Revisions to lending rules by the Australian Securities and Investments Commission could mean Afterpay, Netflix and private school are no longer allowed.
ASIC published recent updated guidance on responsible lending obligations in 2009’s National Consumer Credit Protection Act (the National Credit Act).
“We have listened carefully to all parties, and we have addressed areas that would benefit from the updated guidance. ASIC Commissioner Sean Hughes stated, “We hope this guidance will allow the industry to make more responsible lending decisions. It will also facilitate better lending outcomes for consumers.”
This document contains the most recent lending guidelines and measures 96 pages. It’s designed to protect borrowers from “unsuitable” loans. Lenders are being urged to evaluate potential borrowers’ spending habits before determining their eligibility for loan products.
ASIC offered banks several examples and scenarios that could help them evaluate certain situations. Sarah is applying for a home loan over 20 years. Sarah’s children attend private school.
Sarah would need to talk with her lender about why she doesn’t think a 20-year term is appropriate for her financial situation.
They also discuss the impact that an extension of the loan term could have on both the interest and the repayment amount. Sarah realises that she will pay more interest for a longer term loan, but the original 20-year term was not a priority and could still change,” ASIC stated.
Leah applied for a loan amount in order to pay her car registration fees. Leah was very careful about spending non-essentials. The lender looked at her statements.
ASIC reported Leah discussing her concerns with Leah regarding her financial capability and ability to finance the credit agreement. Leah suggested she cancel her monthly streaming service, which would pay the monthly repayment amount of the loan.
ASIC also included BNPL (buy now-pay later), services in its examples. Legally, lenders are required to identify borrowers who use these services as “high-risk”
Chanthavy is a borrower who applied for a $20,000 auto loan. Chanthavy is a borrower with a good credit history and credit score. Chanthavy also has three credit card accounts and just started using BNPL.
ASIC reported that Chanthavy’s history of using revolving credit and increasing net debt indicate that Chanthavy is at greater risk than she believes. The lender will need more information to determine if Chanthavy is able to afford the car loan payments.
ASIC also asked banks to not rely too much on the basic spending benchmark known as the Household Expenditure Measure (HEM).
ASIC stated that HEM numbers do not include spending on items that are often part of a consumer’s overall outgoings.
It was stated that HEM estimates should be compared to consumer estimates. However, estimates should not include spending on items other than those included in the benchmark number.