Many loan disputes now involve claims of maladministration in lending by a financial services provider: that the loan should never have been made and that the financial services provider should therefore bear all or part of the loss on a defaulting loan.

In its March circular, the Financial Ombudsman service has set out its approach to the responsible lending obligations under the National Credit Act and its implications for a dispute involving claims of maladministration in lending.

The FOS explains that in assessing a dispute it considers not just the National Credit Act but also other legislation (such as the ASIC Act), any case law as it is developed by the courts, ASIC’s guidelines, APRA’s standards, industry codes and practices and its own past approach to claims of maladministration in lending.

The article makes specific comments about FOS’s expectations of financial service provider’s obligations in low doc lending and margin lending and gives case studies for low doc lending and investment lending.

In its view, as a minimum, there should always be evidence of the consumer’s capacity to repay such as:

•verification of PAYG income by reference to payslips or
•verification of self-employed income by reference to tax returns and bank statements.

In the low doc lending case study, the Ombudsman supported the case manager’s conclusion that the borrowers should bear two thirds of their loss and the FSP was responsible for one third of the loss. The Ombudsman commented that “There is a legitimate place for low doc loans to cater for those self-employed borrowers who are unable to provide more traditional evidence of their income. However, a customer’s self-declaration of financial details will not protect the FSP from having the loan considered maladministration or unjust if the circumstances were such that the FSP ought to have made enquiries but chose not to do so.”

National Consumer Credit Protection Amendment Regulations 2011 (No. 1) has extended the exemption from the obligation by a credit licensee or a credit representative to provide credit disclosure documents in Regulation 28N (5) (contained in National Consumer Credit Protection Amendment Regulations 2010 (No. 4)) from 1 April 2011 to 1 August 2011.

A summary of the effect of the delay is set out in ASIC Information Sheet INFO 137.

As part of consultation on the National Consumer Credit Protection Amendment (Credit Card and Home Loans) Bill Treasury has released the following draft documents for consultation:

• a Key Fact Sheet for home loans – to be provided on lenders’ websites or if a consumer makes an inquiry or makes an application.
• a Key Fact Sheet for credit cards – to be included in credit card application forms.
• a pre-contractual home loan disclosure document – to be provided before the consumer enters into the contract, and summarising key features in respect of the terms on which the lender is offering credit.
• a pre-contractual credit cards disclosure document – to be provided before the consumer enters into the contract.

The home loan disclosure document requires disclosure of the total amount to be paid back (including the loan amount and fees) based on minimum monthly payments over the full term of the loan at the current interest rate and current fees and charges.

The credit card disclosure document requires disclosure of the amount of minimum repayments (based on the fully drawn credit limit) and a warning which sets out the number of payments and term, the amount of fees and estimated interest at the Purchases interest rate and at the Cash Advances interest rate, if the borrower reaches the credit limit on the credit card and chooses to pay only the minimum monthly payment.

Submissions close on 28 March 2011.