FOS case studies: responsible lending and maladministration

Many loan disputes now involve claims of maladministration in lending by a financial services provider: that the loan should never have been made and that the financial services provider should therefore bear all or part of the loss on a defaulting loan.

In its March circular, the Financial Ombudsman service has set out its approach to the responsible lending obligations under the National Credit Act and its implications for a dispute involving claims of maladministration in lending.

The FOS explains that in assessing a dispute it considers not just the National Credit Act but also other legislation (such as the ASIC Act), any case law as it is developed by the courts, ASIC’s guidelines, APRA’s standards, industry codes and practices and its own past approach to claims of maladministration in lending.

The article makes specific comments about FOS’s expectations of financial service provider’s obligations in low doc lending and margin lending and gives case studies for low doc lending and investment lending.

In its view, as a minimum, there should always be evidence of the consumer’s capacity to repay such as:

•verification of PAYG income by reference to payslips or
•verification of self-employed income by reference to tax returns and bank statements.

In the low doc lending case study, the Ombudsman supported the case manager’s conclusion that the borrowers should bear two thirds of their loss and the FSP was responsible for one third of the loss. The Ombudsman commented that “There is a legitimate place for low doc loans to cater for those self-employed borrowers who are unable to provide more traditional evidence of their income. However, a customer’s self-declaration of financial details will not protect the FSP from having the loan considered maladministration or unjust if the circumstances were such that the FSP ought to have made enquiries but chose not to do so.”

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