Make a preliminary assessment

Content Summary

Based on the reasonable inquiries about the consumer and any other relevant information available, a preliminary assessment must be made on whether the proposed credit contract is ‘not unsuitable’ for the consumer.

The proposed credit contract will be assessed as unsuitable if at the time of the preliminary assessment it is likely that:

  • the consumer would be unable to meet their financial obligations or could only comply with substantial hardship
  • the contract does not meet the consumer’s requirements or objectives.

ASIC has stated that to demonstrate credit assistance providers are complying with their responsible lending obligations they should have adequate processes in place to assess whether the consumer has the capacity to repay the credit contract without substantial hardship and that the contract meets the consumer’s requirements and objectives.

Assessing the consumer’s capacity to repay

Based on the inquiries made about the consumer’s financial situation and the steps taken to verify this information, a decision will then need to be made if the consumer has the capacity to repay the loan. The maximum amount that will be repaid under the contract, including any fees must also be considered.

The following factors must be considered when making this decision:

  • the amount of remaining disposable income the consumer has after living expenses have been deducted from their after-tax income
  • other debt obligations, including child support
  • if the level of disposable income leaves them in a vulnerable position, for example if there was a rise in interest rates
  • if the consumer’s expenses are higher than on average, e.g. because they live in a remote area
  • consistency and reliability of the consumer’s income
  • if the consumer would be forced to sell assets to repay the loan.

Generally, the National Consumer Credit Protection Act 2009 (National Credit Act) presumes that a consumer should be able to meet the financial obligations of the credit contract from their income, not equity in an asset. Reverse mortgages and bridging loans may be exceptions to this position.

    Capacity to repay and substantial hardship

    ASIC has provided the following examples to illustrate its guidance on capacity to repay and substantial hardship.

Assess if the credit contract meets the consumer’s requirements

A credit contract will be unsuitable if it does not meet the consumer’s requirements and objectives. The credit assistance provider must therefore determine the consumer’s requirements and objectives and if there is any uncertainty, it must be resolved through the reasonable inquiries process.

Some factors that could be considered to assess that a credit contract is not unsuitable include:

  • the consumer’s stated objectives for obtaining the credit and the nature of the credit they request
  • where the loan is to purchase a specific asset, the loan term and the expected useful life of the asset
  • interest rates and fees
  • the complexity of the credit contract and if a more simple product would meet the consumer’s needs
  • any balloon payments
  • if the consumer is switching loans, the benefit of the new credit contract to the consumer
  • if none of the credit contracts that you provide credit assistance for meet the requirements and objectives of the consumer, you must not enter into a contract with the consumer, suggest a credit contract to the consumer or assist the consumer to apply for a credit contract.

    Meeting a consumer’s requirements and objectives

    ASIC has provided the following examples to illustrate its guidance for meeting a consumer’s requirements and objectives.

Additional considerations for switching and refinancing

Additional analysis is required where a credit assistance provider engages in switching and refinancing activities.

This will include considering whether the new credit contract will result in an overall cost saving to the consumer that is likely to override any loss of benefits or the cost savings may be minimal however the new credit contract better meets the consumer’s requirements and objectives.

Refinancing when a consumer is in arrears

A higher level of inquiry is needed if the consumer is refinancing because they’re having trouble meeting their repayments, or if they are in arrears on their existing contract.

If a new credit contract will have the same repayments, it can be determined that, on face value, it will be unsuitable.

Should the current contract be assessed as ‘not unsuitable’ and no alternative contract is considered ‘not unsuitable’, the credit assistance provider can suggest the consumer remain in the current contract without contravention of the responsible lending obligations.