Responsible Lending Laws Changes 2021: What It Means for You
- February 8, 2021
- Posted by: Serres Property Finance
- Category: News
Big changes to lending rules were on the way in 2021.
In September 2020, the Federal Government announced plans to wind back Australia’s responsible lending laws by March 2021. The proposal represented the most significant shift in consumer lending regulation since the laws were tightened after the Global Financial Crisis in 2009.
If you were looking to get a home loan, refinance or take out any form of credit, these changes directly affected how banks would assess your application. Here is what the laws involved, what the proposed changes meant and what protections remained in place for borrowers working with a mortgage broker.
What are these laws?
Australia’s responsible lending obligations were introduced under the National Consumer Credit Protection Act in 2009, following the Global Financial Crisis. The rules required lenders to take active steps to verify that a proposed loan was genuinely suitable for the borrower.
In practice, lenders had three obligations before approving credit:
Over time, especially following the Banking Royal Commission, lenders interpreted these rules very conservatively. They began conducting detailed reviews of bank statements and living expenses, going well beyond what the law strictly required. This added time to the approval process and led to some creditworthy borrowers being declined. If you have ever wondered why a home loan was declined, tightened responsible lending enforcement was one contributing factor during this period.
Understanding how lenders assessed applications helps explain why the Government decided to review the framework. Our guide on common reasons a home loan gets declined covers many of the factors lenders weigh up.
What changes for you
The proposed reforms were designed to shift the balance of responsibility. Under the changes, the onus would fall more heavily on the borrower to ensure they could afford a loan, rather than requiring lenders to verify everything independently.
For borrowers, the practical changes were expected to include:
However, many details were still to be worked out. The core principles of responsible lending were not expected to disappear entirely. Lenders would still need to assess creditworthiness. The key change was in the method and depth of that assessment, not in whether it was done at all.
Why the wind-back
The Government’s stated reason for the change was economic recovery. Australia was in recession following COVID-19, and keeping credit flowing through the economy was seen as essential to supporting households, businesses and the broader recovery.
There were two key concerns driving the review:
Critics of the changes argued that winding back consumer protections too quickly carried its own risks. The debate reflected a genuine tension between supporting economic recovery and protecting vulnerable borrowers from taking on debt they could not sustain.
Brokers still protect you
One important protection remained unchanged regardless of the responsible lending reforms: the Best Interest Duty, which came into effect from 1 January 2021 for mortgage brokers.
Under the Best Interest Duty, mortgage brokers are legally required to act in your best interests when recommending a home loan. This means a broker cannot recommend a product simply because it pays them a higher commission. They must recommend the loan that genuinely suits your needs, goals and financial situation.
So while the changes to responsible lending reduced the obligations on lenders, borrowers working with a mortgage broker retained strong protection through a separate legal duty.
The changes to responsible lending rules may also affect how much you can borrow. If you are curious about why borrowing power changes over time, that article explains the key factors in detail. You can also use our borrowing power calculator to see what your numbers look like under current conditions.
Common questions
Q: Did the responsible lending laws actually change in March 2021?
The Government announced the changes in September 2020 and set a March 2021 target. However, the legislation to implement the changes was ultimately not passed by the Senate. The responsible lending obligations largely remained in place, though lenders did ease some of their more stringent expense verification practices in practice over this period.
Q: Will removing responsible lending laws mean I can borrow more?
Not necessarily. Even with reduced obligations on lenders, APRA’s prudential standards and each lender’s own credit policies still govern how much they will lend. Changes to responsible lending affected the process of assessment more than the ultimate lending limits. Your actual borrowing capacity depends on your income, expenses, existing debts and the lender’s serviceability calculations.
Q: Does the Best Interest Duty apply to all mortgage brokers?
Yes. All mortgage brokers operating in Australia are required to comply with the Best Interest Duty, which took effect from 1 January 2021. The duty requires brokers to prioritise your interests over their own when making a loan recommendation. This applies regardless of what happens with responsible lending obligations on lenders.