Responsible lending – consolidated guidance
Amber Warren, Elise Ivory, Amy Ciolek and Jon Denovan 27 August 2015
Introduction
Key principles
1.
Responsible lending is not about credit risk
Responsible lending is not about credit assessment. It has nothing to do with a financier’s
assessment of risk of loss. It is the opposite. It is about whether:

the consumer can repay the loan without substantial hardship; and

the loan will meet the consumer’s requirements and objectives.
One approach is for licensees to have a separate responsible lending policy from their credit
risk policy, to reflect the fact these are two distinctly separate activities with different
objectives. Credit risk is concerned with avoiding delinquency, and responsible lending is
concerned whether the credit product is unsuitable.
2.
The two responsible lending tests are equally important
Many licensees focus on the first requirement (ie repayment hardship), but it is important to
note that the legislation and ASIC give the two requirements equal weight. Both conditions
must be satisfied for a loan to be not unsuitable.
3.
Licensees may still breach the Act even if the loan is repaid
It is no defence to a breach of responsible lending obligations to say that the loan was repaid.
Courts or ASIC may take the view that the loan still did not meet the consumer’s requirements
and objectives, or that repayment caused substantial hardship.
This report attempts to bring together the various statements by ASIC and the courts on responsible
lending. Unfortunately, no matter how much is said or written, because the obligation is ‘scalable’,
significant uncertainty remains.
This report talks about loans, but the rules apply equally to consumer leases. The rules only apply to
loans and leases regulated by the National Credit Code. There are special rules for small amount
credit contracts (SACCs) and reverse mortgages. These special rules are not discussed in this report.
What are the legal requirements?
The legal requirements are well known and easily stated. A licensee (being a lender, lessor or credit
assistant aka a mortgage broker) must make:

reasonable enquiries into the consumer’s financial situation;

reasonable enquiries into the consumer’s requirements and objectives; and

reasonable steps to verify the consumer’s financial situation.
A licensee must then make sure that the loan is not ‘unsuitable’. A loan will be unsuitable if it does not
satisfy two equally important tests (although many licensees focus on the first test only).
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Test 1: The borrower will be unable to repay or will only be able to repay with substantial hardship
[our bolding]. If the borrower can only repay by selling the borrower’s principal place of
residence, it is presumed that the loan will cause substantial hardship unless the contrary is
proved. This presumption relates only to the borrower’s principal place of residence. This
presumption will not apply if the borrower has to sell other assets, for example an investment
property. This presumption can be rebutted, for example by demonstrating that sale of the
home at or before the time the loan is repayable meets the borrower’s requirements and
objectives.
Test 2: The loan meets the borrower’s requirements and objectives.
An assessment is required before a credit assistant:

suggests that a borrower applies for a loan;

assists a borrower to apply for a particular loan with a particular lender; or

recommends that a borrower remain in an existing loan contract.
Lenders must make the assessment before the consumer enters into a credit contract. For guidance
on Test 1 – see Annexure 1. For guidance on Test 2 – see Annexure 2.
Extension to unregulated credit
CBA v Dogett [2014] VSC 423 concerning the application of the Code of Banking Practice (COBP)
indicates that individuals and small businesses can raise responsible lending type principles in relation
to loans made available by ADIs who have subscribed to either the COBP or the Customer Owned
Banking Code of Practice (COBCOP).
This risk exists irrespective of the size of the facility or whether the loan is regulated by the National
Credit Code. Customers can use failure to lend responsibly as a defence to claims for recovery
against borrowers and guarantors. If the transaction is outside the jurisdiction of the EDR schemes,
customers can raise the issue through the court system.
The standard prescribed in these codes is lower than the ‘unsuitable loan’ standard of the National
Credit Code, but is still a long way from the old concept that bankers did not generally owe this type of
duty of care to customers.
The responsible lending process
The process normally involves:

fact find (obtaining information usually through an application form – a list of suggested items
to include in an application form is shown in Annexure 3);

verification;

assessment (remembering this is not a credit assessment but rather a suitability assessment);
and

