27 April 2009

New National Responsible Lending Laws

Senator Nick Sherry, Minister for Superannuation and Corporate Law, has today released the draft National Consumer Credit Protection Bill 2009 which will put in place new national responsible lending laws for all consumer credit in Australia.

It will be a condition of holding a new Australian Credit License (ACL) that lending must be done responsibly. All forms of consumer credit will be captured and it will become an offence to supply credit irresponsibly.

The laws, which are intended to operate from 1 November, 2009, will entail two elements for assessing whether credit is being extended responsibly. These are: assessing the unsuitability of a credit product for an individual and assessing a persons' capacity to repay the proposed credit debt.

"For the first time, Australia will have laws that prohibit irresponsible lending to consumers by all types of credit providers. This is a major enhancement to our consumer protection regime and is a decade overdue."

"Some families who can in fact maintain a reasonably sized mortgage are often saddled-up with more debt than they need and often more than they can repay. This can lead to losing everything and it just won't be tolerated anymore."

"The responsible lending laws will make it illegal for a lender, known as a credit provider, to extend credit for a consumer that is unsuitable based on their needs and their financial capacity."

"The laws will also make it illegal for brokers and other intermediaries, known as credit service providers, to suggest credit for a consumer that is unsuitable based on their needs and their financial capacity."

"The legislation will assist consumers to more confidently borrow money while limiting the risk of being saddled with unmanageable debts," said Minister Sherry.

Compliance with the responsible lending laws will require an assessment and verification of a consumer's credit needs and financial circumstances. This assessment must be conducted by the credit provider when an individual borrows directly from the provider, such as from a bank; or by the credit service provider where an individual uses a broker to access credit. In the latter case it will open for the ultimate lender to rely on the information gathered by a credit service provider if they choose to, although the obligation to lend responsibly will still apply to all ACL holders at all stages.

"Breaches of responsible lending obligations could result in serious sanctions, including revocation or suspension of a licence and therefore the provider's ability to extend credit."

"These laws strike the right balance to support appropriate and manageable lending by credit providers whilst also targeting the kind of lending that can lead to consumer distress and financial hardship," Minister Sherry said.

In addition, lenders and credit advisers must inform consumers that they are required to assess them under these responsible lending obligations and consumers will be informed that they have the right to receive a copy of that assessment.

Lenders must also inform consumers about who they are, including their ACL number and their dispute resolution membership. They will also be required to inform the consumer about any fees and charges payable upfront before the loan is suggested or entered into and let the consumer know what commissions the lender will get for selling the consumer that loan.

"Open and simple disclosure of fees and commissions is essential for informed decision making and better consumer protection," said Minister Sherry.

Breaches of responsible lending obligations will attract sanctions ranging from fines through to civil and criminal penalties. Where consumers have a dispute and are found to suffer detriment as a result of a breach of responsible lending obligations, the consumer will have access to damages for this detriment.

The Australian Securities and Investment Commission (ASIC) will have an active role in providing assistance and guidance to industry to transition to these obligations and to support and monitor industry's understanding and compliance of the new requirements.

Further details of the national consumer credit package, including the full text of the Bills and details about how to make a submission on the Exposure Draft legislation can be found at www.treasury.gov.au/consumercredit.

27 April, 2009

When a credit contract must be assessed as unsuitable:

A credit contract must be assessed as unsuitable for the consumer if at the time of making the assessment it is likely that:

  • the consumer will be unable to comply with the financial obligations under the contract, or could only comply with substantial hardship;
  • the contract will not meet the consumer's requirements and objectives; or prescribed circumstances set out that the contract must be assessed as unsuitable.

The possible range of factors that may need to be established in relation to a consumer's capacity to repay credit could include:

  • the consumer's current income and expenditure;
  • the maximum amount the consumer is likely to have to pay under the credit contract for the credit;
  • the extent to which any existing credit contracts are to be repaid, in full or in part, from the credit advanced;
  • the consumer's credit history, including any existing or previous defaults by the consumer in making payments under a credit contract;
  • the consumer's future prospects, including any significant change in the consumer's financial circumstances that are reasonably foreseeable (such as a change in the amount the consumer has to pay under the credit contract for the credit or under any other credit contract to which the consumer is party);
  • greater care would need to be taken in regard to inquiries about the consumer's financial situation in the circumstance where the consumer is refinancing, particularly due to an inability to meet the repayments of an existing credit contract. Refinancing may incur transaction costs and fees and charges, including fees for moving from one credit contract to another. All costs of moving credit contracts are expected to be taken into consideration when assessing the consumer's ability to meet the obligations of the new credit contract over a reasonably foreseeable term.

Example: Responsible lending

Theodore was an electrician who earned $1,200 a week. He used $400 a week for expenses. He went to a lender to get a home loan for $250,000. Theodore needed a loan with a low interest rate and relatively low repayments that he could repay the loan over the medium term. Instead, he was offered a loan with a very high interest rate and therefore repayments that he could not readily afford.

Theodore sought an injunction against the lender to stop having to make interest payments. Theodore then sought compensation for the loss and damage he had suffered for being put into an unsuitable loan. The court ordered the lender to reduce the overall debt Theodore owed to the lender, commensurate with what he would have paid if he had been provided with a loan that was not unsuitable, minus the amount he had already paid to the lender; and the loss and damages he suffered as a result of the unsuitable product.

This outcome recognised that Theodore received a benefit from the initial credit provided, but had experienced loss and damage from being put into an unsuitable loan.