The government has recently made some practical (and much-welcomed) changes to the responsible lending rules to address some unintended consequences caused by the latest round of amendments to the Credit Agreements and Consumer Credit Act 2003 (CCCFA) which came into force on December 1, 2021. The CCCFA Amendments were released with the aim of protecting vulnerable consumers from predatory lending. These amendments moved away from a “principles-based” approach and imposed blanket regulations on lenders that required them to follow prescriptive regulations when determining loan affordability. You can find more information about these CCCFA changes in our prior update here.
The problem with the “prescriptive approach” of December 2021
The CCCFA’s prescriptive adequacy and affordability rules required lenders to make mandatory inquiries when extending credit to consumers, including a detailed review of the borrower’s financial condition.
As a result, the new regulations have been the subject of widespread criticism and controversy from lenders facing increased compliance costs and borrowers who find themselves unable to access more secure sources of funding in due to the strict application of the new financial accessibility rules adopted by certain lenders.
Changes to Responsible Lending Code and CCCFA Regulations
Unsurprisingly, major consumer credit reforms introduced in December last year were again reviewed by the government within two months of their introduction.
In June 2022, after taking into account comments from banks, other lenders and consumers, the government reiterated its March 2022 announcement and confirmed that it would relax the rules under the CCCFA to “limit any unintended consequences “Robust procedures introduced in December 2021. .
The recently released Responsible Lending Code (Coded) and the Credit Agreements and Consumer Credit Amendment Regulations 2022 (Regulations) entered into force on July 7, 2022. The overarching changes are intended to provide guidance to lenders, so that they do not interpret the CCCFA’s adequacy and affordability regulations too conservatively while removing general requirements for lenders to scrutinize habits spending by borrowers.
Main changes to the CCCFA Rules:
- “Savings” and “Investments” are no longer expenses: When assessing a borrower’s likely material expenses, lenders were required to include expenses in savings and investment accounts as part of their assessment. CCCFA regulations have now been amended so that lenders do not have to consider savings and investments when assessing the affordability of a loan.
- Detailed information on expenses: Lenders will always need to ensure that the information used to make an initial estimate of a borrower’s expenses is obtained in “sufficient detail to minimize the risk that relevant expenses will be missed or understated to a material extent to the lender.” estimate”. However, this is only a requirement when estimating expenses is based on “asking the borrower” what their expenses are.
Key changes to the Responsible Lending Code:
- Living expenses surveys: When borrowers provide a breakdown of their future living expenses and these are compared with solid statistical data, there is no need to also inquire about their current living expenses from recent banking transactions.
- Estimated expenses: The Code clarifies that when lenders estimate expenses from recent bank transaction records, lenders can ask the borrower how the expenses are likely to change once the credit agreement is concluded. For example, borrowers who frequently incur out-of-pocket expenses may, after taking out the loan, reduce those expenses by eating at home.
- Requirements for obtaining sufficiently detailed information: The requirement to obtain sufficiently detailed information will only relate to information provided directly by borrowers rather than information from bank transaction records.
- Excess Processing, Adjustment and Buffers: The Code provides additional guidance on reasonable excess and indicates that it is not required if the lender has applied adequate buffers and adjustments to income and expenses.
- The “obvious” exception: The updated Code clarifies when the affordability of a loan is “obvious”, so that a full assessment of income and expenses is not required.
The Minister for Trade and Consumer Affairs has recently received a final report and advice from officials and is considering what further action, if any, is needed in this area.