generating a written assessment stating the date of the assessment and the period for which
the approval is valid. The assessment can be recorded electronically. The assessment can
be valid for up to 90 days from the date of the assessment. Lenders can make assessments
for 120 days for the purchase of residential property if the loan is secured by a mortgage over
that residential property. The time limit for new loans relates to the date on which the credit
contract is entered, not the loan settlement date. However, the time limit for principal
increases relates to the date on which the principal is increased, not the contract date.
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Licensees (by way of a reminder this includes lenders, lessors and credit assistants such as brokers)
must be able on request to provide a copy of the assessment. This does not mean the entire credit
file and does not require licensees to disclose their own proprietary information sources or
assessment methods. Rather, the copy of the assessment should feed back to the borrowers the
information that was collected and verified and how the licensee determined that the two tests were
satisfied. A copy of the assessment only needs to be provided on request if credit assistance is
provided by a broker, or a loan is made by a lender.
This brings us to two questions:

what enquiries do licensees have to make (ie what needs to go in the fact find); and

how much verification is required?
As noted before, this is ‘scalable’, but ASIC has given a certain amount of guidance in RG209 and
also other regulatory guides and reports. This report attempts to draw together the key statements
from these sources as set out in the table in Annexure 1 to this report.
When must the assessment be made?
Responsible lending obligations do not just apply to new credit, but also apply to principal increases.
Brokers must make the preliminary assessment within 90 days of when credit assistance is provided.
This will be when a broker assists a borrower to apply for a loan, lease, or an increase to an existing
loan. Assisting a borrower to arrange a settlement is not credit assistance and so the assessment
does not need to be within 90 days of loan settlement.
Lenders and lessors must make the assessment within 90 days of when a loan or lease contract is
entered into or the principal sum is increased (120 days if the loan is used for the purchase of
residential property and is secured by a mortgage over that residential property). The time limit for
new loans relates to the date of the credit contract, not the loan settlement date, whereas the time limit
for principal increases relates to the date the principal is increased, not the contract date.
If an assessment becomes ‘stale’, a re-assessment must be made. The re-assessment can usually
be less rigorous than the initial assessment because the original information can be relied upon when
and if appropriate.
The assessment must state the period the assessment covers – see ss.116, 129, 139 and 152 of the
NCCP Act.
Loan variations
The responsible lending obligations are triggered when a loan is varied by increasing the principal
sum, but it may come as a surprise that other loan variations can also trigger responsible lending
obligations.
The responsible lending obligations are triggered when a credit assistant suggests or arranges for a
borrower to enter into a specific credit contract or specific finance lease. The trigger for responsible
lending is not making a loan but entering into a credit contract. Many lenders document variations by
entering into a new credit contract. For example, a borrower who wants to switch from interest only to
principal and interest or split a loan into two or more accounts may be issued with a new credit
contract rather than a loan variation agreement. Responsible lending obligations will not be triggered
if the change is documented by a variation agreement but will be triggered if a new credit contract
documents the change.
Providing a copy of the credit assessment
Brokers and managers who provide credit assistance must provide copy of the assessment if asked
by the borrower or lessee even if a loan/lease/principal increase is not made.
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Under s.8 of the NCCP credit assistance is given when a person carrying on a business in Australia:

suggests the consumer apply for a particular loan, an increase to a loan, or a lease with a
particular credit provider;

suggests the consumer stay with an existing lender or lessor; or

assists the consumer to apply for a loan, an increase to a loan, or a lease with a particular
credit provider.
Brokers and managers must give the borrower a copy of the preliminary credit assessment if
requested within seven years of the date the quote is given under s.114 – see s.120 NCCP Act.
There is a gap here because in many cases a quote will not be given (ie when the broker/manager is
not charging the consumer any fees). However, the intention is clear that a copy should be provided if
a request is made within seven years of when the credit assistance is provided, and the MFAA
expects that its members will do so.
Lenders must give the borrower a copy of the assessment if requested within seven years of the date
the credit contract is entered or the principal increased (the credit date) – see s.132 NCCP Act. The
request can be made either before the credit is provided or within seven years after the credit date.
The copy need only be given if the loan/lease is provided or principal increased.
The copy of the assessment must be given within:

seven business days if the request is made within two years of the quote/credit date; or

