ASIC Report 358 Review of credit assistance providers’ responsible lending conduct relating to debt consolidation (REP 358) has found that Australian credit licensees which provide debt consolidation services are at risk of not complying with their responsible lending obligations.

ASIC defined ‘debt consolidation’ as ‘securing new or additional credit for the purpose of using that credit to pay off other pre-existing credit contracts or to reduce the total number of payments being made. The types of credit contract that may be affected include, but are not limited to, home loans, credit cards, personal loans and payday loans’.

It is a service that falls within the definition of ‘credit assistance’ in section 8 of the National Credit Act in that it involves a credit assistance provider suggesting or helping a consumer apply for a new credit contract or increase in the limit of an existing contract.

ASIC reviewed 82 clients files across 17 licensed providers.

The most common debt consolidation solutions presented to consumers were:
(a) extending loan terms (often resetting to 30 years) to reduce the monthly repayment commitment (50% of all files);
(b) switching consumers to interest-only loans; and
(c) placing consumers into new credit contracts on different rates (often lower rates, but in some cases on higher rates than pre-consolidation).

The Report concludes that:

• in 30% of files reviewed, the credit assistance provider failed to record or keep sufficient information to identify the consumer’s pre-existing credit contracts
• credit assistance providers in general did not appear to document in their client file whether potential significant risks and costs of debt consolidation had been discussed with consumers
• inadequate recording of the consumer’s requirements and objectives
• inquiries about and verification of the consumers financial situation not being recorded properly
• some assessments of loan suitability being made on credit terms that were different from the eventual loan application, and
• some assessments of loan suitability where the amount recorded for consumer expenses was contradicted by other information on the licensee’s file.

ASIC identifies the risk of rolling all existing loans, credit cards and other debts into a new loan with a longer term (often 30 years) and secured over the family home as including:

• higher long-term costs of repayment resulting from extending the loan term
• transferring default risk of previously unsecured debt onto the family home
• moving consumers to an interest-only loan without an appropriate exit strategy
• leaving pre-existing contracts open, enabling a consumer to redraw on them at a later stage and
• fall further into debt problems, and
• additional costs such as broker fees and new loan establishment fees.

Entities which specialise in assisting consumers to manage multiple payment obligations and advise on debt agreements under the Bankruptcy Act or payment management plans were excluded from the review because they did not arrange new credit as a way of dealing with pre-existing credit obligations, and their activities were generally not subject to the National Credit Act.