In the wake of a royal commission, it’s more important than ever to be aware of the obligations of responsible lending. Consumers are most aware of responsible lending for when lenders have breached it. In the recent royal commission, they scrutinised the banks for failing to abide by responsible lending. As a result, credit providers are to strive to provide credit only in appropriate circumstances.
Put simply, providing money to individuals who are likely to be unable to repay it is not responsible.
Current law
The regulations around responsible lending are set out in chapter 3 of the national consumer credit protection act 2009. The legislation enforces and sets out the expectations for credit providers including what responsible lending is.
Credit law and businesses
The main exception is that the act doesn’t apply to businesses. The legislation will not cover a loan for a business. Likewise, the act also doesn’t apply to loans for shares or investment in commercial property.
Responsible lending
The main premise behind responsible lending is not leading consumers into financial situations that they cannot reasonably handle. This includes:
- entering into a credit contract
- suggesting a credit contract
- assisting with an application for a credit contract
To avoid doing any of those a credit provider can take steps to avoid leading the consumer into a poor situation. This may involve the provider inquiring and finding out the financial background of the applicant. The provider should then confirm this data with the applicant that it represents the applicant’s current financial situation. Then depending on whether the credit agency is a credit provider or credit assistance a final(provider) or preliminary(assistance) assessment should be given.
Documents required
Credit assistance
Businesses which provide credit assistance are covered in s 8 of the act. A person is providing credit assistance when they are either referring or assisting a consumer towards taking on a credit contract with a provider. The first document that a credit assistor must provide is a credit guide. This should be given as soon as possible when it becomes clear to the credit assistor that they are going to give credit assistance. Likewise, before an agency can give credit assistance, they must supply, sign and date a quote for the cost of the assistance. Furthermore, if the business provides credit assistance then they must give a credit or lease proposal disclosure document to the consumer. Finally, the business has to provide a preliminary assessment to the consumer for free if they ask for it.
Credit providers
A credit provider is someone who provides credit. Just like a credit assistance provider, the credit provider must supply a credit guide. The credit provider must provide a final assessment to the consumer for free if requested. For home loans, a key fact sheet must be provided. Likewise, the application for a credit card contract must include a key facts sheet.
Reverse Mortgages
Both providers and assistors must provide projections for the value of the land that may become reverse mortgaged. Thereby, demonstrating to the consumer what their level of indebtedness would be if they take on the reverse mortgage. Then a printed copy of the projections along with an information statement must be provided
Conclusion
At the end of the day whether you are being responsible in how you lend depends on a case by case situation. There are steps that you can take to minimise being branded irresponsible such as supplying all the necessary documents. Finally, it’s important to keep in mind the core question of whether a consumer is able to repay the loan. If you’re unsure about whether your lending arrangements are responsible, a competition lawyer can advise you on whether you meet the legal requirements.
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