Unsuitable credit, when your record is already poor

AWho the rule binds

The responsible lending conduct obligations sit in Chapter 3 of the National Consumer Credit Protection Act 2009, and every credit licensee must comply with them.

ASIC says the obligations apply only to credit regulated under the consumer credit regime, which it describes as products for individuals and strata corporations for personal, domestic and household purposes, or for buying or improving residential investment property. That covers home loans, reverse mortgages, residential investment loans, personal loans, credit cards, medium and small amount credit contracts and consumer leases.

A broker is held to the same line. The Act prohibits a licensee from giving credit assistance about a credit contract that will be unsuitable for the consumer, and before giving that assistance the licensee must make a preliminary assessment, built on inquiries and verification of the consumer’s requirements, objectives and financial situation.

BThe steps, in the order ASIC lists them

ASIC’s page on responsible lending says the obligations involve:

1. Inquirereasonable inquiries into the consumer’s requirements and objectives and into their financial situation
2. Verifyreasonable steps to confirm the consumer’s financial situation
3. Assessan assessment of whether the contract is “not unsuitable” for the consumer: a preliminary one by a licensee giving credit assistance, a final one by the credit provider
4. Copy on requesta written copy of that assessment for the consumer, if they ask for one

RG 209 says they must be made within 90 days before the assessment and before the lender or broker acts, or within 120 days for a home loan; the regulations give the longer home loan period to credit providers only.

RG 209 quotes the Federal Court’s view, in ASIC v TCS, that reasonable inquiries into a customer’s financial situation must include their current income and living expenses.

CWhere a poor record comes in

RG 209 quotes the Federal Court in ASIC v Channic: a consumer’s credit history, and whether they have generally met similar obligations, would also be relevant. ASIC adds that the history may show difficulty meeting obligations on other credit products, past or present.

What follows from that is more inquiry. Where a consumer has had repayment difficulty, ASIC says it will be appropriate to ask more, to understand the difficulty and the chance that the circumstances behind it would also stop them meeting the new product’s obligations. A lender’s own credit risk policies do not settle the matter either: ASIC says applying them should still involve considering the circumstances of the particular consumer, and whether those circumstances put them at higher risk of an unsuitable contract.

ASIC also states the limit of the rule. The responsible lending obligations on their own, it says, should not have the effect that a consumer who has had repayment difficulty in the past cannot get an appropriate loan.

DThe test itself

The Act prescribes the test for unsuitability. When it is met, the lender must assess the product as unsuitable and must not enter into it, suggest it, or help the consumer apply. In Moneysmart’s words for borrowers, a lender must decline a loan its assessment shows could cause hardship, even when the borrower feels confident about repaying.

Money is not the only part of it. RG 209 describes a lender assessing whether a product will be unsuitable for either of two reasons, and one of them is that a product only affordable if the borrower cuts current spending they are not willing to cut will not meet their requirements or objectives, even where those cuts would not amount to substantial hardship.

The test is a floor, not a ceiling. A note in the Act says that even where a contract would not be unsuitable under the test, a licensee may still assess it as unsuitable for other reasons. And an assessment on paper is no defence to the real thing: ASIC says a licensee could breach the prohibition by dealing in a product that is in fact unsuitable, even after complying with the obligation to assess it.

Credit cards carry a fixed measure. In the Act’s section on a preliminary assessment, a consumer under a credit card contract is taken to be able to meet their obligations only with substantial hardship if:

“the consumer could not comply with an obligation to repay an amount equal to the credit limit of the contract within the period determined by ASIC under section 160F.”

National Consumer Credit Protection Act 2009, section 118(3AA)(b)

ASIC set that period at three years. High-cost loans and their warnings explains why credit cards were singled out.

EAsking for the assessment

ASIC’s information sheet on disclosure says a credit provider must give a free copy of the written assessment if the consumer asks within seven years of entering the credit contract. On timing, ASIC’s sheet sets this out for credit providers and lessors (other than assignees): asked within two years of the start of the contract, they must give it within seven business days; asked after two years, within 21 business days of receiving the request.

If you were turned down, Moneysmart says a lender has to tell you if it rejected your application because of your credit report.

FIf a loan looks unsuitable after the fact

Moneysmart’s complaint route starts with the business: contact it to explain the problem and how you would like it fixed, then, if a call or email does not fix it, make a formal complaint in writing, which is called internal dispute resolution. Under ASIC’s Regulatory Guide 271, a financial firm must answer a complaint no later than 30 calendar days after receiving it, and a credit provider or lessor has 21 calendar days where the complaint involves a default notice. The same 21 days applies where the complaint involves a hardship notice or a request to postpone enforcement proceedings, with exceptions where the credit provider or lessor lacks the information to decide or reaches an agreement with the person.

Every credit licensee must be a member of the Australian Financial Complaints Authority, which Moneysmart describes as a scheme that helps resolve disputes with financial firms. Free help with each step is in Where to get free help; warning signs before signing are in Signs of a predatory lender.