By now you all would have heard or seen the news report that BMW Australia Finance Limited has entered into an enforceable undertaking with ASIC to the tune of $77 million. This includes a $5 million payment to contribute to consumer advocacy and financial literary initiatives.
The remaining $72 million comprises write-offs of loans valued at $50 million, interest rate reductions of $7.6 million and remediation payments to consumers of $14.6 million. The remediation programme is to identify the estimated 15,000 consumers that suffered hardship in the last six years at the hand of BMW Finance.
The first unwritten rule of lending is that when assessing loan applications a lender must consider the “first way out” of a loan (repayment in accordance with the parties’ bargain) when assessing their loan applications.
The National Consumer Credit Act enshrines this in the obligations for lenders and credit intermediaries (brokers) to ensure a loan (or recommendation of a loan) is not unsuitable for the consumer. A loan to a person who cannot repay it without undue hardship, is unsuitable.
The Sydney Morning Herald reported that BMW Finance lent $27,000 to a single mother with 10 children who had insufficient income to make ends meet, as well as almost twice the price of a car to a 76 year old man whose income was based on earnings projections.
ASIC Deputy Chairman Peter Kell said, “BMW Finance had a sales-driven culture that failed to comply with the requirements of the credit laws and resulted in poor outcomes for many consumers… This is an example of the staggering cost of poor business practices and should act as a warning to other car financiers to get their houses in order.”
The lending examples provided by the Sydney Morning Herald suggest that Mr Kell’s statement is somewhat restrained. ASIC’s press release discloses that ASIC issued 58 infringement notices to BMW Finance, 36 in January 2015 and 22 in February 2016, and imposed a condition on BMW Finance’s licence in January 2016 and has imposed a further investigation and reporting condition alongside the Enforceable Undertaking.
It is not clear whether the Enforceable Undertaking is because BMW Finance was recalcitrant, or whether it is part of the mechanism to ensure that affected consumers are compensated.
What is clear is that ASIC are taking aim at businesses that forget the fundamental lending principal that to get its money back, a lender needs to make sure that it does not overcommit the borrowers and not rely on just the enforcement of its security. The principal applies to consumers as well as businesses, the difference is the metrics examined when making the credit decision.
ASIC appear to be increasingly active in the consumer protection space and are taking an adversarial role. BMW Finance is likely to throw the spotlight on “used car financiers” but ASIC was quick to point out that they are taking aim at lending practices across the finance industry.
So far the focus has been on consumer loans, but with the recent changes to the Australian Consumer Laws and creation of the Office of the Small Business Ombudsman, we may see further action by regulatory authorities against lenders in the small business space. It’s time for lenders to proactively review their policies and procedures, and consider whether they are fair and address the lending fundamentals.