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Responsible lending conduct (Chapter 3 NCCP; ASIC Regulatory Guide 209)

Main Points

  • Credit providers have obligations under the Credit Law in relation to responsible lending.
  • Credit providers must give all consumers they contract with a Credit Guide.
  • Credit providers must not enter unsuitable loan contracts.
  • In order to assess whether a loan is unsuitable a credit provider must:
    • Make reasonable enquiries about the consumer’s financial situation
    • Make reasonable enquiries about the consumer requirements and objectives in seeking a loan
    • Take reasonable steps to verify the consumer’s financial situation.
  • A loan will be unsuitable if:
    • The consumer cannot meet the financial obligations under the contract, or not without substantial hardship
    • The loan does not meet the consumer’s objectives and requirements.
  • Consumers can apply for remedies including changes to the contract and compensation if credit providers breach these provisions.
  • There are additional obligations for payday loans see Chapter 16.

What is responsible lending conduct?

Responsible lending conduct is narrowly defined as a breach of the provisions of the Chapter 3 of the NCCP. Those provisions are confined to rules aimed at “better informing consumers and preventing them from being in unsuitable credit contracts.” Responsible lending under the Credit Law does not encompass broader issues such as the marketing of credit.

Responsible lending obligations are imposed on five different classes of entity:

  • Credit assistance providers
  • Credit providers
  • Lessors under consumer leases
  • Credit representatives of any of the above
  • Debt collectors (disclosure only)

Credit assistance providers are usually brokers and their obligations are covered in more detail in Finance brokers. Lessors are covered in Consumer leases. Debt collectors are covered in Debt collection. Credit representatives may play a role in fulfilling the obligations of the licensee who appoints them (credit provider, lessor or broker), but are also obliged to give additional disclosure. This is covered below but applies equally to a credit representative authorised by a broker or lessor. The responsible lending obligations of credit providers are covered in this chapter. There are additional responsible lending obligations for payday lenders. See Payday lending/Fringe lending.

ASIC has given some guidance as to how it will interpret the responsible lending provisions in Regulatory Guide 209 – Credit Licensing: Responsible Lending Conduct (“RG 209”), a copy of which can be downloaded from the ASIC Web site (www.asic.gov.au).

Why is responsible lending conduct important?

Responsible lending conduct represents an important step forward in consumer protection. It represents an attempt to ensure that consumers are only given loans they can afford to repay.

For caseworkers, it represents an opportunity to challenge loans where the credit provider has given the consumer an unsuitable loan.

Required disclosures

Credit providers are required to give consumers a Credit Guide. The Credit Guide (s. 126 of NCCP) must:

  • Be in writing
  • Specify the credit provider’s name, contact details, and licence number
  • Provide details of the credit provider’s–
    • Internal Dispute Resolution Procedures
    • The EDR of which the Credit Provider is a member
  • Inform the consumer of the prohibition on credit providers entering contracts that are unsuitable for the consumer and of the consumer’s rights in relation to requesting a copy of the assessment.

Failure to comply means that the credit assistant may be liable for a penalty. Penalties can only be obtained through court or by ASIC. Consumers can also apply for compensation as part of a dispute if they can demonstrate a loss.

Credit representatives

If the credit provider’s credit representative gives the consumer the credit provider’s Credit Guide, then s/he must also give the consumer a copy of the credit representative’s Credit Guide.

The credit representative’s Guide must:

  • Be in writing
  • Specify the credit representative’s name, contact details, and credit representative number
  • Give information about any fees or charges payable for the credit representative’s services
  • Give information about the licensees the credit representative represents – they must be listed by name if there are less than six, or if there are more than six, the six licensees for whom the credit representative believes it conducts the most business
  • State the credit activities the credit representatives is authorised to conduct for these licensees
  • Specify the credit representative’s–
    • Internal Dispute Resolution Procedures
    • EDR of which the credit representative is a member

Credit representatives are required to have a unique identifier, the credit representative’s number, and to be a member of an EDR scheme in their own right.

