Attwood Marshall Lawyers’ Commercial Litigation Lawyer James Griffin explains how borrowers can bring claims against banks that loaned money irresponsibly, even when it was clear the borrower could not repay the loan.
The aftermath of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, which took place between 2017 and 2019, brought to light a myriad of issues that had silently plagued consumers for years.
The Royal Commission prompted a seismic shift in how banks operate in Australia. Faced with the need for substantial reform, financial institutions have been held under scrutiny since the Royal Commission, revealing a trail of irresponsible lending practices that have left countless individuals in financial distress.
In recent years, the Federal Court has been a battleground where banks are held accountable for their transgressions with regulator the Australian Securities and Investment Commission (ASIC) taking consistent action to impose civil penalties for breaches.
In March 2023, ANZ faced a $10 million penalty over their non-compliant Home Loan Introducer Program. The program, designed for home loan referrals from third-party ‘introducers’ such as real estate agents and cleaners, saw the bank mishandle sensitive customer information.
Under Consumer Protection Laws, the bank should have only accepted names and contact details of customers from unlicenced third parties. Instead, they received sensitive information from unlicenced intermediaries, including pay slips and copies of ID. In some cases, the documents were fraudulent.
These types of programs received considerable criticism from the Royal Commission.
This was not the first time ANZ was penalised for their conduct. In October 2022, ANZ was penalised $25 million for misleading customers and failing to provide promised account benefits under their ‘Breakfree package’.
Rival bank, NAB, also had to pay a $15 million penalty in October 2020 for dealing with unlicensed home loan introducers.
The pattern continued in 2018 as Westpac admitted to breaching their responsible lending obligations when issuing home loans and paid a $35 million civil penalty.
The repercussions of these actions extend far beyond the courtroom. Millions of customers have felt the impact of the bank’s misconduct, and many likely remain unaware that they can seek recourse.
What is irresponsible lending?
Irresponsible lending is when a financial institution lends money to someone who cannot afford it.
The National Consumer Credit Protection Act (NCCPA) came into force just after the Global Financial Crisis and now contains the National Credit Code. This uniform federal legislation replaced state-based credit protection laws and the uniform consumer credit code.
Under the NCCPA, financial institutions must do their due diligence to investigate a borrower’s capacity to repay the loan before a customer can enter a credit arrangement. This includes ensuring that the customer can service the loan and not fall behind on any existing financial commitments by taking out the loan.
It would be irresponsible for a lending institution to loan money to someone, which would cause them financial hardship.
Essentially, the principal is that the credit provider must make reasonable inquiries about the customers’ requirements and objectives and their current financial situation and take steps to verify those financial representations.
The responsible lending obligations apply to all credit providers, including banks, credit unions, and finance companies, and cover a wide range of credit products, including:
- Home loans
- Personal loans
- Credit cards
- Car loans
- Reverse mortgages
- Payday loans, otherwise known as small short-term loans with credit over 62 days
What is a legacy claim?
A legacy claim refers to complaints about financial services or products that occurred on or after 1 January 2008, which fall outside the time limits that typically apply to complaints submitted to AFCA.
AFCA were taking legacy claims until June 2020, when they closed their legacy complaints window. However, many banks still honour their commitments made during the Royal Commission to investigate and settle historical claims which now fall outside standard time limits.
Banks are handling legacy claims in several ways. Some banks set up dedicated teams to deal with legacy claims, while others use external dispute resolution providers. Banks are also reviewing their lending practices and policies to ensure they are no longer engaging in irresponsible lending practices bringing them in line with the legal obligations and various recommendations made by Commissioner Hayne.
Responsibilities of the banks
If a financial institution has failed to take all the necessary steps to ensure you can repay your loan, they may have acted irresponsibly, and you may be eligible to make a complaint.
A lender should:
- ensure the loan is suitable to the unique situation of the borrower
- verify the borrower’s income to ensure they can service the loan
- ask questions about the borrower’s living expenses and other financial needs
- ensure the borrower completely understands the agreement they are entering into
- ensure the borrower can meet their obligations on interest-only loans beyond the expiration of the interest-only period
- calculate serviceability in line with interest rates increase.
- in some circumstances, ensure the consumer has obtained independent legal advice.
Making a claim – time limitations
While historically the time limit to lodge a complaint with AFCA was six years from when the loan was granted, updates to AFCA’s rules and guidelines now require a complaint to be made:
a) within two years from the date the credit contract was rescinded, discharged or otherwise comes to an end; or
b) where a complainant makes a complaint directly to a financial firm, within two years of the date a complainant receives a response to their complaint from the financial firm.
If anyone suspects they may have an irresponsible lending claim, it is imperative to seek legal advice as soon as possible. A lawyer can advise you on the time limit applicable to your claim and help you gather the evidence you need to support your claim.
The immediate steps to take if you have been affected by irresponsible lending
- Make a complaint to the lender;
- If not satisfactory, ask for a review of the complaint by their internal dispute resolution department;
- Lodge a complaint with AFCA;
- Contact a suitably qualified lawyer to obtain legal advice about your dispute. An experienced lawyer will help you understand your prospects of successfully making a claim, advocate for you and negotiate on your behalf with the institution and guide you through the legal process.
Attwood Marshall Lawyers – helping consumers protect their rights against irresponsible lending practices
If you are entangled in a dispute with your bank over irresponsible lending, loan repayments, their handling of hardship notices, excessive fees, unsuitable products, or bad financial advice, our banking dispute lawyers can ensure you understand your rights and guide you in resolving the matter as quickly and efficiently as possible.
Our Commercial Litigation team can determine if you are eligible for compensation for any financial loss you have suffered.
To discuss your specific matter, please call our Commercial Litigation Department Manager, Georgia Trapp on 1800 621 071 at any time or email gtrapp@attwoodmarshall.com.au.
