Lenders and brokers face significant challenges to ensure that ASIC will be satisfied with their responsible lending processes.
How can licensees meet both customers’ immediate requirement and objective of a fast and easy approval, while at the same time meeting the legal obligation to enquire and verify information about ability to repay and the customer’s ‘underlying requirements and objectives’?
The Cash Store case demonstrated that courts will impose significant penalties on licensees who do not comply on a systemic basis. The case demonstrated that generic statements about purpose will not be sufficient, and that more detailed enquiries and verification may be appropriate in respect of more vulnerable customers.
It’s interesting to return to the Explanatory Memorandum provided to Parliament when the NCCP Act was presented for adoption. Some selected passages are set out below and help to demonstrate the intention of government when the law was made in 2009. In particular, paragraph 3.71 reflects the scalability in relation to customers with low net worth.
Excerpts regarding enquiries
3.139 The purpose for undertaking reasonable inquiries about the consumer’s financial situation is to ascertain a reasonable understanding of the consumer’s ability to meet all the repayments, fees, charges and transaction costs of complying with the proposed credit contract. The general position is that consumers should be able to meet the contract’s obligations from income rather than equity in an asset.
3.140 Reasonable inquiries about the consumer’s financial situation could ordinarily include inquiries about the amount and source of the consumer’s income, determining the extent of fixed expenses (such as rent or contracted expenses such as insurance, other credit contracts and associated information) and other variable expenses of the consumer (and drivers of variable expenses such as the number of dependents and the number of vehicles to run, particular or unusual circumstances). The extent of inquiries will however depend on the circumstances.
3.141 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; and
- the consumer’s future prospects, including any significant change in the consumer’s financial circumstances that is reasonably foreseeable (such as a change in repayments for an existing home loan, due to the ending of a honeymoon interest rate period).
3.70 Reasonable inquiries about the consumer’s financial situation could include: determining the amount and source of the consumer’s income; determining the extent of fixed expenses (such as rent or contracted expenses such as insurance, other credit contracts and associated information); and other variable expenses of the consumer (and drivers of variable expenses such as number of dependents and number of vehicles to run, and any particular or unusual circumstances).
3.71 The significance of these inquiries will be dependent on circumstances. For example, the credit assistant’s knowledge of expenses such as the monthly mobile phone expense may be a proportionately significant expense for a low income earner, therefore reasonable inquiries would seek to ensure, to the extent possible, that such matters have been included in the consumer’s expenses. In contrast, the mobile phone expense may not be significant to a high net worth individual and may require little inquiry.
3.73 The level of inquiries necessary to meet the level of ‘reasonable inquiries’ is likely to be greater where the consumer is refinancing, particularly where they are having difficulties meeting the repayments, or are even in arrears, on their existing credit contract. In this situation it will be possible to determine that the consumer cannot meet the repayments of the amount being charged under that contract, and a contract will prima facie be unsuitable where the repayments are at the same or a similar level. Where the current contract is no longer not unsuitable and no alternative contract is considered to be not unsuitable, there is a defence provided that allows the credit assistant to suggest the consumer remain in the existing contract without contravention of the responsible lending obligations (see explanation at subsection 124(7)).
Excerpt regarding verification
The Explanatory Memorandum at para 3.146 indicated that it was never the intention of the legislature to impose a new and higher verification standard than what was reasonable prudent business practice operating at the time the Bill was first introduced into the Parliament, stating:
“…must make such efforts to verify the information provided by the client as would normally be undertaken by a reasonable and prudent lender in those circumstances. Conducting a credit reference check, is for instance, likely to be an action that would be reasonable to undertake in most transactions. Credit providers are not expected to take action going beyond prudent business practice in verifying the information they receive”.