Responsible
Lending
Philip Field, Bae Bastian, Carolyn Dea and Ken Moran
NCCP Changes

The National Consumer Credit Protection Act (NCCP)
has had five major impacts on dispute resolution:
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Licensing;
Responsible Lending;
Credit Guide;
Default Notices; and
Financial Difficulty.
Responsible Lending

The NCCP introduces requirements on credit providers and
those providing credit assistance to ensure that the loan is “not
unsuitable”.

These obligations started on 1 July 2010 for all licensees and
representatives except Authorised Deposit-taking Institutions
(ADIs) .
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Responsible lending obligations for ADIs started on 1 January
2011.
Responsible Lending

After making reasonable enquiries, a person providing credit
assistance must make a preliminary assessment about whether
the contract or change to the contract will be unsuitable.

This applies to both intermediaries (brokers) and credit
providers. The assessment must be made no more than 90
days before the credit is provided.

A loan or increased credit limit arranged by a credit provider may
be unsuitable if:
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the consumer could not comply with their financial obligations under the
contract, or only with substantial hardship; or
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the loan will not meet the consumer’s requirements and objectives.
Responsible Lending

The impact of the Responsible Lending obligations will not in
themselves have a significant impact on FOS.

FOS and one of its predecessor schemes have long had
jurisdiction to consider and resolve disputes involving
“maladministration” in lending,
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The Responsible Lending provisions, in my view, replicate the
common law obligation to act as a diligent and prudent lender,
while requiring that lenders be more careful about the process
involved in making that assessment.
FOS Terms of Reference (TOR)

Paragraph 5.1:
FOS may not consider a dispute about an FSP’s assessment of
the credit risk imposed by a client or the security required for a
loan – but this does not prevent FOS from considering a dispute
claiming maladministration in lending, loan management or
security matters

Maladministration:
“An act or omission contrary to or not in accordance with a duty or obligation owed at law or
pursuant to the terms (express or implied) of the contract between the Financial
Services Provider and the Applicant”

The NCCP obligations are a duty owed at law in lending, loan
management or security matters and therefore a dispute about
whether an FSP breached those obligations is within FOS’s
TOR
FOS’ Approach

When deciding a dispute, the TOR require FOS to do what in its
opinion is fair in all the circumstances, having regard to:
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Legal principles
Applicable industry codes or guidance as to practice
Good industry practice, and
Previous relevant decisions of FOS or a predecessor scheme (although FOS
will not be bound by these)
Therefore, our approach to responsible lending and
maladministration disputes takes into account:
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The NCCP
Any case law on the NCCP as it is developed by the courts
ASIC’s guidelines
Industry codes and practice (e.g., Code of Banking Practice (CBP), Mutual
Banking Code of Practice (MBCP))
Our past approach to claims of maladministration in lending
Individual and Small Business

FOS can consider a dispute by an Applicant who is an individual or a
small business

Small business is defined in the TOR as a business which, at the time
of the FSP’s act or omission which gave rise to the Dispute:
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If the business is or includes the manufacture of goods, had less than 100 employees;
or
Otherwise, had less than 20 employees

Subject to our monetary limit of $500,000 and our compensation cap of
$280,000, we will consider a dispute about an FSP’s lending decision,
even though the credit contract may not be regulated under the NCC.

Our monetary limit and compensatory cap are based on the amount of
the applicant’s claim, not the amount of the facility
Low Doc Lending

Low doc lending caters for those self-employed clients who are
unable to provide traditional evidence of their income.

