Responsible lending reform proposals unveiled
Treasury has released for consultation a package of draft legislation and regulations to implement the Federal Government’s proposed reforms of responsible lending. The consultation period ends on 20 November 2020. The package includes:
the National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill 2020 (the “Bill”);
the National Consumer Credit Protection Amendment (A New Regulatory Framework for the Provision of Consumer Credit) Regulations 2020; and
the National Consumer Credit Protection (Non-ADI Credit Standards) Determination 2020 (the “Draft Determination”).
As the title of the Bill suggests, one of the primary objectives of the Bill is to support the economic recovery from COVID-19 by improving the flow of credit.
Rolling back RLOs
The main reform in the Bill is to amend the National Consumer Credit Protection Act 2009 (Cth) (the “NCCP Act”) so that from 1 March 2021, the responsible lending obligations (“RLOs”) which currently apply under the NCCP Act will only apply to “low limit credit contracts” and consumer leases.
A low limit credit contract is a small amount credit contract (“SACC”) or a credit contract that would be a SACC if it were not provided by an authorised deposit-taking institution (“ADI”) (under the NCCP Act, a SACC can only be made by a non-ADI).
Non-ADI Credit Standards
The Bill will empower the Minister to make standards for systems, policies and processes of non-ADI credit licensees (“Non-ADI Credit Standards”).
The reason for introducing Non-ADI Credit Standards is so that credit standards for ADIs issued by the Australian Prudential Regulation Authority can be adopted for non-ADIs.
Non-ADI Credit Standards may specify compliance requirements for a licensee’s systems, policies and processes in relation to:
entering into a credit contract;
increasing the credit limit of a credit contract; or
unconditional representations to a consumer about credit approval.
SACCs will be outside the scope of Non-ADI Credit Standards.
Non-ADI licensees will have to establish and maintain systems, policies and processes that comply with any requirements in the Non-ADI Credit Standards and have them documented in a written plan.
If a licensee repeatedly fails to implement its systems, policies and processes for compliance with Non-ADI Credit Standards, it could be liable for a civil penalty.
Content of the proposed Non-ADI Credit Standards
The proposed Non-ADI Credit Standards are set out in the Draft Determination.
The standards will not apply where the credit is genuinely for the purposes of a small business operated by the consumer (alone or with others) and those purposes are not minor or incidental, having regard to the overall purposes of the credit contract or credit increase.
The Draft Determination says that the systems, policies and processes of a licensee must be adequate to ensure that the licensee has criteria that:
enable it to assess whether it is likely that the consumer will be able to comply with their financial obligations under the contract without substantial hardship if the credit contract is entered into or the credit limit is increased;
allow for the assessment to be proportionate to the nature, type and size of the credit; and
require the assessment to consider some specific relevant factors.
The relevant factors to be considered in an assessment are:
the purpose of the credit to be provided or intended to be provided;
the structure of the credit to be provided or intended to be provided;
the consumer’s sources of repayment, including income and cash flow;
the current risk profile of the consumer, including total indebtedness and other obligations to make payments;
the consumer’s repayment history;
the capacity of the consumer to repay the credit without substantial hardship in a range of situations involving reasonably foreseeable changes in the obligations of the consumer under the contract, including a change from a fixed interest rate to a floating rate or vice versa, or if there is an interest only period, a requirement to pay both principal and interest;
the consumer’s reasonably foreseeable expenses; and
the proposed terms and conditions of the credit contract.
The Draft Determination says that the systems, policies and processes of the licensee must be adequate to ensure that it does not engage in credit conduct unless has made an assessment of whether it is likely that the consumer will be able to comply with their financial obligations under the contract without substantial hardship if the credit contract is entered into or the credit limit is increased. The assessment must be made against the credit assessment criteria referred to above and comply with certain information requirements. The information requirements are that the licensee:
obtains adequate information to undertake the assessment;
makes reasonable inquiries, and takes reasonable steps, to verify the consumer’s sources of repayment;
makes reasonable inquiries and takes reasonable steps to verify the consumer’s current risk profile;
at the licensee’s discretion, relies on information provided by the consumer, unless there are reasonable grounds to believe it is unreliable;
makes reasonable inquiries about the consumer’s expenses, including (at the licensee’s discretion) making reasonable estimates of those expenses; and
takes reasonable steps to verify the accuracy and completeness of information provided about a consumer by a third party.
The Draft Determination says that a credit assessment must be that the consumer will be unable to comply with their financial obligation under the contract without substantial hardship if:
the consumer could only comply with their financial obligations under the contract by selling their principal place of residence (where at the time of making the assessment, the consumer does not intend to sell their principal place of residence in order to comply with those financial obligations);
in the case of a consumer who is renting their principal place of residence, the consumer will be unable to comply without substantial hardship if the consumer could only comply with their financial obligations under the contract by failing to meet their obligations to pay rent; or
in the case of a credit card contract, the consumer could not comply with an obligation to repay an amount equal to the credit limit within three years.
The Draft Determination requires that the systems, policies and processes of a licensee must be adequate to ensure that an approval is consistent with the credit assessment. An approval would not be consistent with the assessment if the assessment was that the consumer would be unable apply with their financial obligations under the contract without substantial hardship.
When considering whether the systems, policies and processes of a licensee are adequate, the nature, scale and complexity of the credit conduct engaged in by the licensee must be taken into account.
The Draft Determination also includes requirements for giving the consumer a copy of the credit assessment if the credit assessment is requested by the consumer.
Extending the best interests obligations
Under the current law, the best interests obligations apply to mortgage brokers from 1 January 2021. The best interests obligations require that a licensee or credit representative must act in the best interests of the consumer in relation to the credit assistance, and if the licensee knows, or reasonably ought to know, that there is a conflict between the interests of the consumer and the interests of the licensee or credit representative (or certain associated parties), the licensee or credit representative must give priority to the consumer’s interests when providing the credit assistance.
The Bill proposes to extend the best interests obligations which apply to mortgage brokers to other credit assistance providers. This reform is not related to the rollback of RLOs. Other credit assistance providers could include finance brokers who are not mortgage brokers.
Reverse mortgages
The Bill also includes some changes to the regulation of reverse mortgages. Again, these changes appear to be unrelated to the other amendments in the Bill concerning RLOs.
Credit licensees will be required to give equity projections to the consumer before the licensee provides credit assistance or enters into the credit contract for a reverse mortgage.
The licensee will also have to ask the consumer about their requirements and objectives in meeting possible future aged care accommodation needs, including the time (if any) at which the consumer is likely to incur costs for future aged care accommodation, and the likely amount of those costs.
The licensee must then present those costs alongside the equity projections, in a way that allows the consumer to appreciate how the equity expected to be left in the home may impact their ability to afford aged care.
Transition
The amendments to the RLOs for credit assistance providers are proposed to apply from 1 March 2021 to credit assistance provided on or after that date, even where the credit contract is entered into before that date.
In the case of licensee credit providers, the RLO amendments will apply in the same way except that, as far as the amendments relate to entering into a credit contract, the amendments will only apply to credit contracts entered into on or after 1 March 2021.
The changes to the best interests obligations will apply to any credit assistance provided on or after 1 March 2021. The changes to the regulation of reverse mortgages will apply from 1 March 2021 to all credit contracts, but where the changes relate to entering into a credit contract, they will only apply to credit contracts entered into on or after 1 March 2021.
Patrick Dwyer and Kathleen Harris
Legal Directors