Responsible lending obligations: Ensuring consumer protection

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Responsible lending obligations is a hot topic at the moment, in light of the current investigation into the misconduct in the banking, superannuation and financial services industry.
In November of last year Malcolm Turnbull announced a $75 million inquiry into Australia’s banking sector, after the chief executives of the Commonwealth, Westpac, National Australia and ANZ banks requested the government step in and end the financial sector speculation and political uncertainty. The leadership team determined the only way the government could give “all Australians a greater degree of assurance” was a Royal Commission into misconduct into the financial services industry. Officially called the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, the inquiry was established on December 14 2017.

We thought it timely to dive a little deeper into the responsible lending obligations that form the basis of this inquiry and provide some tips for consumers to ensure they are in a suitable credit contract.

What are Responsible Lending Obligations?

Responsible lending obligations refer to the rules and requirements that all credit licensees, including both credit providers (e.g. lenders) and credit assistance providers (e.g. mortgage and finance providers), must abide by, as outlined in Chapter 3 of the National Consumer Credit Protection Act 2009 (National Credit Act).

Martin North, from research firm Digital Finance Analytics, says “lending is such a large part of the profit-generating engine of the banks and it’s quite complex because there are a lot of third parties like mortgage brokers as well.”

All credit licensees must abide by these obligations to ensure compliance with the National Credit Protection Act 2009. The business model and credit activities of the licensee will inform the compliance processes that need to be implemented by the licensee and deciding how a licensee will meet these obligations is at the discretion of the licensee.

From a consumer protection stand point these obligations are an important step forward, aiming to better inform consumers and ensure they are only given loans they can afford to repay.

There are two types of situations defined under the National Credit Act that deem a credit contract ‘unsuitable’:

  • Where the consumer is unable to meet the repayments or can only comply under substantial hardship
  • Where the contract does not meet the consumer’s requirements and objectives

At the core of these credit assistance obligations, credit licensees must not:

  • Suggest the consumer remains in an unsuitable credit contract
  • Assists the consumer in entering into, or increasing the limit on, an unsuitable credit contract
  • Suggests the consumer applies for, or remains in, an unsuitable consumer lease
  • Assists the consumer in entering into a consumer lease that will be unsuitable for them

In meeting one’s responsible lending obligations, a credit licensee is required to follow 3 steps:

  1. Make reasonable inquiries about the consumer’s financial situation, and their requirements and objectives
  2. Take reasonable steps to verify the consumer’s financial situation
  3. Make a preliminary assessment (if they are providing credit assistance) or final assessment (if they are the credit provider) about whether the credit contract is ‘not unsuitable’ for the consumer (based on the inquiries and information obtained in the first two steps).

A credit licensee must also be able to provide, at the request of a consumer, a written copy of the preliminary assessment or final assessment.

As a consumer, if you are looking to enter a credit contract, it is important to ensure you are providing the most accurate and up to date information to accurately determine your financial situation and lending options, and to update your credit licensee of any changes as soon as they occur.

Prepare yourself before speaking with a credit licensee by gathering the following information:

  • Amount and source of income, including the length and nature of your employment
  • Your fixed expenses, such as rent, repayments on other loans/debt, child support, insurance
  • Your variable expenses – including a monthly budget of what your living costs are, supported by bank statements
  • Any existing debts that are to be repaid from the loan
  • Your credit history
  • Your age and number of dependents
  • Your assets
  • Any foreseeable changes, such as the end of a honeymoon period on an existing loan, pending retirement, or the end of seasonal employment
  • Your geographical factors, such as remoteness
  • Any indirect income sources, such as income from a spouse, where the income is reasonably available to you

To discuss your requirements and objectives and to find the suitable option for you, speak with a Westlawn Finance Specialist today by calling us on 1300 WESTLAWN (1300 937 852).

29 March 2018

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