The Bill to end responsible lending obligations (“RLOs”) has passed the House of Representatives, but it will not be voted on in the Senate until May at the earliest. If the Bill becomes law, what protections and remedies will be available to consumers?
SACCs and consumer leases
Under the Bill, RLOs will remain as they are for small amount credit contracts and consumer leases, products which are often used by the most financially vulnerable consumers. No change here.
ADI credit standards
Banks and other authorised deposit-taking institutions (“ADIs”) will continue to be subject to the credit prudential standards that they must already comply with.
Prudential standard APS 220 Credit Risk Management issued by APRA is the key standard. APRA has recently revised APS 220 and intends to bring forward the start date of the revised APS 220 if the RLOs are repealed. The new APS 220 requires ADIs to assess credit risk primarily on the strength of a borrower’s repayment capacity. In the case of loans to individuals, APRA proposes to add here that an ADI must “assess the individual’s capacity to repay without substantial hardship.”
For loans to individuals, the new APS 220 says that the credit assessment must include consideration of the following, where relevant:
- the purpose and structure of the exposure and sources of repayment, including making reasonable inquiries and taking reasonable steps to verify income or cash flows;
- the current risk profile of the borrower, including making reasonable inquiries and taking reasonable steps to verify commitments and total indebtedness;
- the borrower’s repayment history and capacity; and
- the borrower’s expenses, including the collection of reasonable estimates. The new APS 220 says that expense benchmarks must not be used as a substitute for an ADI making reasonable inquiries of a borrower’s expenses.
These requirements are very similar to the RLOs.
Non-ADI credit standards
Non-ADIs will have to comply with new non-ADI credit standards which are proposed to be based on APS 220. They will have essentially the same standards as ADIs.
Consumers will still have the right to dispute their loan with the Australian Financial Complaints Authority (“AFCA”). AFCA is free for the consumer, and while AFCA is considering the complaint, enforcement action is put on hold.
When deciding on a complaint, AFCA must do what is fair in all the circumstances – that gives AFCA a broad discretion.
AFCA generally can’t consider a complaint about a lender’s assessment of the credit risk posed by a borrower or the security to be required for a loan, but it can if the complaint is about what AFCA calls “maladministration”, such as when there is a breach of law or contract. A breach of APS 220 or the non-ADI credit standards would be maladministration.
Apart from the credit standards, what other laws or contracts could be relevant to a claim of maladministration?
Duty of care
Lenders don’t have a general duty of care to their customers at common law which would require them to properly assess a borrower’s capacity to repay, but under the Australian Securities and Investments Commission Act 2001 (Cth) (the “ASIC Act”), there is an implied warranty in every loan contract that the services will be rendered with due care and skill. The ASIC Act also imposes an implied warranty that the services supplied will be reasonably fit for purpose, if the consumer makes known the particular purpose for which the services are required or the result that he or she desires the services to achieve.
If the lender does not use due care and skill in making the credit assessment, or writes a loan that is not fit for the purposes of that loan which are made known by the consumer, that could be a breach of the law, and grounds for a finding of maladministration by AFCA.
National Credit Code
Under the National Credit Code, a court can find that a credit contract is unjust and if it decides that it is unjust, it can make a range of orders against the lender. One of the factors that the court can take into account in deciding if the contract is unjust is whether at the time the contract was entered into or changed, the lender knew, or could have ascertained by reasonable inquiry at the time, that the debtor could not pay in accordance with its terms, or not without substantial hardship. This is much the same as the test for an unsuitable credit contract under the RLOs. But the court is not required to take this factor into account when deciding if a credit contract is unjust, and the fact that the debtor can’t pay without substantial hardship does not necessarily mean that the contract is unjust.
Banking Code of Practice
The Banking Code of Practice says that if a bank is considering providing a customer with a new loan, or an increase in a loan limit, it will exercise the care and skill of a diligent and prudent banker. In the case of an individual customer that is not a business, the Code says that the bank will do this by complying with the law. “Complying with the law” would include complying with the RLOs, but if the RLOs are repealed, it would include complying with the credit standards for ADIs.
For mutual banks and credit unions, the Customer Owned Banking Code of Practice (“COBCOP”) also has responsible lending commitments. A subscriber to COBCOP undertakes to always act as a responsible lender and comply with responsible lending laws, and to base its lending decisions on a careful and prudent assessment of the customer’s financial position and requirements and objectives as indicated to it. It also promises to take reasonable steps to verify the customer’s financial situation.
Because these commitments in the banking industry codes form part of the contract between the financial institution and its customer, a breach of these obligations would be maladministration under the AFCA rules.
If the RLOs go, there will be other obligations that require lenders to lend responsibly.
In the current debate over this reform, there is disagreement about whether they will adequately protect consumers.
Patrick Dwyer and Kathleen Harris
Click here to subscribe to our email list for news, comment and analysis