Responsible lending – what the recent changes mean
The Government has recently introduced changes to the Credit Contracts and Consumer Finance Regulations 2004, as part of a reform package for the financial services sector. The changes include revocation of the prescriptive responsible lending affordability assessment regulations from 31 July 2024. Going forward, lenders will still have responsible lending obligations prior to lending, including making reasonable enquiries and being satisfied that the borrower will make loan repayments without suffering substantial hardship.
The much maligned affordability assessment regulations were brought into force in late 2021. The intent of the 2021 regulations was to protect vulnerable borrowers from “rapacious” lenders. The regulations attracted criticism due to a detailed and overly prescriptive approach. In particular, lenders could not rely solely on information provided by borrowers to show that they had made reasonable enquiries about the affordability and suitability of loans. As such, third party verification from banks or credit reporters was often required. For common household expenses, statistical information or benchmarks could be applied. In addition, the regulations required lenders to play “devil’s advocate” and over-estimate a borrower’s expenses. This process essentially involved applying a “buffer” so that there was no prospect of hardship.
The result was that many people who needed credit could not get it. The joke at the time was that too many flat whites or takeaways could defeat a credit application. Unfortunately, for a number of prospective first home buyers, it wasn’t a joke at all.
The high level of criticism meant that the 2021 regulations were amended in mid-2022 to remove some of the absurdities. We wrote about these changes in Changes to the Responsible Lending Rules Underwhelm, 8 July 2022. Further detail about these changes can be found at the link. For those who don’t have the time to read, the title provides an accurate summary.
The 2024 changes remove the prescriptive rules. As noted above, an affordability assessment is still required. However, the assessment is now a more principles-based, rather than a prescriptive, exercise. A lender is simply required to make reasonable enquiries of a borrower’s requirements and objectives before entering into a loan.
Guidance on the new approach is provided in the updated Responsible Lending Code. There is no longer a requirement to obtain verifying information from third parties. Instead, discretion is to be applied. Third party information, or benchmarking, may be useful where the information obtained from the borrower is not reliable.
Also, the level of enquiry should be tailored to depend on whether the borrower is vulnerable or is a well-informed user of credit. The usefulness of a buffer should be considered, but only if there is a risk that the borrower has overestimated income or underestimated expenses. Importantly, a lender is required to keep records of the steps taken and the assessment made.
The new rules provide much needed flexibility and rely more on the commercial acumen of lenders. The result should be greater access to credit. In summary, common sense has finally prevailed. Both lenders and borrowers will welcome these positive changes.
The above article highlights some of the key changes. For more detailed advice, please contact Mark Hopkinson or Mike Roberton.
