When providing credit, you must ensure you comply with the lender responsibility principles. The lender responsibility principles impose obligations on lenders when advertising, before entering into a loan, and during all subsequent dealings with borrowers and guarantors.
The lender responsibility principles apply to all lenders' dealings with borrowers. These principles apply not only to loans, but also to credit-related insurance contracts, guarantees and buy-back transactions. Lenders must act carefully and responsibly at all times, and treat borrowers reasonably and with respect.
The responsible lending code (the code) elaborates on the lender responsibility principles and provides guidance as to how lenders can comply with the principles. The code includes guidance on the information and communications lenders should provide to borrowers and guarantors before and during the loan.
Lenders must exercise the care, diligence and skill of a responsible lender in all its dealings with borrowers and guarantors. This includes when advertising, before entering into a loan, and in all subsequent dealings relating to the loan or guarantee.
Some elements of this principle are set out in specific lender responsibilities and lenders can take guidance from the code as to how to comply. However, the “care, diligence and skill” principle stands alone, and to satisfy it, lenders might need to take an action which may not necessarily be specified in the lender responsibilities or in the code.
Lenders must comply with the specific listed lender responsibilities set out in the Credit Contracts and Consumer Finance Act (CCCF Act).
What are the key lender responsibilities?
Lenders must make reasonable enquiries
Lenders must make reasonable enquiries before entering into a loan or taking a guarantee to be satisfied that:
the credit provided will meet the borrower’s needs and objectives
the borrower or guarantor will be able to make the payments under the loan, or comply with the guarantee, without suffering substantial hardship.
Lenders must help borrowers and guarantors to make an informed decision
Lenders must help borrowers and guarantors make informed decisions about whether to enter into the loan or to give the guarantee. Lenders must help borrowers to make informed decisions in all subsequent dealings about the loan.
This includes lenders ensuring that advertising and information provided to the borrower or guarantor is not likely to be misleading, deceptive or confusing. The terms of the loan or guarantee (and any variation to the loan) must be expressed in plain language in a clear, concise and intelligible manner.
Lenders must act reasonably and ethically
Lenders must treat borrowers and guarantors reasonably and in an ethical manner at all times, including:
when breaches of the loan occur or when other problems arise
when a borrower suffers unforeseen hardship
during a repossession process.
Lenders must make sure loans are not oppressive, that they do not induce borrowers to enter into loans through oppressive means and that they do not exercise their rights under the loan oppressively. In other words, the loan and the lender’s conduct must not be oppressive, harsh, unjustly burdensome, unconscionable, or in breach of reasonable standards of commercial practice.
Lenders must make reasonable inquiries before the borrower enters into a credit-related insurance contract to be satisfied that the insurance will meet the borrower’s requirements and objectives, and the borrower will be able to make the payments without suffering substantial hardship. Lenders must also assist the borrower to make an informed decision about whether to enter into the contract.
Lenders must meet all other legal obligations
Lenders must meet all their other legal obligations to the borrower and guarantor.
This includes obligations under the Fair Trading Act (FT Act) and the Consumer Guarantees Act. The FT Act includes an obligation not to engage in misleading or deceptive conduct.
Lenders also have obligations under the Financial Service Providers (Registration and Dispute Resolution) Act 2008 and the Financial Advisors Act 2008.
What happens if lenders breach the lender responsibility principles?
If lenders breach the lender responsibility principles, the court can make a wide range of orders, including orders restricting lenders’ actions and orders compensating borrowers. For example, a district court may order that a person cannot act as a creditor, lessor or transferee if that person has failed more than once to comply with the principles.