Credit card reform to affect mortgage applications

From 1 January 2019, credit licensees will be required to assess whether a credit card contract or credit limit increase is “unsuitable” for a consumer based on whether the consumer could repay the full amount of the credit limit within the period prescribed by ASIC.

The regulator has noted that the new responsible lending obligations will apply to licensees that provide credit assistance and licensees that are credit providers, for both new credit card contracts and credit limit increases under existing credit card contracts.

Brokers and mortgage lenders will need to take heed of changes

Notably, however, ASIC has also stated that as part of the new measures, credit licensees undertaking responsible lending assessments for “other credit products”, including mortgages, should ensure that the consumer “continues to have the capacity to repay their full financial obligations” under an existing credit card contract, within a “reasonable period”.

In its response to submissions to the credit card consultation paper, ASIC noted that two respondents had asked for clarification about whether the assumptions about the level of repayments on existing credit card contracts held with other credit providers would also apply to other credit products, such as mortgages.

It gave the example of whether credit licensees would be required to assume the consumer is repaying their credit card contract at a rate that would repay the limit, with interest, within three years, when conducting a responsible lending assessment for a credit product such as a home loan or car loan.

In its reply, ASIC responded: “We consider that it is consistent with the intent of the reform for credit licensees to assess applications for new consumer credit products on the basis that the consumer continues to have the capacity to repay their full financial obligations under an existing credit card contract within a reasonable time.

“Accordingly, we think credit licensees should consider assuming a higher amount of repayments consistent with repaying the full balance of the credit card within three years, and not merely their contractual minimum repayments.”

The regulator acknowledged that the “flow-on changes” to responsible lending assessments on other credit products, such as home loans, may “take some additional time for some credit providers to implement”.

ASIC therefore said that it expects mortgage lenders and other credit providers to implement this aspect of the reform by 1 July 2019, seven months after the credit card changes come into effect.

Industry response

During the consultation process, the Finance Brokers Association of Australia (FBAA), which expressed opposition for the new measure, disputed the assumptions that ASIC suggested should be made when assessing whether a consumer can repay the credit limit within three years.

The FBAA proposed an alternative model, which would consider different repayment periods for cards depending on the interest rate.

“If further regulation of the assessment of serviceability under a credit card is unavoidable, the FBAA proposes a model whereby the repayment periods for cards is aligned with the interest rate,” the FBAA noted.

“Low-rate cards should carry a longer repayment period and higher-rate cards a shorter repayment period.”

The industry association stated that such a model would:

• encourage credit card issuers to offer more cards at lower rates
• see a narrowing of the margin between the cash rate and credit card interest rates
• drive consumers wishing to obtain a higher credit balance towards low interest rate cards (and then if they subsequently rely on this card for day-to-day credit by making lower monthly repayments, the level of consumer detriment is lower)
• still make available premium cards with rewards programs which generally carry higher interest rates available to consumers with higher disposable incomes and who can demonstrate serviceability

The FBAA added: “If there is any interest in such a model, the FBAA would propose the threshold be set around 10 per cent with cards with interest rates of 10 per cent or lower being assessed on repayments over five years, and cards over 10 per cent being assessed on repayments over three years.

“Alternately, the interest rate could be a function of the RBA cash rate plus a margin.”

 [Related: ASIC prescribes new responsible lending reform]