COVID-19 Economic Policy Response: Temporary Relief from some Responsible Lending Obligations

As part of the Federal Government’s package of legislative reforms aimed at ameliorating the economic effects of COVID-19, regulations¹ have been introduced which provide lenders with a temporary exemption from some of the responsible lending obligations under the National Consumer Credit Protection Act (NCCPA).

These exemptions are intended to:

• allow lenders to provide credit to small businesses in a more efficient manner; and
• ultimately, assist small businesses in overcoming any liquidity issues.

These exemptions came into operation on 3 April 2020, and will continue for a period of 6 months.

These exemptions apply to applications for credit limit increases, new lines of credit and credit variations and restructures.

Lenders may be exempted from complying with the most onerous of the responsible lending obligations, including:

• The obligation to consider whether the proposed credit contract or credit limit increase will be unsuitable for the (potential) borrower, as set out in section 116 of the NCCPA.
• The obligation to make inquiries in relation to a (potential) borrower’s requirements, objectives and financial circumstances, as set out in section 117 of the NCCPA.
• The obligation to provide a (potential) borrower with a copy of his or her preliminary credit assessment, if so request, as set out in section 120 of the NCCPA.

Importantly, the temporary exemptions only apply in circumstances where both the relevant:

• loan is for a ‘partly’ commercial purpose, to a small business, operated by a consumer; and
• borrower has had a pre-existing relationship with the lender within the last 12 months.

Lavan comment

In circumstances where many small businesses are facing, or are likely to face, some form of financial distress, as a consequence of the proliferation of COVID-19, these temporary exemptions represent another welcome response by the Federal Government.

The assessment as to whether a particular credit application may be considered to be a loan for ‘partly’ commercial purposes, to a small business, operated by a consumer, is something that lenders need to carefully consider, so as to avoid inadvertently contravening any responsible lending obligations, to the extent that they continue to apply.

Lenders also need to consider these temporary exemptions in the context of their existing internal lending strategies and risk profile, as well as their ongoing obligations as gatekeepers and under, for example, the Code of Banking Practice.

Should you require any further guidance, please contact Dan Butler or Ben Fong.  Lavan’s partners are also available to provide webinars for training on the range of recent legislative changes introduced as a result of COVID-19 including those cited in our publications page here.