Kim Busuttil of CHOICE Australia introduces CHOICE's chapter from our Responsible Lending publication.
With the introduction of national licencing and responsible lending provisions at a federal rather than a state-based level in 2009, Australia entered a new era of credit regulation.
This report highlights the nature and potential implications of these reforms. The new credit laws and responsible lending obligations were generally seen as a vast improvement on the state-based schemes and were widely welcomed (in most respects) by the consumer movement.
At the heart of the reforms is the threshold test that credit providers have to meet. After making enquiries and taking reasonable steps to verify a consumer’s financial situation, the credit provider is obliged to make an assessment that the loan is ‘not unsuitable’.
Under the new credit laws, a loan is considered to be not unsuitable if it meets the consumer’s requirements and objectives, and most importantly, the consumer has capacity to repay the loan without experiencing substantial hardship.
As the reforms are relatively new and untested, however, the full effect of the laws remains unknown. Questions remain as to:
• How responsible lending obligations will stack up to challenge unsuitable credit and credit products; and
• If the obligations are enforced or strengthened, whether this will result in further financial exclusion for some groups within our community, such as self-funded retirees or low-income earners.
There has also been uncertainty as to whether the responsible lending obligations will be able to address the growing payday lending industry that provides short-term, high cost loans to consumers.
Whilst the credit reforms do mandate maximum charges and interest rates on the loans, payday loans are still an expensive option usually only accessed by low-income, financially excluded consumers.
More recently, in October 2013, a $40 million class action was commenced against the biggest payday lender in the Australian industry.
This means that the legality of the lender’s responsible lending practices will be tested, for the first time, by the Australian courts. Watch this space!