Failure to comply means that the credit representative may be liable for a penalty. Penalties can only be obtained through court or by ASIC. Consumers can also apply for compensation as part of a dispute if they can demonstrate a loss.

While there is no limit on the number of licensees a credit representative can act for, each licensee must consent to the credit representative acting for any other licensee(s) and each licensee is potentially jointly and severally liable for their conduct. This means that it will be unusual in practice for a credit representative to act for more than one licensee.

The assessment

Credit providers must make an assessment as to whether the loan is unsuitable before entering a contract with a consumer (s. 129 NCCP). The assessment must be made no more than 90 days before the credit contract is entered into to be valid (s. 128 NCCP).

In making an assessment, the credit provider must (s. 130 NCCP):

  • Make reasonable inquiries of the consumer’s requirements and objectives
  • Make reasonable inquiries about the consumer’s financial situation
  • Take reasonable steps to verify the consumer’s financial situation

The consumer can request a copy of the credit assessment either before the credit contract is entered, or up until 7 years after the date of the credit contract (s. 132 NCCP). The credit provider must give the consumer a written copy of the credit assessment if the consumer requests a copy of it.

It is likely that the credit assessment will be very generic in nature as credit providers need to incorporate this into their procedures. This assessment may provide vital evidence in the case of a dispute. Caseworkers should request a copy of the assessment from the credit provider, as part of considering whether to raise a dispute in relation to an arguably unsuitable loan.

Failure to make the assessment attracts a penalty and could result in compensation for the consumer if a loss can be shown.

Unsuitable loans

A loan or increased credit limit arranged by a credit provider may be unsuitable if (s. 131(2) NCCP):

  • The consumer could not comply with the consumer’s financial obligations under the contract, or only with substantial hardship; or
  • The loan will not meet the consumer’s requirements and objectives. Arguably not unsuitable is a lesser standard than a positive obligation to place a consumer in a suitable loan. Certainly, it is not the same as a requirement to place a consumer in the most suitable loan.

The credit provider is prohibited under s. 133 of the NCCP from entering unsuitable loan contracts, including increasing a limit on an existing contract if doing so would make the contract unsuitable.

There are two main categories of loans that will be arguably unsuitable: loans the consumers cannot afford and loans that otherwise do not meet their needs and requirements. If a loan fails the first test, then presumably it would also fail the second.

Loans that the consumer cannot afford

This could occur in a number of different ways:

  1. The credit provider fails to make reasonable enquiries as to the consumer’s financial situation.
    This has been a common practice in relation to credit card limit increases, for example, where the credit provider has some information about the consumer, specifically their repayment history, and decides not to make any further enquiries of the consumer in relation to their financial situation. This type of failure to make reasonable enquiries is arguably a breach of the responsible lending conduct requirements.
  2. The credit provider performs the assessment but receives incorrect, misleading, or inconsistent information.
    Credit providers are required by s. 130 of the NCCP to take reasonable steps to verify the consumer’s financial situation. Therefore, the fact that a broker, for example, has completed an application form with false information, or a consumer has made a genuine error on the face of the application (eg, stating their fortnightly income as weekly), does not excuse a credit provider from relying on this false information. This is perhaps the biggest difference between the new Credit Law and the old law under the Code, where the credit provider is only required to make reasonable enquiries of the debtor.
    Typical low documentation loans, or no documentation loans, where the consumer self–certifies in relation to income are unlikely to satisfy the responsible lending conduct obligations under the Credit Law without some further verification. Further information on what constitutes reasonable verification is covered below.
    Of course, consumers who deliberately supply false information are at risk of being charged under the criminal law, and may have any compensation under the credit law reduced because of their contribution to the loss.
  3. The credit provider performs the assessment, and takes steps to verify the consumer’s information, but is provided with false information.
    A completely fraudulent loan application, for example, with fake pay slips and bank statements provided, is unlikely to cause the credit provider to fall foul of the responsible lending obligations unless there is something on the face of the information that should have alerted the credit provider to the problem. This is substantially the same as the previous situation under the Code. The only difference is that any broker who has committed fraud, or aided and abetted a fraud, is more likely to suffer some consequence, including loss of license. The consumer may also have some recourse against the broker, depending on the level of the consumer’s complicity in the fraud. See Finance brokers.
    Again, consumers who deliberately supply false information are at risk of being charged under the criminal law, and may have any compensation under the credit law reduced as a result.
  4. The credit provider has made the assessment, but the consumer and the credit provider disagree whether the loan would have caused “substantial hardship” to repay
    “Substantial hardship” is not defined in the Act and credit provider’s interpretations are likely to vary. It may be necessary for EDR or Court to determine the matter to settle arguments on the meaning of substantial hardship. See below for a discussion on the meaning of substantial hardship.
  5. Where the loan is structured to disguise the fact that the consumer cannot repay without substantial hardship.
    Examples may include:
  • A home loan where there are interest only payments for a specified period followed by principal and interest payments that the consumer cannot afford
  • A home loan where there are interest only payments for a period, or a repayment holiday (and interest is essentially capitalised) and, the entire loan is repayable as a lump sum at the end of the term (the term may be as short as 1–5 years)
  • A large balloon payment at the end of a car loan or lease12

