One of the major changes is that lenders will now have to follow new detailed processes before issuing, or making material changes to, consumer loans. While the draft regulations clarify some of the uncertainties affecting the current responsible lending regime, aspects of the drafting may leave lenders in doubt as to how to ensure compliance with the new framework.
What will the new tests require?
The draft regulations elaborate on the current requirements under the Credit Contracts and Consumer Finance Act 2003 (CCCFA) to make reasonable inquiries into the affordability or suitability of a consumer loan before it is issued.
When assessing suitability, lenders will need to determine the following stipulated information:
- The amount, purpose, and term of the credit.
- If the agreement is a revolving credit contract, whether the borrower requires credit on an ongoing basis.
- If the agreement will include fees or charges for any other additional goods or services that were not part of the borrower's stated purpose, whether the borrower requires those goods or services and accepts their costs.
- Whether the borrower requires any fees or charges to be added to the amount of credit (for example, whether the borrower requires premiums for insurance related to the credit or payment for extended warranties or repayment waivers to be financed), and whether the borrower is aware of the additional costs of the fees or charges being financed, rather than being paid for separately.
When assessing affordability, lenders will need to estimate income and expenses.
When estimating income, they will need to:
- Obtain from the borrower a statement of current income and ask about any “likely changes".
- Verify a borrower's current income based on “reliable documentary evidence." That may include various listed categories of documents including payslips, tax records, and bank account transaction records, or “any other source".
When estimating expenses they will need to:
- Obtain from the borrower a statement of their current “relevant expenses". These are defined as fixed financial commitments, living expenses, and any “regular or frequently recurring" discretionary expenses. The discussion paper offers as an example a borrower who “regularly purchases cigarettes", but does not clarify what degree of regularity is required.
- Verify the relevant expenses, based on at least 90 days' worth of transaction records for any bank account into which the borrower's income is paid - and any account into which the borrower's income is transferred over that period.
- Ask the borrower about any cash withdrawals from these accounts that “may contribute towards" a payment of a relevant expense.
- Ask the borrower about any “likely changes" to their relevant expenses.
- Obtain a credit report, identify from that any other relevant expenses that the borrower is likely to have (for example, financial commitments), and undertake reasonable inquiries into the amount of those expenses.
If the income or expense information provided by the borrower conflicts with the other information obtained, lenders will need to ensure that that conflict is “adequately reconciled." The discussion paper states that lenders will need to “make judgements as to the most reliable information" although it is unclear how information is to be prioritised.
Lenders will also need to adjust their initial estimate of living expenses or “regular discretionary" expenses by reference to reasonable costs for “a person in the borrower's position" (although this does not apply in respect of fixed financial commitments). This appears to endorse the partial use of benchmarking by demographics for these categories of expenses, but there is little guidance as to how this is to be done or to what extent such benchmarking is permissible.
The regulations introduce other changes. They include:
- Advertising requirements (for instance, that advertisements must state any mandatory credit fees).
- Clarification as to what information must be disclosed as part of a variation to a loan, what disclosure must be made to guarantors, and what must be disclosed during debt collection activities.
- A requirement to disclose certain information about the rate under a high-cost consumer credit contract if the rate changes following a unilateral exercise of the creditor's power.
- Confirmation that the new due diligence obligations will not apply to directors and senior managers of trustees for securitisations or covered bond arrangements or similar arrangements (and will instead apply to contract managers).
However, the most eye-catching of the changes is likely to be the amendments to the responsible lending framework discussed above. That is particularly the case in view of the increased penalties for breaches of that framework under the Credit Contracts Legislation Amendment Bill, which will include new civil pecuniary penalties of up to $600,000.
In summary, the draft regulations establish an intricate set of obligations which may be difficult for even the most diligent lenders to follow. Lenders across all tiers of the consumer credit industry should consider submitting on the draft regulations before the 5 February 2020 deadline.
We will continue to track the progress of the Draft Regulations and the Bill. If you would like further details, please get in touch with the author or your usual Bell Gully advisor.