The sudden and unknown nature of COVID-19 has triggered a global economic shock, and disrupted Australia's economy. As we enter a national state of economic 'hibernation', banks and lenders are grappling with a sudden influx of relief requests from consumer and business customers. Borrowers are rapidly seeking to shed unnecessary expenses to preserve cashflows and survive through the uncertainty. Banks and lenders have been forced to respond rapidly to borrowers, and to the new economic stimulus packages. A sustainable response must strike a balance between:
- demonstrating compassion to borrowers;
- maintaining capital adequacy; and
- avoiding exposure to future regulatory risk.
We examine the issues arising for retail banking and responsible lending, and look at the regulatory / industry body response, as well as the wider market. This analysis is intended to assist you in rationalising the 'grey areas', support you to benchmark your COVID-19 response, and inform your meetings with regulators and businesses.
Implementation of commitments associated with the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry
1. Implementation of the product design and distribution obligation regulations (DDO), the mortgage broker best interest regulations and other regulations in response to Royal Commission recommendations.
Responsible lending and credit assessments
2. Does responsible lending still apply when assessing a new regulated credit application, credit limit increase or refinance?
3. How do you assess a business borrower's application for new credit, a credit increase or refinance? Should you assess the borrower pre-COVID-19, use current information or assume that they will return to a pre-COVID-19 operational capacity after a certain period?
4. Is it reasonable to form a view that a loan is 'not unsuitable' or is affordable if (in the case of a regulated loan) it meets a responsible assessment test, and it has reasonable prospects of being repaid after a three- or six-month repayment break?
5. If a borrower's loan has been approved but, due to COVID-19, they may be unable to pay, should the loan proceed?
6. What if the borrower needs to refinance but cannot afford any loan repayments due to the COVID-19 hibernation or loss of income?
7. Can brokers suggest that borrowers remain in a credit contract?
8. Could a complaint be lodged about a lender giving hardship relief or a repayment break?
9. Could a complaint be lodged about a lender giving hardship relief in the form of a further extension of credit?
10. Must relief be in the form of hardship (under s72 of the NCC, APS 220 and clause 101 of the Banking Code), or can it take the form of a temporary repayment reduction or break?
11. If borrowers request a COVID-19 repayment break, what should be reported to credit reporting bodies?
12. Are lenders required to give statutory NCC and Banking Code notices to guarantors if a borrower experiences financial difficulty?
13. Are lenders required to get guarantor consent to increase the borrower's principal borrowing when giving a COVID-19 repayment break? This is relevant if interest is capitalised, as it becomes an increase in principal.
Unfair contract terms
14. Could it be unfair to enforce loans in default?
Class action risk
15. The Government said that responsible lending doesn’t apply to SME loans. Could we be subject to class action risk for lending without assessing a borrower's capacity to repay?