Self-employed could face limited credit access

Finance experts are warning the National Consumer Credit Protection Act, which came into effect on January 1, could leave the self-employed with less access to credit.

The new consumer credit laws require greater scrutiny of all mortgage, credit card and personal loan borrowers, prompting a warning that some consumers will struggle to access credit.

The National Consumer Credit Protection Package places greater responsibility on lenders to ensure consumers can afford finance.

It is part of a global push by governments to lift the accountability of credit providers after the subprime mortgage crisis in the United States.

Ross McEwan, head of retail lending at the Commonwealth Bank, says the new code is designed to give consumers more protection but might limit credit access for some borrowers.

“There will be a number of customers, particularly those seeking to borrow smaller amounts, shut out from dealing with larger institutions,” he says.

According to McEwan, the new legislation requires far more detail to validate a borrower’s income, which requires extra time and will therefore lower the lenders’ return.

Low-documentation credit is expected to be severely affected as it is typically more difficult for lenders to assess the financial position of self-employed borrowers.

Professor Deborah Ralston, director at the Australian Centre for Financial Studies, says it may no longer be acceptable for a self-employed borrower to issue an accountant’s statement as sufficient verification of income.

“Under responsible lending, an accountant’s statement should not be accepted to verify income unless the lender can attest that the accountant is reputable and has a longstanding relationship with the client,” Ralston says.

“Given that most self-employed applicants seeking a low-doc loan do so because they do not have a demonstrable financial history, such potential borrowers may find access to a mortgage loan no longer possible.”

“Consequently, responsible lending will preclude such applicants from gaining credit for home loans, an outcome which it could be argued is in the spirit of the legislation as it protects borrowers on shaky financial grounds.”

John Kinghorn, chairman of the former RAMS Home Loans, told The Australian Financial Review the law makes it too difficult to issue low-doc credit.

“Ultimately, commonsense will prevail and the NCCP will be amended. But until then, home loans will be denied to the majority of these borrowers,” Kinghorn said.

NAB head of retail banking Lisa Gray says: “We may see less brokers [vying for] banking business as some decide the additional costs of compliance are too much.”