Before you enter a credit contract

31 Jan

Written By For Good Digital

Credit providers, credit assistance providers and lease providers are required to assess the suitability of a credit product before providing it to a consumer (NCCP Act ch 3).
Separate provisions of the NCCP Act apply in relation to:
- credit assistance providers;
- lease providers;
- short-term and small amount credit contracts (NCCP Act pt 3-2C); and
- reverse mortgages (NCCP Act pt 3-2D).
See also ‘Payday loans’ in Chapter 5.8: Mortgages, consumer leases and other finance products.
A credit provider must assess whether a credit contract will be unsuitable for a consumer no more than 90 days prior to entering or increasing the credit limit under that contract (NCCP Act s 128).
That period is extended to 120 days where the credit is secured credit used to purchase residential property (NCCP Regulations reg 28J).
In assessing whether a credit contract is unsuitable for a person, the credit provider must assess whether:
- it was likely that the client would not be able to comply with the financial obligations under the loan, or could only comply with substantial hardship; or
- the loan did not meet the client’s requirements and objectives.
In making that assessment, section 130 of the NCCP Act requires a lender to:
- a. make reasonable enquiries about the consumer’s requirements and objectives in relation to the credit contract;
- b. make reasonable enquiries about the consumer’s financial situation; and
- c. take reasonable steps to verify the consumer’s financial situation.
The courts have not prescribed what specific assessments are required so each case must be considered on its individual circumstances. A credit provider should be obtaining enough specific information about the borrower and their circumstances to be able to satisfy itself that the credit provided is suitable for that individual. ASIC Regulatory Guide 209 Credit licensing: Responsible lending conduct provides additional guidance on responsible lending assessments.
Under the NCCP Act (s 131), a lender must assess that a credit contract is unsuitable for a consumer if it is likely that, at the time of the assessment:
- a. the consumer will be unable to comply with the consumer’s financial obligations under the contract, or could only comply with substantial hardship; or
- b. the contract will not meet the consumer’s requirements or objectives.
Substantial hardship is not defined in the NCCP Act; however, a presumption of substantial hardship will apply if a consumer could only comply with their financial obligations under the contract by selling their principal place of residence (NCCP Act s 131(3)), unless the contrary is proved. This provision directly targets the practice of ‘equity-stripping’ and asset-based lending by predatory lenders.
A lender is prohibited from entering into or increasing a credit limit under a credit contract that is unsuitable (NCCP Act s 133).
Subsections 133(2) and (3) – which replicates the relevant provisions of section 131 – provides guidance about when a credit contract will be unsuitable.
A credit provider’s failure to meet these responsible lending obligations gives an affected consumer a right to seek compensation under the NCCP Act (s 178).
Section 132 of the NCCP Act requires a lender to provide to a consumer, upon request, a written copy of the assessment:
- where the request is made prior to entering a credit contract or increasing a credit limit, prior to entering a credit contract or increasing a credit limit;
- where the request is made within two years of entering a credit contract or increasing a credit limit, within seven business days of the request;
- where the request is made more than two years but less than seven years after entering a credit contract or increasing a credit limit, within 21 business days of the request.
A lender is prohibited from requesting or demanding payment for providing a copy of the assessment (NCCP Act s 132(4)). If a lender does not provide credit to the consumer, the lender is not obligated to provide the consumer with the unsuitability assessment. However, the Credit Reporting Privacy Code may provide a consumer with some access to reasons for refusal.
For small amount credit contracts and consumer leases, there is an additional obligation that the assessment is to be documented (NCCP Act s 133CE). (See also ‘Payday loans’ in Chapter 5.8: Mortgages, consumer leases and other finance products.)
The obligation relating to the suitability of credit contracts and leases commenced for most licensees on 1 July 2010.
However, for some large licensees the obligations only commenced on 1 April 2011 (see NCCP Regulations reg 24A).