Responsible Lending
FOS’s Jurisdiction
• Claim for loss < $500,000
• FOS can award compensation up to $280,000 per claim (plus interest, if
appropriate) and can consider a dispute where there are multiple claims
• The amount of credit provided does not determine our jurisdiction
• If a claim exceeds $500,000 after lodging the dispute at FOS we cannot
continue to consider the dispute
The FSP’s obligations
•
To comply with the law, industry codes and its internal lending guidelines
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To assess if the credit contract is suitable for the consumer’s needs
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To assess whether the consumer can repay the loan without substantial hardship
•
What would a diligent and prudent lender have decided when it assessed the
consumer’s credit application based on the information available?
To do this, we will ask:
- Were there matters in the application which required further clarification
or information (which we call “red flags”)?
- Does the FSP possess other information about the consumer which they
should have taken into account when assessing the loan application.
National Consumer Credit Protection Act 2009
(NCCP)
• The NCCP applies to credit facilities provided by banks and credit unions on or after
1 January 2011. The National Credit Code is included as Schedule 1 to the NCCP.
• The NCCP does not apply to credit contracts provided to businesses or unregulated
credit. However, FOS is still able to consider disputes that are not regulated by the
NCCP
• The NCCP describes a loan as “unsuitable” if:
- it does not meet the consumer’s requirements and objectives, or
- the consumer cannot repay the loan without substantial hardship
• The FSP should take into account:
- the potential impact on the consumer of entering into an unsuitable loan
- the complexity of the loan arrangements, and
- the ability of the consumer to understand the loan arrangements.
Care and skill of a diligent and prudent lender
• Courts have considered that FSPs should exercise the care and skill of a diligent and
prudent lender. The ability of a consumer to repay their loan is crucial to good
lending practice.
• Legal commentators suggest that the assessment of a consumer’s ability to repay
the loan should be based on:
- the information provided by the consumer
- the FSP’s own research about the consumer, the consumer’s demographic
(for example, their age) and the financial industry in general
- calculations using the FSP’s scoring tables, acceptable ratio limits and other
methods
- the consumer’s personal factors including their business or technical ability
Industry Codes
• The industry codes of practice (Codes), such as the Code of Banking Practice, apply
to all consumer and small business customers of any FSPs that have subscribed to
the industry code
• Not all FSPs subscribe to the Codes. As we consider that the Codes reflect good
industry practice we expect all FSPs to ensure their lending guidelines comply with
the Codes
• In all FOS disputes we review the credit assessment and the FSP’s internal lending
policy, apply the principles of the Codes and good industry practice, as well as any
relevant legal principles
What type of information should the FSP
consider?
• The amount and source of the consumer’s income, including the length and type of
employment and the type of employment
• The consumer’s main expenses such as rent, repayments to other loans/debts,
child support, insurance
• The consumer’s variable or discretionary expenses, such as school fees, pay TV
• Any existing debts that the consumer is going to repay from the loan
• The consumer’s credit history and the consumer’s credit file
• The age and number of dependants the consumer is supporting
• The consumer’s assets
• Any reasonably foreseeable or predictable changes and/or geographical factors,
such as the distance the consumer lives from any cities or large towns
What is the minimum the FSP should do?
• Obtain documents to check the consumer’s ability to repay the loan and check
- the consumer’s PAYG income by obtaining copies of their payslips
- the consumer’s self-employed income by obtaining copies of their tax
returns and bank statements
• If the FSP relies only on an automated system, the FSP bears the risk that its
modelling is not correct or does not accurately reflect the consumer’s actual
financial position
• Obtain the consumer details of actual expenses. These details should then be
checked against a published index to assess if the consumer has under-estimated
their expenses
• We expect an FSP to add a buffer to the expenses estimated by the published index
(that is, they should estimate higher expenses) as most published data records an
individual’s minimum expenses
The consumer’s obligations
•
•
•
They must take reasonable care to protect their own interests
- A consumer should not sign a blank or incomplete loan application form
which a broker or lender has said they will fill in
- If a consumer has signed a blank or incomplete loan application, or failed
to consider how they are going to repay the loan, we may consider that they
did not act in a reasonable manner to protect themselves
- Must not falsify documents which are provided in support of a loan
application
We may decide that the consumer should bear some of their loss and the
compensation awarded may be reduced based on an apportionment of
responsibility
We will generally only do this if the loan is not regulated under the NCCP as the
NCCP imposes legislative requirements on the FSP
Responsible Lending and Guarantors
•
We can consider a dispute lodged by a consumer who guaranteed a borrower’s
loan or credit contract
•
The consumer may say that if the FSP had acted responsibly the loan would not
have been approved and the consumer would not have provided the guarantee
•
We can only set aside a guarantee if the total amount of the guaranteed debt or
the amount outstanding under the guarantee is < $280,000. This is because we
cannot set aside only part of a guarantee
•
You can read more about guarantees in the FOS Approach to disputes lodged by
guarantors on www.fos.org.au.
