Insights, Law Changes

Further Adjustments to Responsible Lending Laws Proposed

The Government has announced a further round of changes to the responsible lending laws which were implemented last year. This follows changes made in July 2022 (summarised in our previous article here) to address widespread concerns about the intensive, lengthy and invasive investigations into borrowers’ finances that the regime required,. The new proposed amendments have been put forward following a Government report which concluded that the previous changes will not address “the other drivers of unintended impacts” arising from the 2021 regime.

The first proposed amendment is that the scope of expenses that need to be considered by lenders will be narrowed to more explicitly exclude discretionary expenses. Currently, the Credit Contracts and Consumer Finance Regulations 2004 (‘Regulations’) require lenders to estimate “relevant expenses”. This wide-ranging term encompasses not just a borrower’s minimum expenses but also discretionary expenses, such as gym memberships or streaming subscriptions. The result has been invasive assessments of borrower’s financial activities, and the declining of credit applications because of discretionary expenses that borrowers could have cut back on in order to meet repayment obligations. The proposed change would require lenders to estimate only those expenses which are necessary to borrowers, or which they would be unwilling to give up if faced with substantial hardship. It appears that lenders would also be permitted to assess whether expenses are likely discretionary or not, following additional guidance to be added to the Responsible Lending Code.

The second proposed amendment is the easing of assumptions that lenders are required to make about revolving credit contracts. Currently, the Regulations contain prescriptive requirements for the calculation of expenses arising out of “revolving credit contracts” (e.g. credit cards and buy-now-pay-later schemes). For example, lenders are required to assume that borrowers with credit cards will draw down the full credit limit and only make the minimum required payment. The proposed amendment to the Regulations would soften or remove these assumptions, for example by allowing credit facilities to be excluded from the assessment of expenses where the borrower routinely repays such facilities without incurring interest.

The third proposed amendment is the expanding of the exemption for refinancing of existing credit contracts. Currently, lenders have a narrow exemption under the regulations where one of their existing borrowers seeks to vary or replace a current loan, but where a borrower seeks to refinance a current debt with a new lender, the new lender cannot rely on that exemption. The proposed change would expand the exemption to include refinancing loans with third party lenders where that would be in the best interests of the borrower.

The draft regulations will be released for public consultation on 22 September 2022.