The Australian Securities and Investments Commission has cautioned lenders not to make too many assumptions about how quickly consumers’ income will recover post-pandemic when making loan application assessments.
ASIC has published a letter it sent to the Australian Banking Association in response to a series of questions from the ABA about the regulatory approach to lending during the COVID-19 crisis.
The ABA is looking to give its members guidance on a range of issues, including the application of responsible lending rules when granting customers relief, the credit code, hardship rules, electronic execution of documents and disrupted property settlements.
Three weeks ago, ABA CEO Anna Bligh wrote to ASIC and asked whether it is reasonable in meeting responsible lending obligations for lenders to make the following assumptions: that the income of employees and small business operators adversely impacted by economic conditions is likely to recover within a reasonable period after restrictions are removed; that any deterioration in asset values during the pandemic is unlikely to be permanent; and that a borrower’s requirements and objectives relating to their COVID-19 impacted financial position are likely to be a prominent consideration in meeting responsible lending obligations.
In response, ASIC said: “We note that the consumer’s income is a key consideration affecting capacity to meet financial obligations. The position outlined by the ABA involves making assumptions about a consumer’s income without any regard to the consumer’s actual circumstances which may indicate that such a recovery is more likely or less likely.
“While we agree that ensuring the ongoing flow of affordable credit is important, it is also important that provision of new credit is not based upon assumed changes where these are unlikely to be met, and which will result in unmanageable debt burdens for consumers.”
On the issue of asset values, it said: “In general, we note that the effect of the current economic conditions on asset values may be temporary, and it may be reasonable in some circumstances to assume that asset values will improve in the longer term.”
ASIC noted that the government has made a temporary change to the test for when responsible lending obligations will apply, so that they do not apply where credit is provided to existing customers who operate a small business and a part of the credit provided will be used for the purposes of that business.
“For those loans where responsible lending will continue to apply, we consider there remains sufficient flexibility for lenders to take a range of actions to reduce the difficulty likely to be experienced by significant numbers of consumers,” it said.
On the question of disrupted property settlements, where a home loan is approved and the consumer loses their job before settlement, ASIC said: “In the current circumstances, we would not consider that proceeding to fund the loan and offer immediate hardship arrangements would be an indication of a failure to act efficiently, honestly and fairly.”
The ABA requested that ASIC issue a legislative instrument to facilitate the completion of transactions electronically, as opposed to face-to-face meeting.
ASIC said its powers are restricted