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Following two rounds of public consultation, the Australian Securities and Investments Commission (ASIC) published an updated guidance (RG 209) on the responsible lending obligations that are contained in the National Consumer Credit Protection Act 2019.
The new guidance is designed to provide greater clarity and support to lenders and brokers in meeting their obligations, particularly in light of uncertainty that arose following the banking royal commission.
As anticipated, ASIC has maintained principles-based guidance, which the regulator has said would “support flexibility for licensees”.
Among the changes in RG 209 is the inclusion of guidance regarding the “reasonable steps” that lenders and brokers should take when assessing whether it is suitable for a “mortgage prisoner” – a consumer that is locked into loans with an interest rate that is higher than current available rates – to refinance or switch credit products.
ASIC has stressed the need for credit providers and credit assistance providers to “specifically consider” the payment history of such borrowers under their existing loan.
“Other matters may be given less weight, unless they identify particular risks with the consumer’s financial situation,” the regulator stated in its new guidance.
ASIC noted that it would “likely be suitable” to refinance a borrower’s loan if the borrower:
- regularly met their mortgage payments on time;
- the borrower’s payments will reduce following a refinance to a lower interest rate; and
- there have been no adverse changes to the consumer’s circumstances.
However, ASIC has claimed that continued repayments on an existing loan “could disguise circumstances of financial stress”.
“Consumers will generally prioritise repayments for a principal asset such as a home over other outgoings and may take on additional credit to meet repayments (e.g. by using a credit card),” the revised RG 209 states.
As a result, ASIC has stated that lenders and brokers should ensure that the repayment history information they consider is “for a sufficiently long period (e.g. 12 months)” and that they have regard to any other indicators of either:
- financial stress – e.g. increasing credit usage or delinquencies on utility payments; or
- financial stability – e.g. the consumer regularly pays the monthly balance of their credit card in full, even though it is a substantial lump sum.
Moreover, ASIC’s new guidance calls on lenders and brokers to inform borrowers of the overall costs associated with a new credit contract with a longer loan term.
“If repayments on the new credit product are lower than the consumer’s current repayments because the term of the new product will be longer, the consumer will be paying more in interest or other charges over the longer term,” ASIC added.
“In this case, the consumer should be expressly advised of the effect of the longer term and you should determine whether the new product will continue to meet the consumer’s requirements and objectives.”
Industry welcomes new guidance
The Australian Banking Association (ABA) has welcomed ASIC’s new guidance.
ABA CEO Anna Bligh said the updated RG 209 would provide clarity to banks concerning their obligations under the National Credit Act.
“Our member banks take their responsible lending obligations seriously as they seek to comply with the law and meet customer demand to access timely and appropriate credit,” Ms Bligh said.
“This is an important document for the industry to guide each bank’s approach to responsible lending, which we will now study closely to assess any impacts it may have on borrowing for customers.
“The industry is pleased to see ASIC has maintained a principles-based approach to lending, which as an industry we have called for, and to ensure banks are able to fulfil their obligations without the process becoming too restrictive for customers.”
David Locke, CEO and chief ombudsman of the Australian Financial Complaints Authority (AFCA), echoed Ms Bligh’s sentiments, adding that it would result in “fairer outcomes for consumers”.
“AFCA strongly welcomes the updates to ASIC’s guidance on responsible lending obligations for financial firms,” Mr Locke said.
“AFCA’s approach to complaints about responsible lending will fully align with ASIC’s guidance.”
NAB is the only major bank to issue a response to the guidance.
A NAB spokesperson told Mortgage Business: “We welcome the release of the updated guide from ASIC.
“We are committed to lending responsibly and are continuing to work through the additional guidance provided.”