The National Consumer Credit Protection Amendment (Coronavirus Economic Response Package) Regulations 2020 temporarily exempt Australian credit licensees from certain responsible lending obligations in order to facilitate the flow of credit to small businesses.
'The requirement for Australian credit licensees to assess whether a borrower is accessing credit or goods for a wholly or predominantly personal, domestic or household purpose can be complex and time consuming. This is especially so where the borrower’s personal and business finances are intermingled' the explanatory observes. By temporarily lifting this requirement (in certain circumstances) it's hoped that the burden on lenders will be lessened and businesses will be able to more easily and quickly access credit.
The exemption is temporary and applies for a period of 6 months only consistent with the Commonwealth's messaging regarding the likely impact of the pandemic.
Aimed at small business
The exemption is limited to situations in which a consumer is seeking credit or goods under a consumer lease for purposes that 'include a purpose of a small business operated by the consumer'.
Under the new temporary regulation it will be sufficient for the lender to be satisfied that the credit is being provided at least partly for business purposes. Credit licensees would normally be required to determine that credit is provided wholly or predominantly for that business purposes before they felt comfortable not to apply the strict responsible lending rules contained in the National Consumer Credit Protection Act 2009 (NCCP Act).
The application of responsible lending obligations to loans in these circumstances would require lenders to perform loan unsuitability assessments which would require an analysis of the customer's income and expenses to determine whether or not they could afford to repay the loan without incurring substantial hardship.
To facilitate the timely flow of credit to small businesses, Australian credit licensees are temporarily exempted from these responsible lending obligations in relation to certain lending to consumers who are also small business operators.
The exemption applies:
- in relation to new credit, credit limit increases, variations and restructures, suggestions to remain in credit contracts, and the lease of consumer goods;
- where the consumer is a person who operates a small business and is an existing borrower customer (or was a borrower customer in the last year); and
- for all types of credit or leased goods which are in part used for business purposes.
The exemption applies for all kinds of credit products, including personal loans, credit cards and loans secured by the borrower’s home.
The new provisions appear to be of most benefit for lending arrangements in relation sole traders and small partnerships where personal and business purposes for credit may be intermingled. These are circumstances where lenders may have difficulty determining whether the arrangements are governed by consumer credit laws (and might otherwise be compelled to complete loan unsuitability assessments under the usual responsible lending rules applying to consumer credit).
Hired goods
The Regulations do not remove the need for credit providers and lessors to determine the purpose for the credit or hired goods. The purpose of the credit or hired goods continues to determine whether important protections for consumer apply, including provisions in the National Credit Code that require precontractual disclosure, terms of the contract, interest charges, hardship situations and enforcement of the contract.
Not aimed at facilitating the flow of credit to households/individuals
Consumers whose purposes are entirely personal, household or domestic are not affected by the exemption. The responsible lending obligations continue to apply fully to these consumers.
The Regulations also do not remove the need for credit providers and lessors to determine the purpose for the credit or hired goods. The purpose of the credit or hired goods continues to determine whether important protections for consumer apply, including provisions in the National Credit Code that require precontractual disclosure, terms of the contract, interest charges, hardship situations and enforcement of the contract.
The exemption does not displace other obligations
Credit providers that are authorised deposit-taking institutions are obliged to lend on a prudent basis under prudential standards established by the Australian Prudential Regulation Authority.
Codes of practice, such as the Australian Banking Association Banking Code of Practice, continue to apply to code members.
The Australian Financial Complaints Authority also has jurisdiction to hear and resolve complaints from consumers about credit, finance or loan products, and award compensation as appropriate.
The exemption is temporary and applies for a period of 6 months only and is now in force.
Implications for credit providers
Though the measures are welcome, lenders should tread cautiously. Prior to the COVID 19 pandemic, community and regulatory expectations had significantly shifted and despite the current circumstances, remain high.
For an industry working to restore its reputation and rebuild lost community trust, this is an opportunity show that there has been a genuine shift in approach. Lenders will need to find a balance between providing quick and easy access to credit for businesses under unprecedented financial pressure, while also ensuring they are acting fairly and in line with the new Banking Code requirements.
Lenders will also need to understand the limits of the temporary exemption. The provisions only provide relief from some of the substantive obligations relating to responsible lending. Some responsible lending obligations are unaffected by the new measures. For example the requirements to give credit guides and product disclosure obligations remain in place.
In addition the new temporary exemption does not exclude other elements of the NCCP Act such as the National Credit Code, that sit outside the responsible lending provisions. Lenders making loans in reliance on the temporary exemption may still need to ensure that they are using forms of loan document and related procedures that comply with the National Credit Code (other than the completion of a loan unsuitability assessment).
[Source/further details: The National Consumer Credit Protection Amendment (Coronavirus Economic Response Package) Regulations 2020 and accompanying explanatory statement]
