In response to a request from the Australian Banking Association (ABA), the Australian Securities and Investments Commission (ASIC) has provided guidance on the regulatory approach to be taken in relation to responsible lending during the COVID-19 pandemic.
Responsible lending obligations
Where a customer who has been adversely impacted by COVID-19 seeks to alter their existing repayment arrangements without entering into a new contract or increasing their overall credit limit, ASIC has confirmed that the responsible lending obligations will not apply. This is because the responsible lending obligations apply only to new contracts or where a credit limit under an existing contract is to be increased.
Due to the temporary changes, responsible lending obligations will not apply in circumstances where credit is provided to existing customers for the purpose of operating a small business.
Where the responsible lending obligations do continue to apply for new lending, ASIC has provided guidance for lenders on the appropriateness of making assumptions about a prospective customer’s ‘post-pandemic’ suitability. ASIC suggests that lenders consider:
- The availability of immediate repayment deferral periods;
- Eligibility for Government support (such as JobKeeper or JobSeeker);
- Whether the customer’s employer has registered for JobKeeper (as this may give an indication as to whether the employer intends to reemploy the prospective customer); and
- Whether the employer is able to provide any assurance about prospects of reemployment.
In addition to consideration of qualifications and previous employment history, ASIC also suggests that lenders give consideration to whether it would provide hardship arrangements for an additional period if the assumed financial recovery does not turn out as expected.
The obligation to act efficiently, fairly and honestly
Due to the anticipated and unprecedented volume of hardship applications, ASIC says that it will not necessarily be unfair for a lender to take longer to process some applications than would otherwise be the case.
ASIC also accepts that hardship arrangements that result in a higher amount being paid by the customer overall are not necessarily unfair. Where the lender has taken reasonable steps to advise the customer of different options that are available, an overall increase in cost on its own is not likely to be considered unfair.
In relation to upcoming property settlements where a customer’s income has decreased due to COVID-19, ASIC expects that lenders will act in a way that is efficient, fair and honest in determining whether to terminate the contract before a drawdown of funds or proceed with the loan contract.
ASIC encourages lenders to discuss options with customers and consider the potential consequences that may arise for the customer if the contract was terminated, such as loss of deposit or liability for breach of contract. ASIC accepts that proceeding to fund a loan and then offering immediate hardship arrangements would not be an indication of a failure to act efficiently, fairly or honestly.
If you would like to know more about ASIC’s guidance on responsible lending during the COVID-19 pandemic, please contact a member of our team.
This article was written by Rebecca Jaffe, Partner, Alexandra White, Partner and Rebecca Young, Solicitor.