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Making changes to loan contracts – Part 1: Changing an original loan contract.

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These days, few customers keep the same home loan for long. Updates happen regularly and knowing how to handle these changes quickly and effectively is important to both you and your customer. Frequently, a customer will require a change on their original loan contract, often from one loan product type to another. For example, a change from variable to fixed, P&I to interest only etc. Sometimes they may have a fixed loan that has come to the end of its term and want to arrange another fixed term. They may even want to change the original loan contract to increase their loan amount or to secure a better interest rate.

So what are your compliance obligations when making any of these changes to an original loan contract?

It’s all covered by NCCP!

To determine what is required from a compliance point of view when assisting your client to make changes to their original loan contract, it’s important to refer to the National Consumer Credit Protection Act 2009 (NCCP). If you are providing any kind of credit assistance to a client, then there are certain responsible lending obligations that you must undertake in accordance with the NCCP Act.

When it comes to the NCCP Act there is no middle ground – you either provided credit assistance which would require you to complete your full responsible lending obligations, or if you did not provide credit assistance, there is nothing required of you.

Does making a change to a loan contract constitute providing credit assistance?

To determine if making a particular change to a loan contract is ‘credit assistance’, we would refer you to section 8 of the NCCP Act. You would be providing credit assistance to a consumer if you:

  • suggest and/or assist the consumer to apply for a particular credit contract with a particular credit provider; or
  • suggest and/or assist the consumer to apply for an increase to the credit limit of a particular credit contract with a particular lender; or
  • suggest that the consumer remain in a particular credit contract with a particular credit providers.

So the answer is yes – a change to a loan contract is providing ‘credit assistance’ so you must complete your responsible lending obligations under the NCCP Act. They would apply whether you are assisting your client in changing their home loan, investment property loan, car loan, personal loan or a consumer lease.

Therefore, if your client requests a change to their loan product type based on their current needs and objectives, then you would be providing credit assistance in applying for a particular credit contract with a particular credit provider. So you must adhere to your responsible lending obligations by undertaking three key steps:

  1. Make reasonable enquiries about the consumer’s financial situation, requirements and objectives; and
  2. Take reasonable steps to verify the consumer’s financial situation; and
  3. Make a Preliminary Assessment about whether the credit contract is ‘not unsuitable’ for the consumer.

Tune in next week where we will address your compliance requirements in the event a customer changes their mind prior to settlement.

If you have any questions, please contact the Compliance Support Team by clicking the help icon in Mercury or email us directly at compliance@connective.com.au. We’ll be happy to help.