29/05/2009

Amidst the fallout from the non-prime lending catastrophe in the US has come the concern that in Australia it’s been too easy to get a loan.   Flushed with funds during the longest bull run in history and fuelled by high commission rates for mortgage brokers who introduced potential borrowers, both the bank and non-bank sectors were only too ready to lend money whether for housing or credit cards.  The only qualification seemed to be the need for a pulse!

With the collapse of the lending market and rising unemployment the number of failing loans is starting to increase and if interest rates rise dramatically before employment recovers there could be many people with debt they simply cannot service.

With typical 20/20 hindsight the Federal Government has decided to clean up the consumer lending sector with the release of its draft National Consumer Credit Protection Bill 2009. This new legislation will see the Federal Government take control of consumer credit by establishing a national licensing regime requiring providers and brokers of consumer credit to hold an Australian Credit Licence (ACL) issued by the Australian Securities and Investment Commission (ASIC). ASIC will become the sole regulator with respect to consumer credit nationwide, and will be given enhanced powers of enforcement.

The proposed legislation will impact any person involved in providing, arranging, advising or enforcing consumer credit in Australia, including consumer leases, credit for residential investment property and retailers that offer third party finance.

Most importantly the consumer credit reform package for the first time introduces responsible lending requirements for lenders and other persons who deal with consumers such as finance brokers. Under the responsible lending requirements, lenders and advisers will be required to ensure that a loan is not “unsuitable” for a particular consumer and that the consumer has the capacity to repay the loan.

Bank lending officers and mortgage brokers will return to the days prior to 1995 when to get a loan you had to not only be able to show you had the necessary security but also that you could afford to repay the loan, both now and in the future.

To achieve this lenders and/or advisers will need to:

• fully disclose who they are including their ACL number;
• let the consumer know that they are required to assess whether the loan is unsuitable for the consumer, and assess the consumer’s capacity to repay the loan;
• not recommend or provide a loan to a consumer that is unsuitable for the consumers needs or which the consumer does not reasonably have the capacity to repay;
• disclose all fees and charges before the loan is recommended or entered into;
• disclose all commissions the lender or adviser will receive for arranging or selling the loan to the consumer. 

Under the proposed legislation ASIC will have powers to ban, suspend or cancel an ACL as well as the ability to issues fines and penalise providers for strict liability offences. Significant civil and criminal penalties are proposed for misconduct by licensed providers and brokers including possible imprisonment for up to 5 years for breaching the responsible lending requirements and fines of up to $220,000 for individuals and $1.1 million for a corporation.

Lenders and advisers will initially be required to register with ASIC. Applications for registration will commence 1 November 2009 and continue to 31 December 2009. From 1 January 2010 until 30 June 2010 ASIC will accept applications for an ACL.

ASIC will have the power to enforce new licensing standards. Licensing standards will include minimum training and competency requirements, standards of conduct such as a requirement to act “honestly, efficiently and fairly”, and mandatory membership of an external dispute resolution body.

If you have any questions concerning the proposed Consumer Credit Reform Package please contact Mark Dupuis at Townsends Business & Corporate Lawyers on on 8296 6222.