Irresponsible Lending

The National Consumer Credit Protection Act 2009 (Cth) (“NCCP Act”) imposes responsible lending obligations on financial services providers (such as banks) that provide loans, leases and other credit facilities to consumers to purchase either homes, cars or other personal assets.

The NCCP Act requires that before a bank offers to enter into a loan with a consumer, the bank must make reasonable enquiries and take reasonable steps to check the consumer’s information in their loan application. The bank is also required to assess whether the consumer’s loan or changes to the consumer’s loan will not be “unsuitable” for the consumer.

The NCCP Act describes a loan as “unsuitable” if:

1. it does not meet the consumer’s requirements and objectives; or

2. the consumer cannot repay the loan without substantial hardship.

The National Credit Code (“NC Code”) (which is included as Schedule 1 to the NCCP Act) regulates most personal home loans, credit cards, personal loans and investment property loans which were entered into after 1 July 2010.

The NC Code gives the Court power to “reopen” a regulated credit contract (i.e. a loan) if the court considers it unjust. This means that the credit contract may be undone and the Court can change the terms of the contract.

The NC Code (at section 76(2)) sets out factors which a court may take into account when it decides whether a regulated credit contract is unjust, which includes whether, at the time the credit contract was entered into, the bank knew or could have learned by reasonable enquiry that the consumer:

1. could not make repayments under the credit contract; or

2. could not make them without substantial hardship.

The Australian Securities and Investments Commission Act 2001 (Cth) (“ASIC Act”) prohibits a bank from entering into a credit contract when it would be unconscionable to do so. The ASIC Act also implies into most credit contracts the requirement for the bank to exercise reasonable care and skill when it provides its financial services to a consumer. This, it may be argued, requires a bank to exercise the care and skill of a diligent and prudent lender when assessing a loan application.

Many banks have also developed and subscribed to industry codes of practice, which include, for example, the Code of Banking Practice and the Customer Owned Banking Code of Practice. Within these industry codes, banks commit to acting responsibly, diligently and prudently in their loan assessment process about the consumer’s ability to repay the loan.

The first step would be to lodge a complaint with your bank regarding the loan, which would then be investigated internally by the bank. The bank will usually require that you provide certain documents and information as part of the investigation. Following the investigation, you will receive a written notice from the bank advising of the outcome of the review. If the bank forms the view that at the time of your loan application, the loan was not affordable to you, that is, that your expenses exceed your income (whether based on the information that you actually provided at the time, or the information that the bank ought to have obtained from you in order to satisfy itself as to suitability), then the bank may offer to pay you compensation. If so, you can usually expect to receive the following documents from the bank:
1. outcome letter;
2. serviceability assessment;
3. compensation calculations;
4. home valuation report; and
5. deed of settlement.
As a requirement of entering the deed of settlement, the bank will invariably require that you obtain legal advice about the terms and implications of signing the deed of settlement (and with our clients, the banks even offered to pay the legal costs of obtaining such legal advice). Whether or not the compensation offered is adequate will depend upon the specific circumstances of each case. If for example you have not suffered any loss(es) whatsoever by reason of obtaining a home loan (as it permitted you to purchase a house, which has since increased in value), and you have not defaulted on the home loan, and the only reason you have looked into this issue of compensation is because the bank reached out to you, then you may only be entitled to compensation for the interest or part thereof that you have paid on the home loan paid under conditions of financial hardship.
If on the other hand you have defaulted on your home loan such that you (or the bank) has sold your home and you have suffered various and not insubstantial loss(es), then your compensation entitlements may look very different, and each case will depend on its on facts. Either way, it is important to obtain legal advice before you sign any deed of settlement to ensure that the compensation offered by the bank is fair and adequate. If the bank denies any responsibility to pay you compensation, then it would be wise to have your case assessed by a lawyer to determine whether the bank’s position is justified. If despite the efforts of your lawyer the bank still refuses to pay, then you may wish to lodge a complaint with the Australian Financial Complaints Authority.

Whilst you may bring Court proceedings against a bank over an irresponsible lending dispute for either an award of compensation or the grant of other legal remedies, it is more common, as the first steps at least, to:

1. attempt to resolve the dispute using the internal review or dispute resolution process of the bank; and

2. if a resolution directly with the bank is unsuccessful, then you may wish to refer the dispute to the Australian Financial Complaints Authority (“AFCA”), which is a free and independent external dispute resolution scheme (that has the power to make binding decisions between the parties).

From 1 November 2018, all new financial services complaints are dealt with by AFCA (whereas previously such matters were dealt with by the Financial Ombudsman Service Australia). When a consumer cannot make their loan repayments, the consumer will usually allege that their bank should not have given them the loan as they never had the ability to repay the loan.

In such circumstances, the consumer may lodge a dispute with AFCA for compensation for the loss they have suffered as a result of the bank providing them the loan. The AFCA refers to matters such as these as responsible lending disputes. Where the AFCA
considers responsible lending disputes, the AFCA will decide whether it was appropriate for the bank to lend the money.

When deciding on an appropriate remedy, AFCA will seek to achieve, as nearly as possible:

1. to place you in the position you would have been in if the conduct of the financial firm had not caused the loss; or

2. to compensate you for your loss to the extent AFCA holds the financial firm responsible for the loss.

Some examples of the remedies that AFCA may provide include:

1. the payment of a sum of money;

2. the forgiveness or variation of a debt;

3. the release of security for debt;

4. the repayment, waiver or variation of a fee or other amount paid to, or owing to, the financial firm or to its representative or agent including the variation in the applicable interest rate on a loan;

5. the reinstatement, variation, rectification or setting aside of a contract;

6. in relation to a default judgment, not enforcing the default judgment; and/or

7. an apology.

However, there are monetary, time and other limitations which may affect your eligibility to lodge a complaint with AFCA and this is something you may need to obtain legal advice about. But in essence if you believe that you have suffered a loss as a result of the financial burden imposed upon you by the bank loans and you believe those loans never should have been approved, then you may have a claim for compensation against the bank and should have your case appraised by a lawyer.

If you need legal advice or assistance in relation to an irresponsible lending dispute, please contact AdviiLaw today to speak to one of our experienced lawyers. Contact us on 07 3088 7937 or email us at [email protected]. This commentary is of a general nature only, containing some general information for the reader. It is not intended to be legal advice, nor can it be relied upon as legal advice, as each case will depend upon its own specific facts, matters and circumstances. To this end, please kindly read our Website Terms including the disclaimer contained therein carefully. Laws, rules and principles may be subject to sudden and unexpected changes and you should always consult a lawyer about your specific circumstances before committing to a course of action.