Our Annual Review highlights the increase in disputes we received in 2012-2013 about maladministration in lending - that is, cases where it is said that the financial services provider (FSP) did not exercise the care and skill of a diligent and prudent lender when assessing an applicant’s loan. In our Annual Report we said:
“The number of disputes we accepted about maladministration in lending more than doubled in 2012-2013. There were 706 disputes lodged which related to this issue compared to 333 in 2011-2012 and 209 in 2010-2011. FOS also saw a 99% increase in the number of disputes about maladministration in loan management (153).
While the reason for the significant increase in maladministration matters cannot be stated definitively, FOS is aware of the increased media coverage about maladministration in lending over the last 12 months. Matters relating to maladministration are complex and require detailed investigation. In each dispute we carefully consider the steps taken by both the FSP and the applicant to ensure both have fulfilled their obligations to the other when applying for and being granted a loan.
These complex investigations have had consequences for FOS workflows and resources. In July 2013 we will embark on a pilot program aimed at identifying matters relating to maladministration earlier so that we can deal with them in the most efficient way and reach a decision earlier.”
Given the increase, it is timely to remind applicants and FSPs of our approach to this type of dispute, particularly in relation to low doc lending. In Circular 5 we said that we would consider disputes about low doc lending entered into before the introduction of the Responsible Lending provisions of the National Consumer Credit Protection Act 2009. The Responsible Lending provisions commenced for new lending after 1 January 2011 for Banks, Credit Unions and Building Societies and after 1 July 2010 for all other lenders. We also consider disputes about lending that is unregulated by the National Credit Code.
When we consider a dispute about whether a low doc loan should have been approved, we will take into account a range of factors, including:
- the information provided by the applicant to the FSP
- whether the FSP properly assessed that information having regard to the standard of a diligent and prudent lender
- whether the FSP followed its own credit policies, and
- how the funds were used by the Applicant.
It is our view that a lender’s obligation to lend responsibly is set out in:
- the common law
- to the extent the loan is regulated, section 70(2)(l) of the Uniform Consumer Credit Code (UCCC) and, now, section 76(2)(l) of the National Credit Code
- for subscribing FSPs, clause 25.1 of the Code of Banking Practice (CBP) or clause 6 of the Mutual Banking Code of Practice, and
- sections 12DA and 12ED of the ASIC Act.
In considering these disputes, our Terms of Reference also provide that we should take into account good industry practice. It is our view that good industry practice includes the obligation to exercise the care and skill of a diligent and prudent lender when assessing a loan application.
Where it is said that false information is contained on a loan application form, whether made knowingly or inadvertently, we consider that to be relevant information to take into account when considering these types of disputes. We will ask the FSP to provide a copy of the loan application form and information about the circumstances surrounding its decision to provide the loan.
Even though information provided on a loan application form may be incorrect, this does not mean that maladministration has been established. We will take into account who was responsible for providing that information to the FSP, how the FSP assessed the information and whether, if the correct information had been provided, the loan would still have been granted because the applicant could still afford to repay the loan.
Where it is established that the loan should not have been approved if the lender had applied the appropriate level of care and skill, then we have to consider the appropriate remedy. As a general rule, because the applicant has had the use of the loan funds they will be required to repay the principal amount borrowed. If some or all of the loan was used to refinance an existing facility, then the refinanced amount will need to be repaid with interest.
If the loan involved new lending, then the principal will have to be repaid, but the applicant may receive compensation by way of a refund of the interest charged and other costs that may not otherwise have been incurred. We may, however, reduce the amount of compensation where we form the view that the applicant did not take reasonable steps to protect their own interests – for example, by signing a blank or incorrect loan application form or accepting the loan offered by the FSP without giving due and proper consideration to their own financial position.
In Circular 12, we discussed the sort of information an applicant should provide to us when lodging a dispute. We reminded applicants of our general approach to low doc disputes and maladministration in general, and said that if we agree that the loan should not have been granted, it is very unlikely that the loan balance will be written off entirely. For this reason, applicants should continue to make payments on the loan while we are considering the dispute. The FSP does not have to stop applying interest or fees, and if an applicant does not continue paying off the loan, these costs will increase.
For more information about our approach to low doc lending cases, please see the information contained in Circular 5 and Circular 12.