Should responsible lending laws be simplified or scrapped?

The Treasurer’s proposal is that responsibility for consumer lending be transferred from ASIC to APRA and that consumer loans be governed more simply under APRA’s lending standards. (ASIC is the Australian Securities and Investments Commission and APRA is the Australian Prudential Regulation Authority)

The proposal is controversial. The Treasurer says the transfer and simplification of lending laws will remove ‘unnecessary barriers to the flow of credit’ while consumer advocates say it will be ‘open slather’ for predatory lending.

Currently, ASIC administers the National Consumer Credit Protection Act 2009 (NCCP) and publishes a Responsible Lending Regulatory Guide (RG 209) which is a set of rules for consumer credit providers.

ASIC pursues credit providers for breaching the Responsible Lending Conduct provisions of the Act, as illustrated in the Federal Court proceedings of Australian Securities and Investments Commission v Westpac Banking Corporation [2020] FCAFC 111.

But ASIC leaves loan disputes to the Australian Financial Complaints Authority (AFCA), which operates a dispute resolution scheme for financial services, which is funded by the industry.

In this article, we review a selection of decisions published by AFCA upon disputes relating to Home Loans and Investment Property Loans to determine whether the Responsible Lending rules should be simplified or scrapped for those loans.

AFCA decisions on Home Loans (also called mortgages)

These decisions involve loans made by a bank or other credit provider to fund the purchase of a property or refinance a property loan; generally secured by a registered mortgage over the property being purchased.

Case no 485337 13 March 2018 (construction loan)

The Applicant borrowed a construction loan of $230,000 to build a house.

The Applicant complained that the lender had caused a delay in construction because when it preapproved the construction loan it did not specify that an executed building contract was an outstanding condition. This resulted in a five month delay.

AFCA found the loan was a suitable credit product for the purpose of RG 209.18(a). But the lender was liable for the delay and AFCA recommended compensation of $29,620.40.

Case no 539014 26 September 2019 (debt consolidation)

The Applicant borrowed a home loan of $475,000 from the bank to consolidate debts.

The Applicant complained that the lender made an unaffordable loan because it did not make reasonable wider enquiries as to the Applicant’s financial situation, requirements and objectives as was required when considering debt consolidation under RG 209.

AFCA rejected the complaint because the bank had acted responsibly when it relied on the Henderson Expenditure Measure to find that the loan was affordable. But AFCA recommended the lender compensate the Applicant for $26,306.82 for money advanced to pay off a credit card which was not in her name, and $4,000 for stress and inconvenience.

Case no 612705 12 December 2019 (loan refinance)

The Applicants refinanced their home loan of $460,000 with the ANZ bank. The new loan was a 30 year principal and interest loan. The amount was the same as the old loan but at a lower interest rate of 4.17%, compared with 4.64% for the old loan, and so was more affordable.

The Applicants complained that a 30 year loan was unsuitable because of their ages – the male 55 years, the female 47 years. Specifically, their complaint was that the loan did not meet their requirements and objectives as required under RG 209 because they would be forced to sell and downsize in the next 10 to 15 years, either because their post retirement income would not service the loan or the loan repayments would cause substantial hardship.

AFCA rejected the complaint and said that RG 209.110 had been complied with because the lender had made enquiries about the borrower’s requirements and objectives: The loan would not cause hardship because the borrower’s future plans were to sell and downsize in transition to retirement. Also, the borrowers had substantial home equity (the market value of the house was $1.675 million) and they had superannuation. However, AFCA found that the bank should not have issued credit cards to the borrowers and recommended that it not to charge interest or fees on the credit cards and pay $1,000 for stress and inconvenience.

Case no 692775 29 May 2020 (fixed interest)

The Applicant borrowed a home loan of $475,000 from the National Australia Bank. The loan was interest only for the first five years at a fixed interest rate of 4.99% pa. The Applicant refinanced after four years and the bank charged a break cost of $9,626.68.

The Applicant complained that the bank did not adequately disclose the break cost.