It will be more difficult to establish that such loans are unsuitable than in the situation where the consumer cannot meet the repayments, but there is some helpful information below and in the How to Guides.
In all cases where the consumer cannot afford a loan, you should argue both that they cannot meet their financial obligations without substantial hardship AND that the loan does not meet their objectives and requirements. You should also argue that the loan is an unjust contract under s. 76 – See Unjustness.

12 - This particular example is used in both the RG 209 and the Explanatory Memorandum to the Act when it was introduced into parliament. This does not mean that balloon payments are illegal, only that the credit provider needs to have considered the consumer’s ability to meet any balloon payment.

What are reasonable enquiries?

The NCCP does not define reasonable enquiries, but ASIC has given some guidance in RG 209.

ASIC suggests that the following enquiries would be prudent in relation to the consumer’s financial situation (RG 209, p.15 – 17):

  • The consumer’s amount and source of income, including the length and nature of their employment
  • The consumer’s fixed expenses such as, for example, rent, repayments on other loans/ debt, child support, insurance
  • The consumer’s variable expenses
  • Any existing debts that are to be repaid from the loan
  • The consumer’s credit history
  • The consumer’s age and number of dependents
  • The consumer’s assets
  • Reasonably foreseeable changes, such as the end of a honeymoon period on an existing loan, pending retirement, or the end of seasonal employment
  • Geographical factors, such as remoteness (which may increase expenditure)
  • Indirect income sources, such as income from a spouse, where the income is reasonably available to the consumer.

In relation to their requirements and objectives, ASIC lists (RG 209, p. 18):

  • The amount of credit sought or the maximum sought (in the case of a credit card for example)
  • The timeframe for which it is required (for example, the term and the date by which the loan is required)
  • The purpose and the benefit sought
  • Whether the consumer seeks particular product features or flexibility, and understands the costs of these features and any additional risks
  • whether the consumer requires any additional expenses, such as premiums for insurance related to the credit or consumer lease, to be included in the amount financed, and understands the additional costs of these expenses being financed.

However, RG 209 also says that these obligations are “scalable” (that is, what is required may vary according to the circumstances). Relevant factors to be taken into account are (RG 209, p.13):

  • The potential impact on the consumer if the credit contract is unsuitable
  • The complexity of the product
  • The capacity of the consumer to understand the product (only if any incapacity is evident)
  • Whether the customer is a new customer or an existing customer (that is, how much information the credit provider already holds about the customer)

RG 209 suggests that a reverse mortgage, or a debt consolidation, would require far more enquiries about the customer’s financial situation, requirements, and objectives, than a standard personal loan.

Remember: Regulatory guidance is not the same as the law. However, it may be influential in negotiations and in an EDR dispute – at least until a court makes a decision that contradicts any regulatory guidance.

