like to find out more about TierONE Capital and how we can assist with your next project, you can reach out to us here.
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