- Your responsibilities if you provide credit
- Assessing for suitability and affordability under new credit laws
Assessing for suitability and affordability under new credit laws
From 1 December 2021, lenders providing consumer credit and mobile traders selling on credit will need to comply with new regulations.
Regulations set out the types of inquiries that need to be made before agreeing to lend money to a borrower, or before agreeing to provide further credit under an existing loan. There are penalties for non-compliance and the Commission strongly recommends that lenders seek specialist legal advice to ensure they meet their obligations.
New regulations require lenders to do the following before agreeing to lend money to a borrower (or agreeing to lend more money under an existing loan):
- make specific inquiries about the borrower’s needs and objectives, to help ensure the credit product is suitable
- make specific inquiries in order to assess the borrower’s income and expenses to be satisfied that the repayments are not likely to cause substantial hardship to the borrower.
The Responsible Lending Code provides guidance for adhering to the new regulations
The Responsible Lending Code (the Code) has been updated to provide comprehensive guidance as to how lenders can comply with these new regulations. The Code is not binding but if lenders can show they have complied with the Code, this can be taken as evidence of a lender’s compliance with its responsible lending obligations. Lenders should become familiar with the updated Code and seek specialist legal advice to understand its application to their business. The updated Code will be in force from 1 December 2021 except for the changes to chapter 12 which will come into force on 1 February 2022.
The Code is prepared by the Ministry of Business Innovation and Employment and can be accessed here.
What are the requirements set out in the Regulations?
Some of the key obligations under the new regulations have been summarised below. This should not be taken as a complete summary of all obligations outlined under the regulations.
Assessing the borrower’s requirements and objectives (suitability)
The Regulations set out the types of inquiries lenders must make to collect and assess information to be satisfied that it is likely the proposed credit product will be suitable to meet the borrower’s requirements and objectives . These include (among other things) asking how much money the borrower wants, what they’ll use it for, and how long they’ll want to take to pay it off. There are also specific inquiries to be made depending on the particular terms or type of loan being sought. Using those inquiries, the lender must then assess whether the loan is likely to meet the borrower’s needs.
It is important to note that the inquiries set out in the regulations do not cover every scenario and are not exclusive. Lenders will need to consider whether it is appropriate to make further or different inquiries depending on the individual situation, or where the borrower may be vulnerable. The need to exercise judgment here, is one reason why we recommend lenders obtain specialist legal advice.
Guidance for compliance can be found in chapter 4 of the Code.
Additional requirements for certain waivers, warranties and insurance
For certain add-on products, the lender must make specified, additional inquiries under the regulations to make sure that the add-on product is also suitable:
- where a borrower is considering financing a repayment waiver under the loan agreement
- where a borrower is considering financing an extended warranty under the loan agreement
- where credit-related insurance is arranged by the lender, which includes where the credit-related insurance is financed under the loan agreement.
Guidance for compliance can be found in chapter 9 of the Code.
Assessing the likelihood of suffering substantial hardship (affordability)
Generally, lenders must conduct a full income and expense assessment (full assessment) where a borrower intends to rely on income to make repayments on their loan. If the borrower will rely on means other than income to make repayments, the lender must make reasonable inquiries into those means and be satisfied on reasonable grounds that it is likely the borrower can make repayments without suffering substantial hardship. If the loan is a high-cost consumer credit contract a full income and expense assessment will be required regardless of whether the borrower intends to repay the loan using their income, or through other means.
Where full assessments are required, the lender must make reasonable inquiries to establish the borrower’s likely income and relevant expenses. The lender needs to be satisfied that the likely income will exceed the likely relevant expenses, and that there is a reasonable surplus, or buffers have been incorporated into the assessment.
Lenders may have to verify the amount of the expenses using bank statements, contracts, invoices, or other reliable evidence . In all cases, the lender must consider whether the relevant expenses are a reasonable reflection of the borrower’s circumstances.
Guidance for compliance can be found in chapter 5 of the Code.
Exceptions to the general rules
The Regulations provide for a couple of exceptions where making a full assessment may not be necessary:
- Where the lender’s preliminary inquiries indicate that it is obvious that the borrower will be able to make the payments due under the loan without suffering hardship. Caution should be exercised in relying on this exception as it will be circumstance-specific and does not remove the requirement that lenders assess for affordability. Lenders are encouraged to refer to guidance at chapter 5 of the Code and take legal advice as needed.
- Where the lender is varying or replacing (or proposing to vary or replace) an existing consumer credit contract (with the same lender) and there will be no additional advance of credit.
Regardless of these exceptions, lenders are still obliged to make sufficient inquiries to be satisfied that the loan is not likely to cause the borrower to suffer hardship.
Guidance for compliance can be found in chapter 5 of the Code.
Lenders must make and keep records that show how they have met their responsible lending obligations. These records will need to show the inquiries made, and how the lender has satisfied themselves that a loan is likely to be suitable and affordable for a borrower.
If asked, lenders must make copies of these records available to the Commission, or to any borrower, free of charge and within specified timeframes.
Guidance for compliance can be found in chapter 2 of the Code.
Consequences of non-compliance
Breaches of the Lender Responsibility Principles are subject to civil pecuniary penalties up to $600,000 for a company and $200,000 for an individual, plus statutory damages equal to the cost of borrowing (interest and fees charged to the borrower). Failure to comply with the regulations will result in a breach of the relevant lender responsibility principle, resulting in potential liability for these penalties.Read the Suitability and Affordability Regulations Read the Responsible Lending Code revised February 2021 [PDF]