What is reasonable verification?

Again, the NCCP is silent on what constitutes reasonable verification, but ASIC has given some examples (RG 209 Table 4, p.21-22).

Type of consumer Possible verification
PAYG employees

Recent payslips/payroll receipts

Confirmation of employment with employer

Self–employed consumers

Recent income tax returns

Statement from the person's accountant

Business Activities Statements

All consumers 

Credit reports

Information from other credit providers

Bank account, credit card records held by the credit provider about an existing customer

These are only given as examples and it is emphasised that the standard must be that of a reasonable and prudent credit provider. Further verification is also recommended where the credit provider discovers inconsistent information, or information that appears outside a standard range, such as an excessively high income, or an income that seems very high having regard to the consumer’s stated occupation.

What is substantial hardship?

While the NCCP does not define substantial hardship, there is a presumption that if the only way a consumer can afford to repay a loan is by selling their principal residence, then the consumer cannot afford the loan without substantial hardship unless the contrary is proved (ss. 131(3) & 133(3) NCCP). This should be especially useful in fringe lending scenarios such as where a short–term loan is secured over the consumer’s home and the consumer is inevitably forced to sell the home at the end of the term (equity stripping), but may also be useful in the case of other loans such as credit cards if the consumer can clearly only repay the principal debt by selling their home.

ASIC has also provided some guidance in relation to substantial hardship in Regulatory Guide 209. Credit providers are expected to have detailed policies and processes to assess whether a consumer will be able to repay a loan, including processes for calculating what funds a person needs to pay for basic living expenses, in order to determine at what level a consumer can make repayments. Such processes:

  • Must have reference to the consumer’s situation as ascertained from reasonable enquiries;
  • Must involve some process for enquiring about living expenses or estimating living expenses using a benchmarking tool such as, for example, the Henderson Poverty Index plus a margin, or the maximum level of benefits for a person or family in the consumer’s situation; and
  • Should generally involve the consumer meeting the repayments from income rather than assets (with obvious exceptions such as reverse mortgages and bona fide bridging loans).

In advocating for a consumer, you could argue:

  • That the credit provider has failed to make reasonable enquiries as to the consumer’s actual living expenses (arguably this should include specific questions about their cost of housing if it is not a housing loan and other loan/lease commitments, in addition to general living expenses); and/or
  • That the credit provider has failed to take into account the information it ascertained via those reasonable enquiries in determining the level of repayments the consumer could make; and/or
  • That the credit provider should have applied an appropriate benchmark (but did not) as a safety mechanism to prevent consumers generally from inadvertently underestimating their expenditure, or presenting a best case scenario in order to get the loan that will not withstand the test of time over the term of the loan; and/or
  • That a particular benchmark applied by the credit provider is inadequate, or inadequate in the circumstances (it may be difficult to obtain evidence of what benchmark the credit provider has applied but this may become apparent as submissions are exchanged).

It is important that you gather the best evidence you can of the consumer’s actual costs at the time the loan was taken out, and any negative impact on the consumer experienced as a result of meeting the repayments (if they have actually met any repayments).

It would be very difficult to succeed in a dispute on this point if the consumer has underestimated their living expenses on the application, AND all the right questions have been asked, AND the credit provider has applied a recognised benchmark to determine minimum living expenses. It is important that you get a copy of the application to get evidence of what questions were asked and what replies were given.

Loans that do not meet the consumer’s objectives and requirements (other than because the consumer cannot afford the loan)

This is another way in which the new law has at least the potential to expand the types of loans that can be challenged beyond what was available under the unjust contracts provisions of the Code. There are many ways in which loan may be affordable and yet not meet a consumer’s objectives and requirements. For example:

  • The consumer may have requested a loan to purchase a fridge valued at $1,000 and be given a credit limit for $8,000
  • The consumer wanted interest–free finance to purchase a computer but ended up with a lease with no right to own the computer
  • The consumer may have wished to pay their home off faster and have been given a line of equity loan with a linked credit card in circumstances where a standard home loan with redraw may have been both cheaper and more effective in assisting them to achieve their objective
  • The consumer may have wanted a home loan to pay off their home over a long term (such as 25 years) but is sold a loan that is structured as an “on demand” facility that can be recalled at any time regardless of whether the consumer is in default
  • The consumer may have wanted a small loan repayable over several months, but is instead given a loan that must be repaid in full within their pay cycle
  • The consumer wants to get a loan to purchase a car and ends up with a consumer lease

There are no doubt many other possible scenarios.