FOS considers that the NCCP does not prevent low doc lending,
so long as adequate inquiries are made and the responsible
lending provisions are satisfied.
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No doc lending as a general practice is unlikely to be
sustainable given the NCCP obligations
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In our view, low docs loans should not as a general rule be
provided to PAYG employees
Low Doc Reasonable Inquiries
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Self certification by a borrower will not protect an FSP,
especially if the circumstances were such that the FSP ought to
have made inquiries but chose not to do so
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Business income may be verified by
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An ABN search to confirm the length of time the Applicant has been in business
BAS statements
Occupation and sources of income may be contradicted by identification
provided for FTRA purposes, requiring further inquiry
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E.g., A self-funded retiree provides a pension card for identification
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A false declaration, whether made knowingly or inadvertently, is
a relevant factor to be taken into account, but does not absolve
the FSP totally from liability
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In some cases where an Applicant has provided a false
declaration, we may apportion liability and reduce any
compensation accordingly
IDR Approach to a
Maladministration Dispute
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If you get a complaint, give it due and proper consideration.
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Don’t just go into “defend at all costs” mode. It is best to avoid an
adversarial approach.
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Critically review your organisation’s decision in light of FOS’s
decision-making criteria
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If a regulated contract, did it meet its obligations under the NCCP?
Have reference to industry codes and guidelines, such as ASIC’s guidelines,
CBP and MBCP
CBP and MBCP also reflect good industry practice
FOS Circular No. 5 has case studies showing our approach to previous
disputes
IDR Approach to a
Maladministration Dispute
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If your organisation has made a mistake, put your hand up, say
sorry and fix it up.
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The intention is to put the Applicant in the position they would
have been in if not for your organisation’s error
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Be innovative in your approach as circumstances may prevent
restoration of the Applicant’s pre-loss position (e.g., property
may have been sold)
Case Manager’s Perspective
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Loan Application
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Loan purpose & structure
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Did the FSP obtained the information it required under its policies and verified it – if not,
what is missing?
Credit assessment and approval
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Did the loan structure align with the purpose?
Supporting documentation & verification
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Was it fully completed/was the information correct/did it make sense?
Was the FSP on notice of any problems with the application?
What does the application show about serviceability?
Did it conflict with info already held by the FSP?
Did the FSP raise questions about the application?
Did the approval comply with policy?
When did the loan fall into arrears?
Banking Specialist’s potential red flags
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Income
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Incorrect use of income, the use of which is restricted by a bank’s internal policy –
eg Family tax benefit A & B, Workcover payments or child maintenance
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Conversion of weekly/fortnightly salary or wages to monthly income incorrect
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Single payslip income adopted even when inconsistent with YTD amounts
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Use of overtime or commission not discounted as per bank policy
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Rental income not verified in terms of bank policy or incorrectly adjusted for
holding costs
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Add-backs incorrect or inappropriate for assessment of self-employed income
Banking Specialist’s potential red flags
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Expenses
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Credit cards not included in commitments or not at correct level (based on
current balance not limit)
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Credit card debts not repaid and facility cancelled, despite information contained
in application to contrary
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Continuing rental expense not taken into account with land loans or investment
property purchases
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Living expenses understated or based on incorrect family unit assumptions
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Interest only credit assessment of lines of credit or overdraft type debts when
P&I amortisation over 25/30 years more appropriate
Banking Specialist’s potential red flags
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Others
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Evidence of other external debt overlooked ( eg outside institution credit card
tendered as part of 100 point identification but not disclosed in application)
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Bridging proposals – inadequate assessment of residual debt servicing or
inadequate allowance for interest capitalisation
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Low doc loans – incorrect, misleading or incomplete information
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Age of applicants in relation to excessive term approved (especially low doc
loans)
Case studies
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Did the FSP make reasonable inquiries?
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Did the FSP approve the loan application within its
guidelines?
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Did the customer have capacity to repay the loan
without undue hardship?
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If maladministration, what would be the outcome?
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What other outcomes would be fair?
Case study 1
Home purchase and bridging finance
Background
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E and T were pensioners and each owned a home
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They obtained bridging finance to purchase a home
together, on the basis that they would sell their
individual homes within six months
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They refinanced with FSP when their existing lender
declined an application for an additional $40,000
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The dispute concerned additional funding FSP
provided over the next 18 months
The complaint
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Cost overruns, applied for further funds
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Neither house sold within 12 months, applied for
further funds
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FSP advised them not to accept an offer
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Both properties were only sold 3 years later
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FSP restructured the residual debt into a 30 year
loan, with monthly repayments of $851, which they
cannot afford
FSP’s response
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Initially approved bridging finance to refinance
existing commitments and provide $40,000 for pool
construction
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Subsequently approved an additional $117,000 over
18 months to 2 years
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E and T applied funds to other purposes
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No advice regarding offers
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Offered 3 months without interest
Information obtained from investigation
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Initial loan application showed only 77 cents in
savings
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Bank valuations markedly less than E and T’s
estimates, and expressed caution in market
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FSP’s guidelines on bridging finance only allowed the
facility for existing customers
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Loan application was initially declined and referred for
manual assessment
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E and T required to sign undertaking to sell
Information obtained from investigation
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April 2006 application made when neither existing
property had sold
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Funds again needed to complete pool and cover
interest
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Cash reserves were in fact residual of initial advance
Information obtained from investigation
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August 2006 advance was processed when neither
existing property had been sold
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Funds needed again to complete pool
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Approval on basis of refinance to include security
over new home
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Condition that valuations be obtained, but FSP only
obtained valuation for one existing property
