Understanding credit and finance

Credit providers, credit assistance providers and lease providers are obliged to assess the suitability of a credit product before providing it to a consumer (ch 3 National Consumer Credit Protection Act 2009 (Cth) (‘NCCP Act’)).

Separate provisions of the NCCP Act apply in relation to:

• credit assistance providers;
• lease providers;
• short-term and small amount credit contracts (pt 3-2C NCCP Act);
• reverse mortgages (pt 3-2D NCCP Act).

In 2021, an exemption to responsible lending obligations was enacted in relation to certain lending activity to small business customers. Instead of considering whether the borrower is accessing credit or goods for a wholly or predominantly personal, domestic or household purpose, where there is any business purpose (notwithstanding that some of the credit will likely be applied to household finances), licensees are exempted from the responsible lending laws (see reg 28RB National Consumer Credit Protection Regulations 2010 (Cth) (‘NCCP Regulations’)).

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 not more than 90 days prior to entering or increasing the credit limit under that contract (s 128 NCCP Act). 

That period is extended to 120 days where the credit is secured credit used to purchase residential property (s 28J NCCP Regulations).

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:

1. make reasonable enquiries about the consumer’s requirements and objectives in relation to the credit contract;
2. make reasonable enquiries about the consumer’s financial situation; and
3. take reasonable steps to verify the consumer’s financial situation.

ASIC v Westpac [2020] FCAFC 111 

In ASIC v Westpac Banking Corporation [2020] FCAFC 111, the Full Federal Court held that the responsible lending provisions of the NCCP Act did not prescribe the way credit providers had to assess whether the loan was unsuitable. Therefore, the justices held that Westpac was not necessarily required to consider living expenses declared by a consumer when assessing whether a loan was unsuitable. Although the Federal Court held that a creditor could decide how to use the information under section 130 of the NCCP Act to assess whether a loan was unsuitable, the creditor was still prohibited from entering unsuitable loans. This case focused on the responsible lending assessment process. ASIC did not allege that Westpac had entered unsuitable loans in this case.

Despite the decision in ASIC v Westpac, responsible lending claims should still be considered where a loan has been entered into that does not meet the client’s requirements and objectives, or is not affordable without sustantial hardship, and this should have been apparent to the creditor when they assessed the loan.

ASIC Regulatory Guide 209, ‘Credit licensing: Responsible lending conduct’ provides guidance regarding responsible lending assessements. It is likely that this ASIC guide will be updated following the decision in ASIC v Westpac.

Under the NCCP Act (s 131), a lender must assess that a credit contract will be unsuitable for a consumer if it is likely that, at the time of the assessment:

1. the consumer will be unable to comply with the consumer’s financial obligations under the contract, or could only comply with substantial hardship; or
2. 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 (s 131(3) NCCP Act), unless the contrary is proved. This provision directly targets the practice of ‘equity-stripping’ and asset-based lending by predatory lenders;
• ASIC’s Regulatory Guide 209 ‘Credit licensing: responsible lending conduct’ provides guidance to credit providers when assessing ‘substantial hardship’.

A lender is prohibited from entering into or increasing a credit limit under a credit contract that is unsuitable (s 133 NCCP Act).

Subsections 133(2) and (3) – which replicate the relevant provisions of section 131 – provide 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 (s 132(4) NCCP Act).

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.

The obligation relating to the suitability of credit contracts and leases commenced for most licencees on 1 July 2010. However, some large licencees (i.e. Australian Deposit Taking Institutions, like Banks, and registrable corporations) required more time to implement compliance systems. 

Accordingly, for these lenders:

• if the application for credit or lease was received between 1 October 2010 and 31 December 2010, the obligations commenced on 1 April 2011;
• if the application for credit or lease was received on or after 1 January 2011, the obligations commenced on 1 January 2011 (reg 24A NCCP Regulations).