Tip

Line of Credit loans for the purchase of a home, or refinance of a home loan, which do not have a term or provision for repayment of the loan over a term present a particular challenge (the loan can usually be drawn on and repaid continually up to the specified credit limit, just like a giant credit card).

It could be argued that this is simply another way of structuring a loan to disguise the fact that the consumer cannot afford it. However, credit providers will argue that some more sophisticated borrowers are content not to pay off their home and to rely on the capital gain to improve their financial position over time.

The best way to dispute such a loan is to argue that the consumer’s objectives and requirements included paying off their home over time (if this is in fact the case). You will need a copy of the loan application, any assessment done by the credit provider, and the broker if applicable, and any other evidence from the consumer about what was said at the time the loan contract was made. If the consumer could not afford principal and interest payments on the same loan amount, then it should also be argued that the consumer could not afford to repay the loan without substantial hardship.

What if the loan is (arguably) unsuitable?

The consumer can seek an order from the court:

  • Declaring part or all of the contract to be void
  • Varying the contract
  • Refusing to enforce one or more terms in the contract
  • For the credit provider to refund money or return property
  • For payment of loss or damage
  • For the credit provider to supply a specified service

It is likely that the remedy will be that the consumer is put back in the position they would have been but for the unsuitable loan. In practice, the remedies are likely to be similar to those available for unjust contracts (s. 76 NCC; s. 70 the Code). Examples of what this means appear in Unjustness.

EDR Schemes consider they are more limited in what they will do. For instance, an EDR Scheme will usually refuse (and argue it does not have the power) to:

  • Make any part of the contract void
  • Vary the contract (apart from the ability to determine a variation on the grounds of hardship see Financial hardship)
  • Refuse to enforce one or more terms in the contract (apart from the ability to order compensation)
  • Supply a specified service

EDR Schemes do have the power to:

  • Refund money
  • Order compensation
  • Require the return of goods, cars, or even real property

The time limit for taking action in relation to breaches of the responsible lending obligations is six years from the date of the breach. If the conduct occurred more than 6 years ago, an application under the unjust contracts provisions (ss. 76 & 77 NCC) will usually be the only option.

When did the responsible lending provisions start?

The responsible lending conduct provisions generally apply only to loans and leases entered from 1 January 2011.

For brokers and non–bank credit providers (basically, any credit provider who is not a bank, credit union, building society or registered finance company) the requirement to assess whether a loan is unsuitable commences on 1 July 2010, but the disclosure provisions do not commence until 1 January 2011.

If the contract was made prior to the relevant date, your only option is to argue that the contract is unjust under s. 76 of the NCC (see Unjustness). If there is a dispute about when the contract was actually entered, get legal advice.

What and who isn’t covered by responsible lending?

Responsible lending under the Credit Law does not cover:

  • Marketing, which can only be dealt with under the ASIC Act provisions in relation to misleading and deceptive conduct and representations and the NCC, as opposed to under the responsible lending provisions (ASIC Act, ss. 12DA and 12DB; s. 154 NCCP); or
  • Debt collection, which is subject to the hardship provisions of the NCC as discussed above, the ASIC Act (s. 12DJ) and the Joint ASIC/ACCC Guidelines under that section; or
  • Credit advice, which is not covered unless it involves suggesting a consumer enter, remain in, or increase the credit limit of, a particular credit contract or consumer lease, with a particular credit provider or lessor, and/or assisting the consumer to do so.