Responsible Lending and Brokers
•
Generally, a broker is the consumer’s agent and if this is the case the FSP is not
responsible for errors made by the broker
•
There are limited circumstances where the broker is the FSP’s agent
•
We will consider whether the broker was the consumer’s agent or the FSP’s agent
as part of our investigation where part of the consumer’s claim extends to the
actions of the broker. Sometimes the FSP may appoint a broker as its agent just to
verify the consumer’s identity. However, this does not make the broker its agent
for all other purposes.
•
If the broker is the FSP’s agent, the FSP may be responsible for errors made by the
broker.
Information we consider to assess if broker is
FSP’s agent
• A statement that the broker is not the FSP’s agent is not conclusive if it exists only
in an agreement between the FSP and the broker
• If the consumer asked the FSP questions about the loan product, whether the FSP
referred the consumer back to the broker
• Did the FSP pay commission to the broker
• Did the broker have access to the FSP’s internal systems in the presence of the
consumer
• Was the broker allowed to use the FSP’s logo in the broker’s own promotional or
contractual documents
• Was the broker required to comply with the FSP’s internal policies when dealing
with loan applications
• Did the FSP train the broker about the FSP’s internal policies and practices
• What was the role of any other another person or intermediary in submitting and
progressing the loan – for example, a mortgage originator
Relying on information provided by a Broker
•
•
•
•
We will review whether it was reasonable for the FSP to rely on the information
the broker provided.
Inaccurate information in a loan application does not in itself mean the FSP should
not have granted the loan. We will also look at whether the FSP, as a diligent and
prudent lender, would still have approved the loan if it had known the consumer’s
true financial position.
A consumer may have a separate claim against the broker. If the broker is also a
member of FOS, we will open a second file and try to consider the two disputes at
the same time.
If the consumer is awarded compensation for the broker’s conduct, we will take
this compensation into account when assessing the consumer’s loss as a result of
being provided with the loan by the FSP.
Common Errors in FSP loan assessments
•
Income
- The FSP relies on a source of income which has restrictions on how it can
be used, such as child maintenance payments (which should be used only
for children’s expenses).
- The FSP miscalculates the consumer’s monthly income from the
information provided about the consumer’s weekly or fortnightly salary or
wages.
- The FSP adopts the consumer’s income from a single pay period even
when it is inconsistent with year-to-date figures shown on the consumer’s
payslip.
- The FSP does not discount the consumer’s income from overtime or
commission in accordance with the FSP’s policy.
- The FSP does not verify the consumer’s rental income in accordance with
the FSP’s policy (which usually requires a discount to be applied to allow for
periods when the consumer’s investment property may be vacant).
- The FSP has relied on a spouse’s income to assess the consumer’s ability to
repay, even though the spouse will not be a co-borrower.
Common Errors in Loan Assessments
•
Expenses
- The FSP only looks at the consumer’s current credit card balances, rather
than the credit card limits.
- The consumer’s living expenses are understated or based on an incorrect
assumption about the consumer’s household.
- The FSP does not take into account the amount of rent that the consumer
will pay while their home is being built.
• Available Information
- If the consumer has other accounts or facilities with the FSP, the FSP fails to
consider its corporate knowledge about the consumer’s other financial
commitments, such as income receipts and expenses in the
consumer’s transaction account.
- The FSP overlooks information showing the consumer has other external
debts.
- The FSP fails to take into account the consumer’s age and capacity to
continue to earn an income over the term of the loan.
Common Errors in Loan Assessments
•
Incorrect Calculations
- The FSP assesses the consumer’s ability to make repayments based on the
consumer only repaying interest. Prudent lending practice requires the FSP
to base its assessment of the consumer’s ability to repay both principal and
interest over 25 or 30 years, even where the credit contract will have an
interest-only period.
- For bridging finance (where the consumer is seeking finance to purchase a
new property before they have sold their old property), the FSP
inadequately assesses the debt which may still need to be serviced after sale
of the old property.
Loss and business/investment purposes
• The FSP is liable for the credit risk of its lending decision. However, it is not liable
for the consumer’s investment risk in how the consumer uses the loan funds for a
business or investment such as shares
• If the consumer used the loan funds for investments (such as shares) or for their
business, usually the consumer will have to repay at least the principal amount the
FSP lent to them (even if the value of the investment has gone down)
• The consumer’s loss is usually only the interest and fees they paid to the FSP
• For credit contracts which are not regulated by the NCCP, we may decide to reduce
the amount of compensation the FSP has to pay the consumer if we consider that
the consumer contributed to their loss by not acting responsibly
Refinanced Debt
• If the consumer used the loan funds to refinance an existing debt (for example, an
existing home loan or credit card) they may not have suffered any loss. This is
because the consumer was already liable to repay that amount of debt
• The consumer will only have suffered a loss if the FSP’s loan has a higher interest
rate or fees than the previous loan
• We may award compensation for the costs the consumer paid to refinance their
debt and for the difference between the FSP’s interest rate and fees and the
previous lender’s interest rate and fees
• If the consumer received additional funds from the FSP when they refinanced the
debt we will consider whether the consumer is in a worse position overall taking
into account all interest rates and fees
Loans used to purchase property
• When we find that the FSP should not have granted the loan, the following
approach will apply to work out how much the Applicant owes the FSP
• The Applicant remains liable to the FSP for the principal loan amount borrowed.
