CONSUMER LAW – RESPONSIBLE LENDING
Credit licensees must comply with the responsible lending conduct obligations in Chapter 3 of the National Consumer Credit Protection Act 2009 (National Credit Act). Importantly, the rules in this part of the Act apply to licensees that provide credit assistance in relation to credit contracts, as well as to the credit providers themselves.
The rules are aimed at helping to prevent consumers from entering into credit contracts that are not suitable for their circumstances. These obligations placed on providers of credit assistance mean that consumers are better informed before they enter into credit contracts. Vulnerable consumers who may be particularly subject to exploitation are especially protected by the provisions.
One of the fundamental obligations on credit licensees is that they are required to make reasonable inquiries into an individual consumer’s specific circumstances. Secondly, reasonable steps must be taken in order to verify the consumer’s true financial situation. This ensures that consumers are able to meet their repayment obligations without substantial hardship and that the credit contracts entered into meet the requirements and objectives of the consumer. Thirdly a person providing credit assistance must make a preliminary assessment, or a person providing the credit must make a final assessment about whether the credit contract is ‘not unsuitable’ for the consumer. This determination should be based on the inquiries and information obtained from the consumer.
So, the credit licensees must not suggest a credit contract to a consumer, assist a consumer to apply for a credit contract or enter into a credit contract with a consumer if the credit contract is unsuitable for the consumer.
ASIC has released a Regulatory Guide to assist licensees to understand their obligations – RG209 Credit licensing: Responsible lending conduct. This guide was updated in November 2014 following a Federal Court judgment, to better inform licensees.
In the case of Australian Securities and Investments Commission v Cash Store Pty Ltd (in liquidation)  FCA 926, ASIC launched proceedings against payday lender, The Cash Store Pty Ltd (in liquidation) (TCS), and loan funder, Assistive Finance Australia Pty Ltd (AFA). The Federal Court found that both companies breached consumer credit laws and engaged in unconscionable conduct in the sale of insurance.
The Federal Court ruled that both institutions did not comply with their responsible lending obligations to their particular customers. Most of their customers were on low incomes, or in receipt of Centrelink benefits, such as unemployment benefits. The Court further held that TCS acted unconscionably in selling consumer credit insurance in relation to these loans when it was unlikely that that insurance could ever provide any benefit to their customers. The Federal Court clarified that to enable a meaningful assessment of whether a loan is suitable, credit licensees must inquire about the customer’s current income and living expenses. As well as those inquiries, further information must be obtained depending on the circumstances of the particular consumer involved.
The maximum penalty for a corporation for breaching responsible lending and credit guide laws is $1.1 million for each contravention.
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