The Australian government has announced it will wind back responsible lending laws, making it easier to access credit

Treasurer Josh Frydenberg (SMH, Dominic Lorrimer)
  • The federal government is loosening credit restrictions in an attempt to encourage lending.
  • On Friday Treasurer Josh Frydenberg announced the responsible lending laws would be would back, having become “an overly prescriptive, complex, costly, one-size-fits-all regime”.
  • There is some anxiety over the consequences of encouraging greater lending during a recession.
  • Visit Business Insider Australia’s homepage for more stories.

In an effort to kickstart the economy, the Morrison government will axe responsible lending laws to make it easier to get a loan.

On Friday, the government announced it would overhaul lending regulations, which govern how lenders assess customer applications for everything from mortgages to credit cards and beyond.

If they pass, the changes to the Credit Act will aim to simplify the lending process, eliminate the doubling up of regulators, and avoid court disputes, such as the now-infamous Wagyu and Shiraz furore.

“Lenders have become increasingly risk-averse and overly conservative. As a consequence, borrowers, irrespective of their financial circumstances, have faced an ever more intrusive, difficult and drawn-out approval process,” Treasurer Josh Frydenberg wrote in an opinion piece.

Frydenberg said the changes would end what had become “an overly prescriptive, complex, costly, one-size-fits-all regime”.

In recent years, the guidelines have been expanded so that banks can ask potential borrowers to give up things like Netflix subscriptions and private schools to get a loan.

Users of buy now, pay later platforms, and food delivery services can also be penalised.

It’s caused some grief between banks and regulators.

The so-called Wagyu and Shiraz ruling, made in an ill-fated case brought against Westpac by ASIC, decided that ultimately Australians should be allowed to borrow and cut their spending as required. In other words, not have their loan rejected because banks didn’t like some of their discretionary spending.

Will it do more good than harm the economy?

The argument is, in so many words, more credit translates to more spending.

The changes were immediately welcomed by the construction industry, sure to be one of the chief beneficiaries of the writing of more mortgages.

“It is good to see the Federal Government is giving banks flexibility to deal with applications on a case by case basis which should result in lenders providing mortgage finance to more people,” Master Builders Australia CEO Denita Wawn said.

From a broader economic perspective, it’s backed up somewhat by the Reserve Bank. Governor Phillip Lowe observed last month that, “the way we’ve translated these principles into reality needs looking at again.”

While his pleas for more fiscal spending have fallen on deaf ears, Canberra appears to have at least heeded that message.

However, there is understandable anxiety are what more credit may mean as Australia lumbers into a recession.

As many as 650,000 Australians are struggling to service existing loans as is and are expected to defer repayments into next year.

With unemployment set to hit 10%, and government support to be wound back over the next six months, there are likely to be others yet who might join them.

In terms of mortgages, there are also question marks over whether it’s truly needed. The latest ABS lending figures showed home lending enjoyed its biggest ever rebound in July, as owner-occupiers pile into the market without any encouragement.

Loosening credit regulations could simply push more people into getting leveraged, raising Australia’s already sky-high household debt at a time when servicing that debt is becoming increasingly difficult.

Nonetheless, this is the path the federal government has chosen to go down.