Where liability is apportioned the Applicant may also have to pay a proportion of
the interest on this amount
• From this amount we deduct all repayments made by the Applicant to the loan.
The Applicant is also entitled to a compensation figure made up of purchase and
holding costs minus any benefit the asset provided. Again, where there is an
apportionment, the Applicant may only receive a reduced amount of compensation
for this item.
• The amount the Applicant owes to the FSP can be summarised as:
- principal borrowed (plus any apportioned interest)
- less repayments made
- less the compensation figure
Loans used to purchase property
• The amount owed by the Applicant based on the above formula is required to be
paid to the FSP within 3 months (by the sale of the asset or otherwise ie. refinance)
• If this amount is not repaid then the Applicant must surrender the secured
property to the FSP. The FSP is liable for the costs of selling the property – that is,
those costs are not added to the debt.
• If the property sale proceeds are insufficient to repay the loan and the costs, then
the Applicant will be liable for the shortfall unless the property was the primary
place of residence in which case the FSP will waive the shortfall
• If the amount received from the sale of the property exceeds the amount owed the
FSP must pay that excess amount to the Applicant.
Example
•
An Applicant borrowed $500,000 to purchase an investment property. The
Applicant made repayments to the loan over two years totalling $80,000. The costs
of purchasing and holding the property during that time totalled an additional
$60,000, but the Applicant received rental income during the period of $40,000
• The Applicant then lodged a dispute at FOS and it is found that the FSP had not lent
responsibly
•
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The Applicant owes the FSP the following:
Principal amount borrowed :
$500,000
Less repayments made :
$ 80,000
Less compensation figure :
$ 20,000
Total$400,000
• The Applicant has 3 months to repay $400,000 to the FSP whether by sale of the
property or otherwise, failing which the property must be surrendered to the FSP
Loans used to purchase a vehicle
• A consumer cannot claim the FSP did not lend responsibly and retain the car that
has been purchased with the loan
• The car will need to be sold or surrendered to the FSP so that we can work out the
amount of compensation that may be payable
• We assess loss by taking into account:
- any amount the consumer personally contributed to the purchase (for
example, the value of a trade-in or a deposit)
- costs paid by the consumer related to the purchase (for example, a
roadworthy test)
- any repayments the consumer made to the loan account
- any costs paid by the consumer related to selling the car (for example,
advertising costs and roadworthy certificate fee)
• We then deduct the value of the benefit the consumer had from using the car
• The FSP must then write off any shortfall debt. If there is a surplus, it must be paid
to the consumer
How we assess benefit for use of a vehicle
• To assess the benefit a consumer has received from using the vehicle, we look at
the difference between:
- the price the consumer paid for the car, and
- the current retail price for the car if it was sold by a second hand car dealer
(adjusted for the number of kilometres the car has been driven)
• To assess this difference we work out the current retail (not wholesale) value using
either:
- an actual valuation from an independent valuer, or
- by referencing a reputable vehicle valuation guidebook (such as Glass’s
Guide)
Low Doc Loans
• A low doc loan is one which is approved based on the Applicant’s declaration of income,
rather than being supported by payslips and other documents showing their income
• Low doc loans may be suitable for consumers who are self-employed or living on their
own investments and savings
• As a general rule, low doc loans should not be offered to PAYG employees. This is
because it is easy for a PAYG employee to provide current payslips and group tax
certificates to the FSP and an FSP can call the consumer’s employer to verify their
employment and income
• Low doc loans should not be offered to companies because the Corporations Act
requires companies to maintain management accounts which could be produced to an
FSP in support of a loan application
• Good industry practice requires any FSP which offers a low doc loan to act responsibly
when assessing the low doc loan application
• An Applicant that provides a false declaration of income may have to bear some of their
loss if the loan should not have been granted
Low Doc Loans
 The income declaration in the application form includes a statement that the
information the consumer has provided is true. This does not mean that the FSP
does not have to make proper enquiries when it is deciding whether the consumer
can afford the loan
• If there were “red flags” in the application and the FSP failed to make adequate
enquiries we may conclude that it did not lend responsibly
• Red flags can arise if the loan application contains information which appears to be
inconsistent, incomplete or wrong. For example:
- the FSP may receive a copy of the consumer’s transaction account
statements which show regular repayments on an existing loan which was
not disclosed in the low doc loan application form.
- the FSP may have information about the consumer’s financial position
which is not declared in the income declaration in the low doc loan
application form.
- ABN searches conflict with information provided by the Applicant.