otherwise 21 business days.
These periods are extended by reg 28M to 15 and 25 business days respectively for credit providers
under a credit contract that has been legally assigned.
Lenders do not have an obligation similar to that imposed on credit assistants to provide a copy of any
recommendation to remain in an existing credit contract with the lender.
A full copy of the licensee’s file need not be provided and sensitive or internal policy material may be
omitted. Often a copy of the loan application forms part of the information given in response to a
request.
Notice under the Privacy Act
The Privacy Act requires lenders to provide a notice to customers in two cases in respect of consumer
credit. This requirement is only imposed on lenders, not brokers.
(a)
Irrespective of when a credit report is received, if a lender refuses consumer credit
wholly or partly based on a credit report received from CRB – s.21P Privacy Act.
(b)
Irrespective of whether consumer credit was refused wholly or partly because of
information in a credit report, if credit is refused within 90 days of receiving a credit
report, paragraph 16.3 of the Credit Reporting Code (submissions to remove the
inconsistency between s.21P and the Code were rejected).
This document does not comprise legal advice and neither the MFAA nor Gadens Lawyers
accept any responsibility for it. Gadens Lawyers and the MFAA assert copyright in respect of
this work.
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Annexure 1 – Guidance on financial assessment
Source
Guidance
RG209.22
What does scalable mean?
More extensive enquiries are likely to be necessary when:

the potential negative impact on the consumer is likely to be relatively
serious;

it is evident that the consumer has limited capacity to understand the
credit contract, the consumer has conflicting objectives, the consumer is
confused about their objectives, or there is an apparent mismatch
between the consumer’s objectives and the product being considered
by the consumer;

the product is a reverse mortgage (the regulations prescribe specific
factors to be considered in relation to reverse mortgages);

certain services or products are provided, such as where a licensee
offers a debt consolidation service, or a switch or refinance – see RG
209.127 and ASIC Report 358; or

a consumer is in arrears on an existing credit contract or consumer
lease - RG 209.130.
Less extensive enquiries are likely to be necessary when:

the credit contract or consumer lease has relatively simple terms that
most consumers can easily understand; or

the consumer is an existing customer.
[Gadens comment: Although the scope of enquiry can vary significantly, the
law will not be satisfied by:

pure asset lends, where there is no enquiry or verification as to
serviceability at all; or

