The Government has recently made some practical (and much welcomed) amendments to the responsible lending rules to address some unintended consequences caused by the latest round of amendments to the Credit Contracts and Consumer Finance Act 2003 (CCCFA) that came into effect on 1 December 2021. The CCCFA amendments were released for the purpose of protecting vulnerable consumers from predatory lending. These amendments took a step away from the “principle-based” approach and imposed blanket regulations on lenders that required them to follow prescriptive regulations when determining loan affordability. You can find more information on these CCCFA changes in our prior update here.
The problem with the December 2021 ‘prescriptive approach’
The prescriptive CCCFA suitability and affordability rules required lenders to make mandatory inquiries when issuing credit to consumers, including detailed examination into a borrower’s financial circumstance.
As a result, the new regulations suffered widespread criticism and controversy from lenders facing increased compliance costs and from borrowers who find themselves unable to access safer funding sources due to the stringent application of the new affordability rules undertaken by some lenders.
Changes to the Responsible Lending Code and CCCFA Regulations
With no surprise, the major consumer credit reforms introduced in December last year were back under review by the Government within two months of being introduced.
In June 2022, after considering feedback from banks, other lenders and consumers, the Government reiterated its announcement in March 2022 and confirmed it would loosen the rules under the CCCFA in order to “curb any unintended consequences” from the robust procedures introduced in December 2021.
The newly published Responsible Lending Code (Code) and Credit Contracts and Consumer Finance Amendment Regulations 2022 (Regulations) came into force on 7 July 2022. The overall changes are aimed at providing guidance to lenders, so they do not interpret the CCCFA suitability and affordability regulations too conservatively while also removing the blanket requirements for lenders to meticulously examine borrowers’ spending habits.
Key Changes to the CCCFA Regulations:
- “Savings” and “Investments” are no longer expenses: When assessing a borrower’s likely material expenses, lenders were required to include outgoings into savings and investments accounts as part of their assessment. The 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 expense information: Lenders will still need to ensure that information used to make an initial estimate of a borrower’s expenses is obtained in “sufficient detail to minimise the risk of relevant expenses being missed or underestimated to an extent material to the estimate”. However, this is only a requirement when the expense estimate is based on “asking the borrower” about their expense.
Key changes to the Responsible Lending Code:
- Inquiries into living expenses: When borrowers provide a breakdown of their future living expenses and these are benchmarked against robust statistical data, there is no need to also inquire into their current living expenses from recent bank transactions.
- Estimating expenses: The Code clarifies that when lenders estimate expenses from recent bank transaction records, lenders can ask the borrower about how expenses are likely to change once the credit contract is entered into. For example, borrowers who incur frequent takeaway expenses may, once they have taken out the loan, reduce those expenses by eating at home.
- Requirements to obtain information in sufficient detail: The requirement to obtain information in sufficient detail will only relate to information that is provided by borrowers directly rather than relating to information from bank transaction records.
- Treatment of surplus, adjustment and buffers: The Code provides further guidance on reasonable surplus and that it is not required if the lender has applied adequate buffers and adjustments to income and expenses.
- The ‘obviousness’ exception: The updated Code provides clarity on when affordability of a loan is ‘obvious’ so that a full income and expense assessment is not required.
Next steps
The Minister of Commerce and Consumer Affairs has recently received a final report and advice from officials and is considering what, if any, further actions are required in this area.
If you need advice on the Responsible Lending Code or the application of the CCCFA Regulations, please get in touch with any of the lawyers in our Banking & Finance Team.
