Credit card issuers will have to assess individual circumstances
Providers of high volume, low value credit products, such as credit cards, may no longer be able to rely on generic data to assess a consumer's capacity to repay the loan.
Last week, The Financial Ombudsman Service issued a circular to members setting out its view of financial service providers' responsible lending obligations under the National Consumer Credit Protection Act.
The Ombudsman's position is that generic data often fails to take into account particular needs, such as additional medical and pharmaceutical expenses, voluntary commitments, such as school fees, and additional transport costs for people in remote locations.
The Ombudsman said: "Without an assessment of individual circumstances, financial service providers can offer a credit limit which the consumer cannot afford."
The Ombudsman said NCCP allowed for low-doc lending "if adequate inquiries are made and the statutory provisions regarding responsible lending are satisfied."
"We recognise that there is a place for low-doc loans to cater for those self-employed clients who are unable to provide more traditional evidence of their income. However, in our view, low-doc loans should not, as a general rule, be granted to PAYG employees.
"We anticipate [that any] no-doc lending on the level previously experienced is unlikely to be sustainable, given the new obligations."
NCCP says that a credit provider must first make reasonable inquiries and take reasonable steps to verify information, and then make an assessment about whether a consumer credit contract "will not be unsuitable".
A loan will not be unsuitable if it meets the consumer's requirements and objectives, and the consumer has the capacity to repay the loan without experiencing substantial hardship.
The Ombudsman says it will rely on guidelines issued by the Australian Securities and Investments Commission when considering whether reasonable inquiries have been made. ASIC's Regulatory Guide 2009 recommends that credit providers look at the consumer's source and level of income, and the length of their employment.
It recommends that inquiries cover the consumer's fixed expenses, repayments to other loans, variable expenses, credit history, age, number of dependents, assets, and any foreseeable change to the consumer's financial situation.
ASIC's position is that the credit provider's obligations are "scalable", which means their obligations will vary with the circumstances.
The Ombudsman said that, as a minimum, the credit provider would have to see evidence of capacity to pay, such as verification of income by reference to payslips or, in the case of the self-employed, tax returns and bank statements.
The Ombudsman said: "This requirement is not scalable but rather a mandatory consideration."
In trying to provide some guidance on what it understands by "scalable", the Ombudsman said: "The scale of inquiries should be established with reference to the type of consumer and the type of product - the potential impact on the client of entering into an unsuitable loan, the complexity of the loan, and the ability of the client to understand the loan arrangement."