Credit assessment is no longer just about managing credit risk: it’s also a compliance obligation.
Responsible lending under the credit legislation requires credit licensees to:
- make reasonable inquiries about the consumer’s requirements and objectives and financial situation;
- take reasonable steps to verify the consumer’s financial situation;
- make an assessment whether the credit contract or increase is unsuitable; and
- not enter into a credit contract or increase the credit limit if the contract or increase is unsuitable for the consumer.
There are other obligations, like the requirement to provide a credit guide and a copy of the suitability assessment on request.
Here are 4 reasons why credit licensees should now consider getting a responsible lending compliance review.
1. Penalties if you get it wrong
If you don’t follow the responsible lending requirements, the consequences can be very serious.
Failing to make reasonable inquiries or verify a consumer’s financial situation is subject to a civil penalty of up to $360,000 for an individual or $1.8 million for a company – for each time that the breach occurs.
To see how these penalties can add up, in the recent Channic decision a car yard financier in Cairns was ordered to pay penalties totalling $776,000. You may be surprised that this decision involved only 10 customer contracts. But there were multiple contraventions for each contract by the broker company, the lender company and the individual who stood behind those companies. A total of 154 contraventions.
Maybe more worrying is that a breach of responsible lending requirements is a crime: a credit provider that enters into an unsuitable contract commits a criminal offence where the penalty is $18,000 or 2 years’ imprisonment, or both.
2. ASIC is actively enforcing
Responsible lending is a priority for ASIC and it has been active in enforcing the law in this area. This includes both court proceedings and other actions such as enforceable undertakings.
Probably the best known enforceable undertaking is the one given by BMW Finance in 2016 which involved BMW Finance providing $72 million in redress for consumers (including $50 million in loan write offs) plus a $5 million community benefit payment.Until recently the court actions on responsible lending by ASIC have been against soft targets. In the Cash Store case the defendant didn’t even bother to show up. In the Make It Mine case, the breaches were blatant and the defendant largely admitted to them. The Channic case was against a small-time operator.
But on 1 March 2017, the whole dynamic changed when ASIC commenced civil proceedings against Westpac, one of Australia’s largest banks. ASIC alleges a number of contraventions of the responsible lending obligations by Westpac in relation to home loans. These include the use of a benchmark instead of the actual expenses declared by borrowers in assessing their ability to repay the loan.
It’s one thing for ASIC to sue companies on the margin with poor compliance processes – it’s something completely different when ASIC takes on a large, mainstream financial institution.
The outcome of this case could have a major impact. Westpac’s practices are probably similar to those of many other credit providers. If ASIC wins, there could be many loans at risk of being in breach of responsible lending requirements. If Westpac wins, it could lead to a more practical approach to responsible lending in the future.
3. The law has changed
Responsible lending requirements started for most credit providers back in 2011 (in 2010 for some credit providers).
If you put in place your responsible lending procedures then and they are still the same, it might be time for a fresh look – because the goalposts have moved.
The fundamental requirements in the legislation have not been amended, but the court cases and ASIC enforcement activity have changed the way the law is applied, placing more onerous burdens on credit providers than perhaps was seen when the legislation first started.
No doubt Westpac thought its responsible lending practices were compliant when they were rolled out. It would have had teams of people checking this. Now it is being sued by ASIC.
4. What APRA says
The Australian Prudential Regulation Authority (APRA) sees the importance of responsible lending compliance for Authorised Deposit-Taking Institutions (ADIs).
In February APRA released updated guidance on sound residential mortgage lending practices for ADIs (APG 223).
In its update, APRA added the following paragraph to APG 223:
“Failure to meet responsible lending conduct obligations, such as the requirement to make reasonable inquiries about the borrower’s requirements and objectives, or failure to document these enquiries, can expose an ADI to potentially significant risks. A prudent ADI would conduct a periodic assessment of compliance with responsible lending conduct obligations to ensure it does not expose itself to significant financial loss.”
But even if you are not an ADI, APRA’s warning should be heeded. The risk of significant financial loss is the same whether or not you are an ADI.
We do compliance reviews
Dwyer Harris can assist you by conducting a responsible lending compliance review for your organisation.
When we do a responsible lending compliance review, our usual method is:
- Discuss requirements and agree scope and cost
- Prepare a request for a legal review
- Issue an information request for documentation to be reviewed
- Review credit assessment policies, procedures and processes
- Review sample loan files (if in scope)
- Provide a written report highlighting risk areas and making any recommendations.
A review can cover all products or specific product types, such as credit cards.
Because we are lawyers, our investigation and report is subject to legal professional privilege. This gives you greater assurance that any adverse findings in the report will be confidential.
Reviews can be done periodically. Once a baseline is established in the initial review, the work involved and cost is reduced for future reviews.
If you would like to have a confidential discussion about a responsible lending compliance review, please call Patrick Dwyer on 02 8912 2503.
Patrick Dwyer and Kathleen Harris