New updated regulatory guidance on responsible lending obligations (RG 209)

On 31 March 2011, the Australian Securities and Investments Commission (ASIC) issued updated regulatory guidance to provide clarity for lenders on assessing consumers’ capacity to repay under the responsible lending requirements of the National Consumer Credit Protection Act 2009 (Act). 

Set out below are the major changes to RG 209. 

Reasonable inquiries about a consumer’s financial situation

Where a consumer appears to have no obvious continuous income stream for the full life of the credit contract, ASIC has clarified that a conclusion of substantial hardship may be rebutted/avoided with reasonable inquires about:

• whether the consumer’s assets produce income;

• any significant changes to the consumer’s financial circumstances that are reasonably foreseeable, such as the consumer’s plans to fund retirement eg. from superannuation or income-producing assets; and

• perhaps most significantly, indirect income sources, such as income from a spouse, where that income is reasonably available to the consumer.  ASIC suggests that this income source needs to be assessed taking into account the history of the relationship between the consumer and the indirect income source (eg. the spouse) and the expressed willingness of the earning person (eg. the spouse) to meet the repayment obligations of the consumer.

If a lender is relying on indirect income for example from a spouse in assessing a consumer’s financial situation, the RG 209 states that the lender will need to obtain information about the earning person’s financial situation and verify that information including their ability and willingness to meet the repayment obligations of the consumer.

Meeting repayment obligations – new examples

The following new examples are also included in the guide to illustrate ASIC’s guidance on how lenders can assess a consumer’s ability to meet the repayment obligations from sources other than current income:

• If a person is close to retirement age, superannuation may be taken into account in assessing a consumer’s ability to meet repayment obligations if the superannuation amount will be more than sufficient to meet a person’s ongoing financial needs as well as repayments under a loan. 

• If a person’s income is likely to change (ie. upon retirement and the post-retirement income is insufficient to meet repayment obligations without substantial hardship) and a person has plans to sell their home and downsize in the future.  If it is likely that a person’s equity position will be such that they can readily pay the outstanding balance of the loan at the time of the planned sale, it is reasonable to assess the loan as ‘not unsuitable’ as the person will be able to meet their repayment obligations despite the fact that they are selling their principal residence. 

Lavan Legal comment

The responsible lending obligations in the Act were phased in from 1 July 2010.  Businesses engaging in consumer credit activates including banks, credit unions, finance companies, brokers and pay-day lenders were subject to the responsible lending obligations from 1 January 2011. 

The RG 209 has been updated to address two main areas being, first, the assessment of mature age borrowers whose employment will or may reduce or cease before the end of the loan term, and, second, the ability of licensees to take into account the income of a spouse of a consumer.

The statement in the guide about the ability of licensees to take into account a spouse’s (or other person’s) income is interesting, particularly as the guide does not suggest, at least expressly, that the spouse needs to be a formal guarantor for the facility before their income can be taken into account.  The ability to take a guarantor’s income into account in itself is a departure from the practices adopted by many lenders.  It will be interesting to see what ASIC will consider satisfactory (or not) in terms of establishing ‘a willingness (on the part of a spouse) to meet the repayment obligations of the consumer’. 

Licensees should ensure (when relying on a spouse’s income) that the consumer and the spouse both understand that the assessment of the consumer’s capacity to repay depends on the availability of that income and that this is noted in the assessment.  Some steps will also need to be taken to document the spouse’s ‘willingness’ to meet the repayment obligations. 

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

For more information please contact partner Geoff Stevens on (08) 9288 6926 / geoff.stevens@lavanlegal.com.au or associate Linh Trinh on (08) 9288 6935 / linh.trinh@lavanlegal.com.au.