New Consumer Credit Laws Amended
In December 2021, the Government implemented changes to consumer credit laws, including extending suitability and affordability requirements across all lending types and all consumers. This resulted in widespread concern, as lenders felt obliged to conduct intensive, lengthy and invasive analyses of their borrowers’ financial circumstances. In response to this concern, the Government has now modified the new regime.
The modifications include new guidance in the Responsible Lending Code and edits to the Credit Contracts and Consumer Finance Regulations 2004. The first significant change is that ‘savings’ and ‘investments’ will be removed from the list of expenses that lenders are required to estimate as part of assessing whether a loan is affordable. This change reflects the understanding that such items are optional and different from a borrower’s outgoings or necessary expenses.
The regulations, which currently require lenders to obtain information used to estimate a borrower’s expenses in “sufficient detail” to avoid the risk of missing or underestimating relevant expenses, only apply when they are “asking the borrower” about expenses, not when basing estimates on other sources such as bank transaction records. This is to free lenders from having to check multiple sources to verify a borrower’s expenses.
The Code now allows a lender to exclude from the affordability estimate an expense where it is clear in the circumstances the expense will stop. For example, if the borrower is borrowing to buy a home, the lender can exclude rent as an expense, or if the borrower frequently purchases takeaways, this can be reduced as an expense if the borrower undertakes to eat at home more often after taking out the loan.
The Regulations currently require lenders to ensure borrowers have a “reasonable surplus” after deducting expenses from income. The amended Code states that a reasonable surplus will not be required where the lender applies buffers or adjustments that adequately address the risk that likely income may be overestimated, likely expenses may be underestimated, or that the borrower may incur other expenses that cause them to suffer substantial hardship. This recognises the fact that many lenders already make conservative estimates of borrowers’ abilities to service loans.
The Regulations provide an exemption from the detailed requirements of estimating income and expenses where it is “obvious” that a borrower can make loan repayments without suffering substantial hardship. The amended Code clarifies this exemption, including as examples small changes to existing loans, temporary arrangements and a borrower having a large surplus.
Unfortunately, these changes are really just tweaks and will not put an end to highly detailed, lengthy and invasive assessments of most borrower’s financial circumstances. We’ll keep an eye out for any further changes that may be made.