A window, not a file from the last loan
The checks have to be recent. RG 209 says the inquiries and verification must fall within 90 days before the assessment and before the lender acts, or within 120 days for a home loan, and that the regulation allowing the longer home loan period applies only to credit providers. A broker’s responsible lending inquiries must be made within 90 days of its credit assistance. The new lender’s inquiries have to fall inside its own window.
What the new lender asks about
- Your requirements and objectives for the loan, and your financial situation, with reasonable steps taken to verify that situation.
- At the very least, enough understanding of your income and spending to judge whether there is a real chance you can meet the contract’s obligations, in the words of a Federal Court judgment that RG 209 quotes. The same judgment says reasonable inquiries about your financial situation must include your current income and living expenses.
- Your credit history, and whether by and large you have kept up with similar obligations, which a second court judgment quoted in RG 209 treats as relevant too.
- In Moneysmart’s plainer words, your income, expenses and savings, to see whether you can keep up the repayments.
How much further a lender needs to go is a matter of degree in each case, the first judgment adds. The point of the inquiries and verification, RG 209 explains, is to give the lender enough reliable information to make an informed assessment of whether the loan is unsuitable for the particular person applying.
Which loans the checks cover
RG 209 says the obligations apply only to credit regulated under the consumer credit regime, which it describes as credit given to individuals and strata corporations for personal, domestic and household purposes, or to buy or improve residential investment property. RG 209 lists home loans, reverse mortgages and residential investment loans among the products that includes. The National Credit Code’s own test also covers credit provided wholly or predominantly “to refinance credit that has been provided wholly or predominantly to purchase, renovate or improve residential property for investment purposes”. So the refinance of a home loan, or of a residential investment loan, falls within it.
Where a refinance changes the questions
RG 209 treats refinancing as a case of its own. It says the reason a consumer refinances is likely to bear on how much risk the new credit carries for them.
Past trouble with repayments is one such signal. Where a consumer has had difficulty making repayments, RG 209 says it will be appropriate to inquire further, both to understand that difficulty and to judge how likely it is that the same circumstances would leave the consumer unable to meet the new product’s obligations as well. Refinancing when repayments are hard follows that case further.
Where a lender applies credit risk policies, RG 209 says applying them should still take account of the circumstances of the consumer in front of the lender, and whether those point to a higher risk of an unsuitable contract.
The test the new loan must pass
The National Credit Act prescribes a test for unsuitability. If the test is met, RG 209 says the lender must assess the loan as unsuitable and must not enter into it with you. Among the obligations ASIC lists is the lender’s final assessment of whether the contract is ‘not unsuitable’ for you.
Affordability is read against your own plans. RG 209 says a loan will not meet your requirements or objectives if it is affordable only through cuts to your current outgoings that you are not willing to make, even where those cuts would not necessarily put you in substantial hardship.
Each step is a duty in its own right. RG 209 notes that the requirements are separate civil penalty provisions, and that a lender could breach the prohibition by entering into a loan that is in fact unsuitable, even after it has made the assessment. ASIC describes the goal as a reasonable balance: fewer people entering unsuitable credit, and credit kept open to people who want it and are able to service it.
Your copy of the assessment
The responsible lending obligations include being able to give you a written copy of the final assessment if you ask for one. ASIC says a credit provider must give a free copy if you ask within seven years of entering into the credit contract, due within seven business days if you ask within two years of the contract’s start, and within 21 business days of the request after that. A lender that never enters into the contract does not have to give one.
A copy is how you can see the lender’s working. If you think the checks went wrong, complaints about a refinance sets out where to take it, and a broker on a refinance covers the separate duty a broker owes.
Next station: Refinancing when repayments are hard