ASIC guidance letter overview
ASIC has published a letter it sent to the Australian Bankers Association in response to the ABA’s request for guidance on a number of matters around regulation of consumer credit lending during the COVID-19 pandemic.
ASIC’s letter deals with issues of hardship variations, responsible lending, and the obligation of lenders to act efficiently, honestly, and fairly.
ASIC emphasised the importance of responsible lending obligations in providing key protections so that short-term assistance does not become a longer-term, unmanageable burden for consumers.
ASIC’s guidance will have a general application following the end of the pandemic.
Responsible lending obligations and hardship variations
ASIC responded to specific scenarios.
Reducing short-term repayment obligations of consumers experiencing financial hardship, including changing the repayment terms from principal and interest (P&I) to interest-only (IO), 6 month repayment deferrals with the capitalisation of interest, and extending the term of the loan.
ASIC says that:
“We confirm our view that changes of this kind can typically be achieved through variations to the existing contract, as opposed to entry into a new contract on different terms. As you are aware, the responsible lending obligations only apply before a contract is entered into or a credit limit under an existing contract is increased. Accordingly, we consider these obligations will not be triggered for variations of the kind described.
While capitalisation of interest may result in an increase to the balance of a credit contract, that does not necessarily involve an increase to the credit limit under the contract. We note that under s3(2) of the National Credit Code interest charges under the contract are taken not to be a part of the ‘amount of credit’ and so are not included as part of the maximum amount of credit that is provided under the contract.”
Debt consolidation to reduce total repayments across a wider credit portfolio.
ASIC says that:
“While this may be an appropriate strategy for some borrowers, this kind of response is more likely to involve an increase to the credit limit under the home loan and may significantly increase the consumer’s exposure to loss of their home. If there is an increase in the credit limit under the home loan as a result of the debt consolidation, the responsible lending obligations will apply. “
Responsible lending obligations and new loans
ASIC noted that the government has made temporary changes to the responsible lending obligations when credit is provided to existing customers who operate a small business and a part of the credit provided will be used for the purposes of that business.
What about a new loan to an individual for personal purposes?
It said “For those loans where responsible lending will continue to apply, we consider there remains sufficient flexibility for lenders to take a range of actions to reduce the difficulty likely to be experienced by significant numbers of consumers. “
The ABA asked whether lenders could assume that a person whose income is adversely impacted by COVID-19 economic conditions is likely to regain previous income within a reasonable period after restrictions are removed?
ASIC replied that lenders must have
“regard to the consumer’s actual circumstances which may indicate that such a recovery is more likely or less likely. …it is … important that provision of new credit is not based upon assumed changes where these are unlikely to be met, and which will result in unmanageable debt burdens for consumers…
lenders should seek to form a justifiable view of what is likely, based on their understanding of the circumstances affecting the particular consumer.
If a lender does rely on assumed changes to the consumer’s financial position, consideration should be given to how the lender will respond if the assumed recovery does not in fact occur or only over an elongated period.
For example, the lender may need to consider whether it would be prepared to provide hardship arrangements for an additional period to give the consumer a further opportunity to recover their financial situation. “
Application of the obligation to act efficiently, honestly and fairly
ASIC said the general obligations set out in section 47 of the National Credit Act should not be regarded as a barrier to offering consumers appropriate hardship arrangements.
“Hardship arrangements ordinarily do not reduce the amount ultimately payable by the consumer and may result in a larger amount being paid for credit in the longer term. On its own, this increased cost would not suggest a failure by the lender to act fairly.
However ASIC said ” It may be unfair to encourage the consumer to undertake a particular contract change that reduces risk exposure for the lender (such as through debt consolidation) but ignores longer term priorities for the consumer.”
Changes to financial circumstances: loan approvals and disrupted property settlements
Must lenders conduct a further unsuitability assessment after entry into a credit contract, even if there are significant changes to the financial situation that was considered before entering into the contract?
“We have previously confirmed the industry view that the responsible lending obligations do not apply to require a further unsuitability assessment to be completed after entry into a credit contract, even if there are significant changes to the financial situation that was considered before entry into the contract. Accordingly, the responsible lending obligations do not raise a barrier for proceeding with ‘in-flight’ property transactions where there is a change of circumstances between entry into the loan and drawdown of funds on settlement of the property transaction.”
What if the lender elects to terminate the contract before providing any credit if the credit contract allows the lender to take that path (eg if there is an adverse circumstances clause)?
“The lender may elect to terminate the contract before providing any credit if the credit contract allows the lender to take that path. This is a commercial decision for the lender to make in accordance with the terms of its contract.
We expect the obligation to act in a way that is efficient, honest and fair may affect how the lender chooses to exercise their discretion to terminate the contract, rather than funding it. For example, the lender may consider it appropriate to discuss the changed circumstances with the consumer, determine what flow on effects the decision will have in relation to the property transaction (e.g. loss of deposit, loss of home, potential contractual liability for the consumer) and whether it is fair in all the circumstances to terminate the contract.
We understand that some lenders may be concerned that they would be at risk of breaching the obligation to act efficiently, honestly and fairly if they proceed to fund a home loan in these circumstances, and immediately offer hardship arrangements such as repayment deferrals.
In the current circumstances we would not consider that proceeding to fund the loan and offer immediate hardship arrangements would be an indication of a failure to act efficiently, honestly and fairly. “
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Author: David Jacobson
Principal, Bright Corporate Law
About David Jacobson
The information contained in this article is not legal advice. It is not to be relied upon as a full statement of the law. You should seek professional advice for your specific needs and circumstances before acting or relying on any of the content.