loans which rely on the consumer’s declaration of income or
affordability where there is no verification of the financial information.
On the other hand, if the loan product does not require serviceability for a
certain period (for example an extended honeymoon period), there is no need to
demonstrate an ability to service the loan during that period.]
REP445
Make special enquiries when consumers have uncertain, volatile or irregular
income and make appropriate discounts where there is any uncertainty as to
income continuing at the same level.
A standard 20% discount on rental income may not be sufficient in some
circumstances.
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Source
Guidance
RG209.31
Overview of financial assessment
In ASIC v The Cash Store [2014] FCA 926, the court considered responsible
lending obligations. At paragraph 42: ‘Assessing whether there is a real chance
of a person being able to comply with his or her financial obligations under the
contract requires, at the very least [our bolding] a sufficient understanding of
the person’s income and expenditure. It is axiomatic [self-evident] that
reasonable enquiries about a customer’s financial situation must include
enquiries about the customer’s current income and living expenses. The extent
to which further information and additional enquiries may be needed will be a
matter of degree in each particular case’.
RG209.33
Can income of people who are not borrowers be taken into account?
Indirect income sources (such as income from a spouse) can be taken into
account when that income is reasonably available to the consumer, taking into
account the history of the relationship and the express willingness of the
earning person to meet repayment obligations.
[Gadens comment: It would be wise to have the third party providing support to
guarantee the loan and acknowledge in writing that he or she must contribute to
the repayments on a regular basis - as distinct from the usual position of a
guarantor who is only called upon as a last resort. Consider requiring this third
party to obtain independent legal and financial advice.]
RG209.104
and 105
Can benchmarks be used?
Benchmarks, such as the Henderson Poverty Index, can be useful tools in the
process of determining whether a particular consumer will experience
substantial hardship as a result of meeting the obligations of a credit contract.
Applying benchmarks may provide a credit licensee with an indication of
whether a consumer would be assumed to be exposed to substantial hardship.
The use of benchmarks is not a replacement for making enquiries about a
particular consumer’s current income and expenses, nor a replacement for an
assessment based on that consumer’s verified income and expenses.
REP445
If benchmarks are used to verify living expenses, income adjusted benchmarks
should be used. Use the higher of actual and benchmark unless there are
reasonable and documented grounds for doing so.
Take reasonable steps to verify the amount of existing debt and repayment
amounts.
Make enquiries into borrower’s actual expenses, take reasonable steps to verify
the information, and document the inquiries and verification. In Report 445
ASIC makes special mention of the need not only to undertake the enquiries
and verification, but also to document what is done.
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Source
Guidance
RG209.37
Credit cards and loan purpose
A credit card has no particular ‘loan purpose’ and so there is a limited
requirement to understand a consumer’s requirements and objectives.
However, enquiries about the maximum limit the consumer requires are
appropriate.
RG209.4142
Use of credit application and behavioural scoring systems
Although credit application and behavioural scoring systems may assist in
meeting responsible lending obligations, the requirements of the legislation
must still be met (for example, the borrower’s ability to make the repayments
must be assessed).
A system that only measures the credit risk of the consumer but does not
assess the consumer’s capacity to repay will not meet the responsible lending
requirements (although such a system may provide a good prediction about the
overall risk of default in the loan portfolio).
RG209.49
Can automated systems be used?
Where automated systems are used to test the reliability of information, credit
licensees must satisfy themselves that the system is adequate, appropriate, and
regularly monitored and reviewed.
RG209.48
Verification without receiving information from the consumer
In some circumstances, credit providers will be able to verify a consumer’s
financial situation without receiving information from the consumer (for example
a bank could look at a consumer’s regular deposited salary, timing of credit card
payments and expenses). However, credit providers should take care when
relying on such information as it may not reflect a complete picture of the
consumer’s financial position.
RG209.51
When must further steps be taken?
If the information the consumer provides is inconsistent with other information
that the licensee holds about a consumer, or is outside the standard range for
the consumer (eg the income stated is far greater than would be expected for
the type of work the consumer undertakes, or their expenses are far lower than
would be expected, as indicated by relevant benchmarks) further enquiries will
be needed.
RG209.54
Can credit providers rely on information provided by brokers?
Credit providers and lessors can use information about the consumer provided
by a credit assistance provider. Credit providers and lessors are still bound by
the reasonable enquiries and verification obligations and so should consider
conducting spot checks, only using information from intermediaries that have
robust compliance arrangements, and having processes to actively discourage
inappropriate practices.
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Source
Guidance
RG209.107109
Can you take equity in an asset into account?
Generally, consumers should be able to meet their obligations from income
rather than equity in an asset. However, there may be circumstances where it
is not unreasonable to rely on the sale of an asset for repayment (eg bridging
loans and reverse mortgages).
However, remember that if the borrower can only repay by selling their principal
place of residence, it is presumed that the loan will cause substantial hardship
unless the contrary is established. The contrary can be established by ensuring
the borrower intends to sell.
RG209.118
What about balloon repayments?
Care is required with balloon repayments to ensure that the consumer
understands, and has the capacity to cover, the final repayment.
RG209.132
Do refinances have to produce a financial benefit?
A refinance can be justified on the basis of financial benefit or for other reasons
(eg customer service, greater flexibility, additional product flexibility).
REP 445
Interest rate buffers should be at least 2% and should be applied to existing
loans as well as the proposed loan.
When assessing affordability of interest only loans, assess the ability to make
P&I repayments over the remainder of the term, not the whole term. For
example, if a 25 year term loan has a 10 year interest only period, serviceability
should be assessed on repaying P&I over 15 years not 25 years. The same
principles apply to lines of credit which convert to amortising after a set period.
Section 47
Impact of other requirements imposed on licensees
There are two other key requirements in the NCCP Act which could impact on
the unsuitability test, namely:

the obligation to act efficiently, honestly, and fairly; and

the obligation to ensure clients are not disadvantaged by any conflict of
interest.
[Gadens comment: Read literally these provisions could significantly impact on
the type of loans a licensee could arrange. For example, it could be argued that
a completely efficient, honest, and fair licensee would tell a borrower to go to
someone else who has a better product.
This extreme interpretation of these two requirements is incorrect because it
would change the requirement from a prohibition on providing an unsuitable
loan to a requirement to arrange the best loan. That is clearly not the intention
of the legislation.
However, it is important that licensee’s disclosure documents clearly explain
what you or your business can and will do. For example, a mono-line broker
can only arrange loans through its funder and so its disclosure would need to
clearly explain this.]
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Source
Guidance
ASIC
REP262
This report related to credit assistance providers’ responsible lending conduct,
focusing on ‘low doc’ home loans.
1. Brokers should adhere strictly to their own responsible lending guidelines.
2. Brokers need to investigate and record the consumer’s medium to long
term objectives. Records should be readily accessible and may be kept
electronically.
3. The consumer’s identified objectives should be prioritised (eg is the cost of
the product the most important thing for the borrower?).
4. Brokers must record the steps taken to verify the consumer’s income and
cannot rely only on statements from the consumer.
5. It is inappropriate to rely solely on estimates of future earnings to verify a
consumer’s self-employment income, no matter the source, without some
form of appropriate verification.
6. It is inappropriate to solely rely on a living expense figure sourced from a
lender’s or LMI’s calculator. Although benchmark figures can be useful for
verifying living expenses, it is still necessary to make reasonable enquiries
into (and verifications of) actual living expenses. If consumers self-report
living expenses, and that amount varies from the benchmark figure, further
enquiry should be made and any anomalies followed up.
7. Consider taking steps to verify expected ongoing fixed expenses, such as
other existing loans that have not been refinanced.
8. The file should record how a consumer’s ability to make repayments has
been assessed. Many brokers rely on calculators supplied by the proposed
lender or mortgage insurer. Brokers must ensure that they have a
reasonable basis for relying on these tools.
9. It might be appropriate to impose an interest rate buffer on other loans
being retained and not just the loan being documented.
10. Letters from accountants can be a suitable verification of income. Best
practice is to ensure that the accountant’s statement confirms the
consumer’s actual level of regular income, specifies the basis on which the
statement is made, includes comments on previous earnings and the
underlying information supporting the statement, and identifies the period
for which the accountant has been engaged by the consumer. Accountants
should not express an opinion that the borrower can afford repayments
because that may amount to providing credit assistance and require a credit
licence.
[Gadens comment. Item 9: It is not always appropriate to apply a buffer on
other loan repayments because the buffer is nothing more than a ‘safety
margin’. It was never intended to be a scientific estimation of what might
happen in the future. If a scientific estimation was to be made, allowance would
need to be made for increases in all other expenses, and also (importantly)
income.
Item 10: Different lenders have different rules for non PAYG borrowers, and it is
difficult for brokers to ‘guess’ what particular lenders may require in specific
circumstances. The standard required from brokers for preliminary credit
assessments should be lower for ‘low-doc’ loans.]
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Source
Guidance
REP 445
Verification (as distinct from enquiry about of outgoings)
Take reasonable steps to verify the amount of existing debt and repayment
amounts.
Resolve any inconsistencies between information provided by consumers.
[Gadens comment: There is no clear guidance on the degree of verification
required for loans, particularly in respect of financial liabilities and commitments,
other than in respect of current credit facilities being refinanced – see
RG209.27.
Although there is widespread consensus about verification of income (eg pay
advices, employer letter, tax returns, rental statements, etc), there is
inconsistency between lenders as to the verification in relation to credit facilities
that are not being refinanced.
Many licensees conduct minimal or no verification of other outgoings (living
expenses).
In the Cash Store case at item 48, the judge held that The Cash Store failed to
take reasonable steps to verify the consumer’s financial information because it
did not verify the customer’s income and rent or mortgage payments.
It appears reasonably clear that it is not necessary to verify all information
collected. However, the law requires the licensee to make reasonable
verifications.
If a borrower declares current credit facilities, those that are to be refinanced
from the loan being sought should be verified by way of statements covering the
past six months (includes credit cards).
There is inconsistency between lenders as to whether verification is required in
relation to credit facilities that are not being refinanced.
A prudent licensee would record the type of verification. Any material
inconsistencies identified during the verification should be discussed with the
borrower, and the response clearly recorded.]
N/A
What about bank statements?
[Gadens comment: Other than for SACC lending, there is no requirement to
collect bank statements.
If bank statements are obtained, it is likely that licensees will be deemed to be
on notice of the information in those statements. If the statements are
inconsistent with the information provided by consumers, further enquiries
should be made.]
ASIC
REP358
What are the significant risks of debt consolidation?
The significant risks and costs of debt consolidation include:
20130944.5
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higher long-term costs of repayment resulting from extending the loan
term;