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Loan term for one year with interest only repayments
Information obtained from investigation
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October 2007 advanced processed when only one
existing property had been sold
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Loan amount increased to provide funds to service
the loan
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Did the customer have capacity to repay the loan
without undue hardship?
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Condition that valuations be obtained, but FSP again
relied on January 2006 valuation
FOS assessment
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No further finance should have been provided until
existing properties had been sold
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Decisions for all further advances were
maladministration in lending
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Funds provided to service loans should have been
applied against loans rather than to E and T’s account
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Given E and T’s monthly income, it was evident that
any finance was meant to be short term, with equity in
existing properties clearing the debt, but this was
depleted
Outcome – FOS assessment
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E and T would still be liable for pre-existing bridging
finance
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E and T also needed to account for benefit from pool
construction, home improvements and general living
expenses, but without interest
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E and T should be reimbursed for costs of refinance
and own contributions to interest payments
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If E and T could not service recalculated debt, the
new home would have to be sold
Outcome - settlement
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Debt reduced from $145,000 to $90,000 in
recognition of costs E and T incurred
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Debt of $90,000 represented benefits they derived
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E and T repay debt without interest over life of loan
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E and T’s monthly repayments of $278 were
affordable on their pensions
Case study 2
Residential investment lending
Background
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Broker sourced V’s details from default listing
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Broker offered finance to consolidate debts and purchase
investment property
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Broker completed loan application, disclosing V’s income at
$60,000 with supporting employment information
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FSP provided $80,000 for debt consolidation and $250,000 for
investment property
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V received rental income until broker said he would be realising
investments
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V has received no further rental and the property is vacant
The complaint
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V said she was a Centrelink recipient, supplementing
her benefit by selling produce at the local market
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V’s income is less than $15,000 p.a. – income details
on loan application were false
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She did not sign the loan application
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V accepted liability for $80,000 debt consolidation
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V said she should not be liable for the $250,000
investment loan
FSP’s response
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Application was introduced by an introducer affiliated
to a mortgage manager
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FSP paid commission to mortgage manager, had no
relationship with introducer or broker
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V’s application was assessed in accordance with its
policies and procedures, including telephone call to
V’s employer
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V’s verified income was sufficient to service her loans
even without rental inocme
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V was liable to repay both loans
Information obtained from investigation
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V’s signature on loan application likely to be forged
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Loan application and employer details showed
relationship between broker, introducer and employer
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FSP’s guidelines said preferred verification of income
was by way of bank statements
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FSP’s lending approval did not show any inquiry
about where V’s stated income was being deposited
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FSP had relied on fraudulently raised letter of
employment and then phoned fraudster for
confirmation
FOS assessment
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If FSP had sought V’s account statements as its
guidelines required, the fraud would have been
uncovered and the loans not granted
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Loans totalling $330,000 were maladministration in
lending
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V had received benefit from $250,000 because she
had an investment property and had received rental
income from broker
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No apportionment of liability as V was unaware of the
fraud being perpetrated against her and FSP
Outcome – FOS assessment
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V’s investment property should be sold at FSP’s cost
and FSP would bear any loss
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V was liable for $80,000 loan with interest and had to
account for rental income
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All loan repayments should be applied in reduction of
$80,000 debt
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If the reconstruction resulted in the $80,000 debt
being satisfied in full, any excess had to be refunded
to V
Case study 3
Investment lending – Releasing equity
Background
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Mr and Mrs B were self funded retirees whose assets
included share investments
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Financial adviser recommended Mr and Mrs B obtain
a loan to establish an investment, and then
approached FSP on their behalf
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Loan application completed by adviser was inaccurate
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FSP provided a loan of $210,000 which was repaid
when Mr and Mrs B sold their home
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Mr and Mrs B want $210,000 refunded
The complaint
Mr and Mrs B said:
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FSP was aware of their investment strategy and they could only
afford repayments from dividends
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They were unaware of the risks of a low doc loan
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FSP engaged in asset based lending
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They signed the LAF because they trusted FSP was looking
after their interests as it would assess their application against
prudent lending guidelines
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They were forced to sell their home to repay the loan, and FSP
should reimburse them
FSP’s response
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LAF disclosed combined income $66,800 and assets
$1,172,000
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Mr and Mrs B authorised FSP to deal with broker, therefore
broker was their agent
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FSP relied upon Mr and Mrs B’s declarations as to accuracy of
information in assessing their application
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Its low doc loans policy did not require a borrower to provide
standard income verification, rather a declaration as to accuracy
of information and self assessment of capacity to service
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Acknowledgements also in loan offer
Information obtained from investigation
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LAF disclosed:
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Mrs B was employed part time
In approving the loan, FSP made Mrs B a co-borrower rather than a
guarantor, and noted that affordability was not evident
FSP relied upon Mr and Mrs B’s declarations as to accuracy of information
in assessing their application
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Credit inquiry by FSP revealed an inquiry for a margin loan of
$700,000
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Mr and Mrs B’s tax returns showed total income of $37,440
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Mr and Mrs B had an existing share portfolio of $116,000, and
intended to increase their assets by using cash and a $600,000
margin loan
FOS assessment
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Issue was FSP’s knowledge of the proposed entire
transaction which involved a geared investment
strategy
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CRA report put FSP on notice of Mr and Mrs B’s
strategy and intention to take a margin loan of around
$700,000
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So FSP ought to have made further inquiries about Mr
and Mrs B’s capacity to service all loans
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If FSP had done so, the loan would not have been
approved
Outcome
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Matter settled with FSP refunding all interest Mr and
Mrs B had paid on their loan, together with interest on
that sum at term deposit rate, totalling $57,600