AFCA rejected the complaint. The bank had clearly disclosed that the interest rate would be fixed and provided information about the method of calculation of break cost in the home loan contract. This satisfied the bank’s obligation to be clear and transparent under RG 209.

Case no 615207 17 June 2020 (bridging loan)

The Applicant obtained a bridging finance of $606,125 in March 2018 through mortgage brokers from a private lender for a term of six months, secured by an existing residential property and the residential property being purchased. She sold one property and was being forced to sell the second to repay the loan. The interest rate was 9.5% pa (non-default) and 15% pa (default).

The applicant complained that the loan should never have been approved because she did not have capacity to service the loan, and the loan was only made available because the brokers had classified it as a business loan. If it had been assessed under the responsible lending guidelines, it would have been an unsuitable and inappropriate loan.

AFCA accepted the complaint. AFCA said that it was a consumer loan and that the brokers did not make reasonable inquiries to assess whether the loan was suitable for the complainant or appropriate to her needs as required under RG 209. AFCA recommended that the brokers pay the total fees and interest on the loan of $257,528. No recommendation was made against the lender because they were not a member of AFCA.

AFCA decisions on Investment Property Loans

The buyer borrows funds usually from a bank or other financial institution to purchase an investment property. The loan is generally secured by a registered mortgage to the lender over the investment property.

Case no 395966 3 March 2016 (company loan)

The Applicant purchased two new investment properties in a Queensland mining town in 2012, with loans which totalled $1,233,000.

The Applicant complained that the lender should have realised that they could not service their loans and therefore is not entitled to commence recovery action.

AFCA rejected the complaint - the lender had properly considered the income streams and serviceability for both the properties and the guarantors. The lender was not obliged to assess the loan applications under the NCCP or RG 209 because the borrowing entity was a company, even though personal guarantees were given.

Case no 405931 8 March 2016 (property risk)

The Applicant purchased two investment properties in a mining town in 2011 & 2012, with loans from the lender.

The Applicant complained that the lender failed to take into account that the purchase was a speculative venture, not a relatively secure investment.

AFCA rejected the complaint – the lender was not obliged to consider the investment risk associated with the properties. The NCCP and RG 209 were satisfied because the rental income had been discounted by 20% in accordance with good industry practice and an interest rate buffer of 1.5% was included in the serviceability calculation.

Should responsibility for consumer lending be transferred to APRA?

The Treasurer’s criticism is: “What started a decade ago as a principles based framework to regulate the provision of consumer credit has now evolved into a regime that is overly prescriptive, complex and unnecessarily onerous on consumers.”

The Treasurer’s criticism has force in that ASIC has been treating the Guide (RG 209) as a set of rules to be followed, not as a reference guide for lenders.

ASIC’s bias towards more regulation is clear in its media release which it issued to announce it would not appeal the Westpac responsible lending decision:

“ASIC will review its updated regulatory guidance RG 209 (Credit licensing: responsible lending conduct) and will consider what implications the Federal Court decision has for that guidance.”

It is therefore a good move to transfer responsibility for RG 209 from ASIC to APRA because ASIC’s approach to Responsible Lending is to add rules, which is not justified by the decisions reviewed in this article.

Should Responsible Lending Regulatory Guide (RG 209) be simplified or scrapped?

The AFCA decisions reviewed in this article use RG 209 as a reference point to strike balance between ‘lender beware’ and ‘borrower responsibility’.

To scrap the Guide would remove useful guidance to determine disputes.

But RG 209 is complex. It contains 271 paragraphs. A simplified Guide would give lenders discretion, and would be in line with what is contained in the Guide:

• It is up to the financial firm to decide what inquiries are reasonable for it to make in order to meet its responsible lending obligations (RG 209.28).
   
• The obligation to make reasonable inquiries is scalable. The lists of factors included in RG 209 are not designed to be a checklist that financial firms are expected to follow in each instance (RG 209.29).

In summary, the proposal to transfer responsibility for Responsible Lending from ASIC to APRA is a good move, but the Responsible Lending Guide should be simplified, not scrapped.

The proposal is proposed to be implemented through a change to the Credit Regulations and will commence from 1 April 2021.

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