ASIC have recently issued infringement notices totaling $180,000 to the Commonwealth Bank of Australia (CBA) for a breach of the responsible lending obligations under the National Consumer Credit Protection Act (NCCP Act).
The breach by CBA of its responsible lending obligations arose due to a programming error in the automated serviceability calculator used to assess certain applications for personal overdrafts. The calculator automatically substituted declared housing expenses for $0 and living expenses for a benchmark far lower than declared living expenses in some cases.
The error in calculating living expenses resulted in a total of 9,577 consumers being approved for overdrafts that would have otherwise been considered unsuitable for the purposes of the responsible lending provisions of the NCCP Act. On this basis, ASIC found that CBA was in breach of its responsible lending obligations by allowing consumers to enter into overdraft facilities that were not suitable for the consumer.
The responsible lending obligations under the NCCP Act apply to credit providers and finance brokers. As a finance broker, your primary responsible lending obligation is to ensure that you do not suggest a loan, or assist a consumer to enter into a loan if that loan is unsuitable for the consumer.
To make an assessment of the suitability of a loan for a consumer, you must:
- make reasonable enquiries about the consumer’s requirements and objectives in relation to the loan;
- make reasonable enquiries about the consumer’s financial situation to determine whether the consumer has the capacity to meet their obligations; and
- take reasonable steps to verify the consumer’s financial situation.
The level of inquiries that you need to make depend on the circumstances of the consumer and the loan. Below are several factors relevant to the level of reasonable enquiry required.
The potential impact on the consumer of entering into an unsuitable loan
It is important to view the size of the loan compared to the capacity of the consumer to repay it. For example, even some small loans may be difficult for consumers on low incomes to repay.
Complexity of the loan
Less extensive inquiries are likely to be necessary where the loan has relatively simple terms that most consumers can easily understand. More extensive inquiries are necessary if the loan has more complex terms.
Capacity of the consumer to understand the loan
Where it is evident that a consumer has limited capacity to understand the loan and their payment obligations under it more inquiries are likely to be needed. For example, for consumers with limited English-speaking skills. Also, if the consumer has conflicting objectives or there is a mismatch between the consumer’s objectives and the product they are considering, more inquiries are likely to be needed.
Whether the consumer is an existing customer or a new customer
If you already hold information about an existing customer, you may be able to make less extensive inquiries about that existing customer for a new loan.
Based on the inquiries made above, you must then make an assessment about whether the proposed loan is unsuitable for the consumer. If a loan is unsuitable, you are unable to suggest a consumer apply for that particular loan or assist the consumer in applying for the loan.
Finance brokers should have appropriate policies and procedures in place to ensure that they comply with their responsible lending obligations. These procedures should also include requirements for continuously monitoring internal responsible lending processes, particularly with automated decision-making systems, to ensure they remain compliant with the NCCP Act.