The National Consumer Credit Protection reforms - responsible lending conduct

In Part 4 of our series on the National Consumer Credit Protection reforms, we provide a brief overview of some key aspects of the responsible lending conduct obligations in Chapter 3 of the National Consumer Credit Protection Act 2009 (National Credit Act), which apply to credit licensees such as credit providers e.g. banks, credit unions and finance companies and credit assistance providers e.g. mortgage and finance brokers (credit licensees).

What are the responsible lending conduct obligations?

Credit licensees must comply with the responsible lending conduct obligations in Chapter 3 of the National Credit Act. The key obligation is that credit licensees must not suggest, assist with or provide a credit contract or a consumer lease (credit contract) to a consumer that is unsuitable for the consumer. The obligations also apply to increases, suggestions, or assistance to increase, credit limits, or for a consumer to remain in a particular credit contract. In making a determination, credit licensees will need to:

• make reasonable inquiries about the consumer’s financial situation, requirements and objectives; and
  
  
• take reasonable steps to verify the consumer’s financial situation.

Based upon these inquiries, credit licensees must make, during the prescribed times, a preliminary assessment (in the case of credit assistance) or a final assessment (in the case of credit providers) of whether the credit contract is ‘not unsuitable’ for the consumer and, if requested, provide a copy of such assessment to the consumer.

A credit contract will be unsuitable for a consumer if, at the time of the relevant assessment, it is likely that:

• the consumer will be unable to comply with the consumer’s financial obligations under the credit contract, or could only comply with substantial hardship; or
  
  
• the credit contract will not meet the consumer’s requirements or objectives.

Importantly, and unless the contrary is proved, there is presumption of substantial hardship under the National Credit Act if the consumer could only comply with the consumer’s financial obligations under the credit contract by selling the consumer’s principal place of residence.

There are other responsible lending conduct obligations in Chapter 3 such as the requirement to give certain documents to consumers at varying stages of the credit process for example, a quote and credit or lease proposal disclosure document in the case of credit assistance providers, and a credit guide in the case of credit assistance providers, credit providers and credit representatives.

What are reasonable inquiries?

Credit licensees are required to make inquiries and verify information to a reasonable standard. Generally, these obligations are scalable, and what a credit licensee will need to do will depend on the relevant circumstances and also, for example, on the type of service being provided to the consumer (e.g. as a credit assistance provider or a credit provider). Some factors relevant to scalability include:

• the potential impact on the consumer of entering into an unsuitable credit contract – where the potential negative impact on the consumer is likely to be relatively serious if the credit contract is unsuitable, more extensive inquiries are likely to be necessary;
  
  
• the complexity of the credit contract – if the credit contract has complex terms more extensive inquiries are likely to be necessary;
  
  
• the capacity of the consumer to understand the credit contract – where it is apparent the consumer has limited capacity to understand the credit contract, is confused or conflicted about their objectives, or there is an apparent inconsistency between the product the consumer is considering and the consumer’s objectives, more inquiries about the consumer’s requirements and objectives are likely to be necessary; and
  
  
• if the consumer is an existing customer of a credit provider, less extensive inquiries and verification may be required where the credit provider already holds information about the consumer.

Generally, credit licensees will need to decide what, and the extent of, inquiries and verifications they will need to make to meet their responsible lending conduct obligations.

Reasonable inquiries about the consumer’s financial situation could include for example, but would depend on the circumstances, the current amount and source of the consumer’s income, the consumer’s fixed and variable expenses, the consumer’s age, number of dependants, nature and value of assets, credit history and any reasonably foreseeable changes in the consumer’s financial circumstances.

Reasonable inquiries about the consumer’s requirements and objectives could include for example, but would depend on the circumstances, the purpose, benefit to the consumer, timeframe and amount for which the credit is sought. If the credit contract is required to purchase a specific item, the inquiries may cover the term of the loan relative to the useful life of the asset, the nature of the credit requested and the consumer’s stated objectives.

Reasonable steps to verify information or the consumer’s financial situation could include for example, but would depend on the nature of the consumer and the circumstances, obtaining credit reports, bank account statements, payslips, confirmation of employment, recent income tax returns and business activity statements.

When do these obligations start?

The requirement not to arrange or provide credit that is unsuitable will apply to non-ADIs and non-registered finance corporations (and their credit representatives) from 1 July 2010, and will apply to ADIs and registered finance corporations from 1 January 2011.

Other responsible lending conduct obligations including disclosure requirements with respect to, for example, upfront fees and charges, will apply to all credit licensees and their credit representatives from 1 January 2011.

Next Steps

Credit licensees will need to familiarise themselves with the responsible lending conduct obligations to determine what they need to do, and to ensure they have in place adequate and documented arrangements, systems, processes and measures to comply, and demonstrate compliance, with those obligations and requirements.

In all instances, we recommend you seek appropriate legal advice to cater to your specific circumstances.

Further information

For further information please contact Kylie O’Keeffe, Partner, on (08) 9288 6852 or email her at kylie.okeeffe@lavanlegal.com.au.