transferring default risk of previously unsecured debt onto the family
home;
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Source
Guidance

moving consumers to an interest-only loan without an appropriate exit
strategy;

leaving pre-existing contracts open, enabling a consumer to redraw on
them at a later stage and fall further into debt problems; and

additional costs such as broker fees and new loan establishment fees.
Debt consolidation is not a one size fits all solution to financial difficulty. It is
essential that advisers ensure that the debt reduction strategy they are
proposing meets the consumer’s requirements and objectives and is affordable
both in the short and long term.
It is important that files record the consumer’s requirements and objectives. It is
insufficient to record them merely as ‘debt consolidation’.
Copies of the consumer’s pre-existing credit contracts or account details for
each contract should be obtained and considered to assist in determining
whether the consolidation will meet the consumer’s requirements and
objectives.
ASIC’s audit found inconsistent record keeping practices particularly in relation
to debt consolidation and refinances. The records often did not set out the
reasons why the consolidation would benefit the consumer. Licensees should
be careful how they market debt consolidation to consumers and should have a
proper basis for recommending debt consolidation beyond a general notion that
fewer repayments or a lower regular payment is in the consumer’s interests.
If debt consolidation is provided as a solution to a consumer’s immediate
financial difficulty, the licensee should also ensure that the consumer has
ongoing support to ensure their financial difficulties are addressed.
N/A
Importance of written records
[Gadens comment: ASIC, courts, and tribunals often test compliance by
reference to written records. These records can be kept electronically.
Accordingly, it will usually be insufficient to say ‘we did this, but didn’t record it’.
From time to time, ASIC may ask a licensee to produce a set of borrower files.
If the licensee is not able to demonstrate what information they asked the
borrower to provide, how the information was verified, how inconsistencies were
dealt with, and how decisions were made, then it is possible ASIC will consider
that appropriate steps have not been taken.
It is also important that there are some written procedures and that the written
procedures are followed.]
N/A
What is substantial hardship?
At paragraph 22 of the Cash Store case, the judge said that “the expression ‘it
is likely’ imports as a matter of ordinary meaning ‘a real chance or possibility’.”
[Gadens comment: However, it is still hard to imagine how a small loan of up to
say $5000, can cause substantial hardship to a person who is not living in
poverty.]
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Annexure 2 – Guidance on requirements and objectives
What are requirements and objectives?
There has been confusion about how the loan purpose differs from the consumer’s requirements and
objectives. The answer is that purpose is a component of requirements and objectives, and not
something different. However, ASIC’s view is that merely asking about the loan purpose is not
generally a sufficient enquiry into the consumer’s requirements and objectives.
Report 445 –released August 2015
REP445 emphasises that there is a need not only to enquire about requirements and objectives (ROs)
but also to document the results.
The most challenging aspect of the report is ASIC’s expectations in relation to borrowers’
requirements and objectives (ROs). ASIC’s thoughts on this topic are not new and have been in the
public arena for at least one year. Release of the report emphasises ASIC’s focus on ROs and is a
call to action for all lenders and brokers.
ASIC found that most lenders surveyed did not appear to be making sufficient enquiries in relation to
ROs, or if they were those findings were not being recorded. There is significant emphasis on both
enquiring and recording.
ASIC expressed doubts whether a tick box system will be sufficient to identity ROs, at least in respect
of home loans. Tick boxes with some free text may suffice. There is a risk that ASIC’s expectations
may not be satisfied unless there is some personal communication.
Financiers have struggled with the issue of what ROs apply to home purchase loans because typically
borrowers will say that their key and only RO is to purchase the home. The concept is easier to grasp
for refinances, as there should be ROs that trigger the desire or need to refinance.
It appears that ROs for home purchases largely come down to loan product features.
For example, if a borrower states that their prime objective is to pay off the loan as fast as possible,
the simplest and cheapest loan will be appropriate, and lenders should not offer a more expensive
multi-featured loan. However, the requirement does not extend to requiring lenders to send borrowers
away to another lender with a cheaper loan. This is a difficult concept because the cheapest loan may
not be the best way to pay off faster because a loan with a redraw or offset account combined with
proper money management may better achieve that RO.
ASIC specifically says that an interest only term of more than five years for a home loan is at a high
risk of not meeting R&Os. Special notes should be recorded indicating why a longer term is
appropriate.
The message is clear:

make more extensive enquiries into ROs;

record those ROs; and

do not arrange or provide a loan that does not meet those ROs.
What enquiries should be made?
Depending on the circumstances, reasonable enquiries about a consumer’s requirements and
objectives could include enquiries about the following - RG209.36:
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Suggested enquiry
Verification or further
question
The amount of credit needed.
The timeframe for which the credit is required.
The purpose for which the credit is sought and the benefit to the
consumer [our bolding].
Does the amount of credit
needed generally meet the
loan purpose? If no, discuss.
(Note 1)
Particular product features or flexibility required, and whether any
additional cost is acceptable in return for having those features.
Whether the consumer requires any additional expenses to be
included in the amount financed, and whether the consumer is
aware of the additional cost of these expenses being financed.
Discussion about:


add on costs, and
how borrower proposes
to pay for associated
costs.
Note 1: In ASIC v The Cash Store, ASIC suggested numerous times that the amount borrowed did
not reflect the loan purpose. It may be difficult to know the cost of an item, but to improve compliance,
if the loan amount seemed generally inconsistent with the purpose or asset being purchased, a
licensee could ask about the perceived difference, and record the response. This may not be relevant
to home loans as the lender will generally have a valuation.
Factors when considering whether a loan meets ROs
RG209.22 explains that whether a loan meets a consumer’s requirements and objectives will vary
depending on the circumstances, but some examples of factors that could be taken into account are
set out in the following table.
RG209 factor
Comments
The nature of the credit requested by the
consumer.
This is dictated by what the consumer asks for. The
common types of credit are:

home loan

personal loan

secured personal loan (eg car finance)

credit card.
The consumer’s stated objectives in
obtaining the credit.
This is the purpose – eg I want to buy a house or a car,
or I need a loan for one or more purposes.
RG209.35 notes that the description of the consumer’s
stated purpose for obtaining a loan should be specific
enough and consistent with the amount of credit sought
to enable the licensee to understand the consumer’s
objectives and requirements. For example, general
descriptions such as ‘personal’ or ‘living expenses’
would not be sufficient.
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RG209 factor
If the consumer has more than one
requirement or objective, the relative
importance of each to the consumer (eg
whether the cost of the credit or flexibility
to make later changes is more important
to the consumer).
If the credit will be used to purchase a
specific item, the term of the credit
relative to the likely useful life of the
asset.
Comments
Consider:

is a simple loan with a low interest rate preferred
over a flexible loan?

does the consumer want redraw or offset?

does the consumer want flexibility in case of
reduction of income for a period?
A short term loan will usually be unsuitable for housing
finance, and a 10+ years term will usually be unsuitable
for car finance.
A bullet repayment must match the objectives. For
example, a four year term bullet repayment car loan
maybe suitable if the stated intention is to replace
vehicles every four years.
The interest rate, fees and charges
applying to the credit contract or
consumer lease.
Very high interest rates and high fees may be unsuitable
for long term finance, but suitable for short term finance.
This requirement does not seek to require lenders or
brokers to provide the cheapest loan.
The consumer’s understanding of the
proposed contract.
Credit contracts should be in plain English.
A letter summarising the principal financial obligations
may also assist understanding.
For complex structures, consider requiring consumers to
obtain legal advice.
For a consumer lease, whether the
consumer is aware that they will not own
the goods at the end of the contract.
A clear prominent disclosure should be made if the
consumer has no legal right to purchase the goods.
The complexity of the credit contract or
consumer lease, and whether a more
basic product could meet the consumer’s
needs.
Consumers should not be provided with a multi-featured
loan, if a simple loan at a lower cost is available.
If other expenses, such as premiums for
insurance relating to the credit contract or
consumer lease, are to be financed,
whether the consumer is aware of this
and accepts the additional costs of these
expenses being financed.
A clear prominent disclosure should be made.
Whether the consumer will need to
finance a large final payment under the
contract.
Any bullet repayment should be matched with a source
of repayment.
In relation to switching, the extent to
which switching to the new credit contract
will benefit the consumer.
Switching appears to mean refinancing. Licensees must
ensure that consumers benefit from refinancing. The
benefit may be other than financial (eg service, loan
features). The reasons must be documented.
There are limited circumstances when a credit assistance provider can suggest that a consumer
remain in an existing credit contract that is unsuitable. The licensee must reasonably believe that
there is no other credit contract that is ‘not unsuitable’ and they must inform the consumer about
hardship variation procedures available under the National Credit Code (s.124) - RG 209.137.
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Annexure 3 – Suggested content for application forms – fact find
These are suggestions only. This outline should be adapted for specific loan products and specific
requirements.
The law also requires reasonable verification of the information collected. It seems clear this does not
require a full audit of a consumer’s expenses. However if the information collected doesn’t appear
logical, or there is inconsistency between the information collected and other information held by the
licensee (for example bank statements), further enquiry and possibly verification is required.
Loans being refinanced do need to be reviewed to make sure that the refinance meets the consumer’s
requirements and objectives.
Requirements and objectives
Loan amount (ensure this amount is sufficient to cover all expenses associated with the financing
and any related purchase, including insurance premiums):
$__________________
Loan term:
______years ______months
Purpose of loan (eg acquire house/car)
 Buy to live in
 Buy as investment
 Buy and build
 Build
 Refinance
 Other (please specify) _________________________________________________
Benefit to you of loan
If you are refinancing or consolidating debt, what are your requirements and objectives for seeking
refinance or debt consolidation? Please number the applicable options in order of priority, with 1
being the most important to you. Please  any option which is not important to you.
Better interest rate

