Compliance tip - Detecting hardship
How to detect hardship at the Preliminary Assessment stage.
A common catchphrase under the NCCP regime is ‘responsible lending’. The application of this is not only reserved for credit providers, but also for brokers acting as credit assistance providers. Therefore you have an equally important obligation to review the consumer’s requirements and objectives, make reasonable enquiries and verify information as part of your Preliminary Assessment to ensure the contract is “not unsuitable”.
How is a consumer credit contract qualified as “not unsuitable”? The National Consumer Credit Protection Act 2009 has a broad definition which explains that a credit contract will be unsuitable when a consumer is unable to comply with their financial obligations or can only comply with substantial hardship.
As a credit assistance provider, you are expected to consider the consumer’s purpose for credit and establish whether their financial circumstances allow them to achieve their goals. There are several opportunities throughout the assessment phase where you may identify cause for hardship.
At the outset, the loan purpose should be a primary focus and where it’s for a refinance, debt consolidation or top-up, caution should be exercised and additional enquiries made. If the client is struggling to manage their existing liabilities and requires a restructure of their loan facilities, these may only provide short term relief and simply forestall foreclosure or enforceable action.
It’s important to evaluate and understand the consumer’s Needs Analysis responses. This will highlight any areas for concern, particularly around whether current commitments are up to date. If a client answers ‘no’ to this question, this is a signal requiring further investigation and must be satisfactorily mitigated.
Finally, scan the client’s transactional bank statements for possible indicators of hardship, including payday lender deductions, exceeding a personal overdraft limit, payments to multiple credit card providers, regular debit balances and overdrawn or dishonoured fees. Any of these factors may suggest hardship and require further consideration.
By completing the Preliminary Assessment process, you will have assisted your client in understanding that the credit contract has been assessed as “not unsuitable” and you will have demonstrated compliance with responsible lending obligations.
When in doubt, contact the compliance team via compliance@connective.com.au We’ll be happy to answer any questions you may have.