How brokers’ responsible lending obligations could change if Government repeal succeeds
In response to the COVID-19 pandemic and recognising the impact responsible lending obligations (RLOs) were having on the flow of credit, the Federal Government is seeking to repeal the RLOs.
The Federal Government has taken steps to repeal the Responsible Lending Obligations (RLOs), partly in response to the impact they had on the flow of credit during the COVID-19 pandemic. The proposed legislation is currently being debated in the Senate, with a vote slated for May 2021.
If passed, it could change the way brokers do business.
In this article, our Compliance Team explains the original intent of responsible lending and broker’s current obligations, how the RLOs have shaped the lending landscape today, and what changes are expected going forward.
What are the Responsible Lending Obligations?
The RLOs were introduced in 2009 as part of the National Consumer Credit Protection Act 2009 (Cth) (NCCP). They were introduced to ensure that brokers and lenders would make an assessment of a loan’s suitability before providing credit to a consumer.
To meet their RLOs today, brokers and lenders must:
(i) make reasonable inquiries about a consumer's financial situation, their requirements and objectives,
(ii) take reasonable steps to verify a consumer's financial situation and
(iii) make an assessment that the credit contract is not unsuitable for the consumer.
RLOs and their impact on credit today
The application of RLOs has become increasingly onerous, especially in the wake of the Royal Commission and more recently due to the economic impact of COVID. There has been a shift from “borrower beware” to a “lender beware” environment, which has resulted in brokers being obliged to conduct a more forensic-style verification of customer information regardless of the borrower’s actual financial position.
In the recent Westpac v ASIC case (otherwise known as the ‘wagyu and shiraz’ case) the Court of Appeal observed that there was too strong a focus on reviewing a consumer’s living expenses and a failure to recognise that a consumer could change their spending patterns following the assumption of a large debt obligation.
This is when, in response to the stagnant flow of credit during the pandemic, the Federal Government decided to propose repealing the RLOs.
What changes are expected?
If passed during the Senate vote in May, the proposed changes will come into effect over the second half of 2021. The main proposed changes are:
- RLOs will only apply to small amount credit contracts (up to $2,000) and consumer leases
- For all other credit regulated by the NCCP, RLOs will no longer apply
- Lenders regulated by APRA (ADIs) will continue to be subject to existing prudential lending standards. Equivalent lending standards will apply to other lenders (i.e., non-bank lenders) and they will be regulated by ASIC
- Best interest duty (BID) will apply to all credit assistance providers (all finance brokers assisting on consumer credit deals), not just mortgage brokers. The extension of BID to all brokers will likely have an effective date later than the removal of RLOs.
These changes should reduce the need for brokers to verify the customer's financial situation to the extent that they are currently. Income must continue to be verified and reasonable checks conducted into a customer’s financial position. However, there will be far less scrutiny around living expenses, which is a big win for brokers and customers alike. Otherwise, the impact of these changes on mortgage brokers will not be material as they are still subject to BID, which is a higher standard to RLOs.
Who will be impacted by the proposal?
The removal of the RLOs will impact all Australian Credit Licence holders and exempt credit industry participants who provide credit or credit assistance in relation to consumer credit products that are regulated by the NCCP.
Extension of BID to all credit assistance providers (regardless of whether they are a mortgage broker or an asset finance specialist) will result in an even playing field for all brokers when providing assistance on consumer asset finance and personal loans.