Consolidate debts

Specific product features

Dissatisfaction with existing lender’s service or products 

Reduce overall commitments
Reduce the amount of each repayment

Other (please specify)  _______________________________________________
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Do you require any of the following?
 Redraw account
 Offset account
 Split loan (splits of variable, fixed, and line of credit available)
 Internet access
 Phone banking
 Cheque book
 Credit card
 Tick to acknowledge that you are aware that additional interest and other costs will be incurred
if you elect to borrow money to pay additional expenses such as insurance, stamp duty, etc.
Note: As part of the assessment, licensees must ensure that consumers benefit from any refinancing.
The benefit may be other than financial (eg service, loan features). The reasons must be
documented. Usually, this will require obtaining details and statements of loans being refinanced.
Income
Annual income
$
Do you expect any significant change to your financial situation over the
foreseeable future that would ADVERSELY impact your ability to meet loan
repayments or reduce your income as stated in this application?
 YES
 NO
Income Verification

Income should be verified using payslips, PAYG, statements etc.

If a consumer discloses that they do expect a significant change to their financial situation in
the foreseeable future, licensees should investigate further.
Your Household Living expenses
Item
Monthly expenses (total annual cost, divide
by 12)
Accommodation (mortgage, rent)
$
General living expenses including food, clothing
$
Mobile phone/internet
$
Foxtel/Austar/other subscription services
$
Utilities and rates
$
School fees/childcare fees
$
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Spouse or child maintenance payable
$
Insurance (house, life, health, car etc)
$
Personal loans/credit cards/ motor vehicle loans/
other loans
$
Other debts (HECS, tax liability)
$
Travel/transport, including rego and maintenance
$
Other (eg holidays, entertainment, gym
membership, cleaning, gardening services etc)
$
Other large annual costs (birthdays, vacations, etc)
$
Total
$
Verifying Living Expenses
Any verification method used, and the outcome, should be recorded on the borrowers loan file.
Determine whether the stated living expenses consistent with the living expenses estimated generated
by a decision engine, or an index? A predetermined tolerance level could be used to prompt for
further enquiry. If the expenses are not consistent, licensees should use the higher of the stated living
expense, and the living expense generated by the decision engine or other tool.
Using bank statements to verify
Asking for the borrower’s bank statement can be problematic. It may or may not give useful
information about the borrower’s expenses and spending habits, and it puts the licensee on notice of
all the items listed on the statement. Often bank statements will only tell part of the story as the
customer may have other accounts and/or conduct most transactions on a card.
At a minimum, a lender with bank statements should:
(a)
check that the income listed on the bank statement roughly matches the borrower’s
stated income; and
(b)
check that the expenses roughly match the borrower’s stated expenses.
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