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Responsible Lending Obligations

The responsible lending obligations are contained in Chapter 3 of the National Consumer Credit Protection Act 2009 (Cth) (“the Act“).

Licensees who provide credit assistance or issue credit to consumers are required to:

  • Refrain from engaging in conduct in relation to unsuitable credit products and credit limit increases;
  • Gather certain information about the consumer by making reasonable inquiries and taking reasonable steps to verify the information obtained;
  • Assess whether a credit product or credit limit increase is unsuitable for the consumer; and
  • Provide a written copy of the assessment upon request.

Who do the Responsible Lending Obligations apply to?

The obligations apply to:

Credit Providers

Such as lenders, small amount lenders and finance companies

Lessors under Consumer Leases

Credit Assistance Providers

Such as mortgage brokers and finance brokers

The obligations only apply to consumer credit products regulated by the Act – meaning credit products provided to consumers or strata corporations for personal, domestic or household purposes, or for the purchase or improvement of residential investment property.

The responsible lending obligations apply when credit licensees engage in the following conduct:

  • For credit assistance providers – when suggesting or assisting a consumer to apply for a credit product or increase a credit limit;
  • For credit providers or lessors – when entering into a credit product with a consumer, increasing a credit limit or making an unconditional representation to a consumer that they will be eligible to enter into the credit product.

The responsible lending obligations do not apply to credit licensees that do not engage in conduct which triggers the obligations – for instance, credit intermediaries who do not provide credit assistance to consumers.

When will a credit product be unsuitable?

The Act prescribes a test for unsuitability where:

  • The consumer will:
    • be unable to comply with their financial obligations under the credit product; or
    • only be able to comply with their financial obligations under the credit product with substantial hardship; or
  • The product will not meet the consumer’s requirements or objectives.

In June 2023, new legislation in relation to Small Amount Credit Contracts (“SACCs“) repealed the rebuttable presumption that a SACC was unsuitable for a consumer where the consumer had two or more other SACCs.

A full responsible lending assessment must now be completed for all SACCs. The same legislation introduced new requirements in relation to consumer leases, requiring lessors to:

  • document a full responsible lending assessment
  • obtain and consider a consumer’s account information for the preceding 90 days in the course of verifying a consumer’s financial situation.

Making reasonable inquiries

Licensees are required to make reasonable inquiries about a consumer’s:

Requirements and Objectives

Financial Situation

Inquiries should be carried out within 90 days (or 120 days) of making an assessment about whether the credit product is unsuitable for the consumer. The purpose of the inquiry is for licensees to:

  • determine and understand why a consumer is seeking a credit product and
  • clarify the consumer’s ability to meet the repayment obligations and pay any fees and charges associated with the product.

Licensees also need to verify the information received from consumers about their financial situation. The verification requirement is designed to ensure the licensee is taking into account reliable information when making their assessment.

What information do you need from Consumers?

information gathering

ASIC’s guidance notes that Licensees will need information about:

  • The amount of credit the consumer needs;
  • The timeframe for which the credit product is required
  • The purpose for which the product is sought
  • Whether the consumer is seeking particular features or flexibility
  • Whether the consumer is willing to pay additional costs for certain features
  • Whether the consumer requires any additional expenses to be included in the financed amount, such as insurance
  • Information about the consumer’s financial situation, including their:
    • Income – how much and whether it is consistent and likely to remain at that level
    • Source of income – from employment or government benefits
    • Outgoings and expenses – existing debts and liabilities, essential items such as rent payments, food and clothing
    • Whether outgoings are shared with another person
    • The number and kind of dependents
    • Assets held by the consumer and whether these are available to be sold to meet their financial obligations under a credit product

ASIC’s list is not exhaustive. Licensees must seek sufficient information to enable them to understand what is important to the consumer in terms of acquiring the credit product.

What is a reasonable standard of inquiry and verification?

ASIC’s guidance states that what is reasonable is scalable, based on a number of factors, including but not limited to:

Credit risk exposure for the lender.
The risk of consumer harm by taking on a new credit product and new financial obligation.
The type of credit product - for instance, larger, longer-term loans will generally represent a longer commitment and repayments will be a higher proportion of the consumer's income.
Whether the consumer is refinancing and the purpose of the refinance.
Whether the Licensee can form a view on the purpose for which the credit product is sought, any particular requirements or needs of the consumer and whether the consumer understands what they will be required to do under the credit product.
Hardship indicators and negative repayment history information.
A Licensee's existing relationship with the consumer.

In relation to verification, ASIC states that Licensees should not rely on information if the Licensee has reason to believe it is not true. Accordingly, Licensees may need to seek further information to determine the truth of the information provided by the consumer.

Verification of a consumer’s financial situation involves considering a range of information that is available to the Licensee, including data from open banking and digital data capture sources. Table 2 of Regulatory Guide 209 includes a list of data sources which Licensees may utilise.

Importantly, ASIC states that the obligations of brokers and credit providers are separate. A broker is required to make inquiries, verification steps and assessments to meet its own obligations, not simply to support a lender’s ability to make a final assessment about the credit product.

Accordingly, lenders must also make their own determination in relation to whether the information provided by a broker (or any other third party) is reliable and up to date. A lender’s obligation extends to making further inquiries and verifications where it does not consider that the information received from a broker is unreliable or out of date.

Statistical Benchmarks

ASIC cautions against relying on benchmarks as the sole source of verification. ASIC’s stance at present is that benchmarks should be used as a broader verification and assessment tool and that lenders must ensure the benchmark is adequate and appropriate, and subject to regular review by the lender.

The Royal Commission and ASIC Report 445 examined the use of benchmarks, and found that some credit providers had a practice of defaulting to the use of a benchmark figure, rather than making inquiries into the consumer’s actual expenses. ASIC’s latest commentary on this issue is that if a lender has access to verifying information about a consumer’s expenses and income, steps should be taken to obtain it and have regard to it in their assessment of the credit product.

Benchmark

Written copy of the Assessment

When a Licensee is asked by a consumer for a copy of the written assessment that the credit product is not unsuitable, this must be provided free of charge. This means, Licensees must have proper records of their assessments, in a form that can be easily and promptly provided to the consumer. The written assessment should include:

WRITTEN COPY OF THE ASSESSMENT
  • A statement of the consumer’s requirements and objectives in relation to the credit product;
  • A description of the information about the consumer’s financial position which has been relied on, and how this information was verified;
  • Where the consumer’s ability to repay depends on another person, a description of the information the Licensee holds about the other person’s financial position;
  • Where the consumer’s ability to repay depends on them reducing their expenses, a clear statement of the action the consumer has stated they will take; and
  • A statement of whether the terms of the credit product meet each of the requirements and objectives of the consumer

Written assessments are not required where:

  • For lenders – the transaction did not proceed
  • For brokers – credit assistance was not provided

Further Reading

Regulatory Guide 209

Credit Licensing: Responsible Lending Conduct

ASIC Report 445

Review of Interest-Only Home Loans

Consultation Paper 309

Update to RG 209 - Credit Licensing: Responsible Lending Conduct

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