If a variation to a loan contract is documented by a new credit contract instead of a variation agreement, the responsible lending provisions will be triggered.

Everybody knows that the responsible lending obligations are triggered when a loan is varied by increasing the principal sum, but it may come as a surprise that other loan variations can also trigger responsible lending obligations.

The responsible lending obligations (making enquiries about the borrower’s requirements and objectives, enquiring about and verifying the borrower’s financial position and making a credit assessment) are triggered when a credit assistant suggests or arranges for a borrower to enter into a specific credit contract or specific finance lease.

As you can see from the last paragraph, the trigger for responsible lending is not making a loan but entering into a credit contract. Many lenders document variations by entering into a new credit contract. For example, a borrower who wants to switch from interest only to principal and interest or switch from variable to fixed may be issued with a new credit contract rather than a loan variation agreement. Responsible lending obligations will not be triggered if a variation agreement is used but will be triggered if a new credit contract documents the change.

ASIC has confirmed that although the substance of a variation agreement and a new credit contract is the same, the responsible lending obligations will be triggered if there is a new credit contract regardless of whether the change could have been effected by a variation.

Responsible lending obligations are also triggered where a credit assistant (broker) suggests that a borrower remain in an existing credit contract. Whether actions by a credit assistant in connection with arranging a variation amount to suggesting that a customer remain in an existing credit contract (as distinct from simply suggesting or arranging a variation) will be a question of fact in each case. Relevant considerations will include the purpose of the variation, incentives to the broker in suggesting a variation to an existing contract instead of recommending a new contract, and whether the change is so minor that it would not materially affect the circumstances of the customer.

A ‘mere’ variation will not normally be considered to be a suggestion that a consumer remain in a particular contract under section 8(c) if the changes merely give effect to the consumer’s direct request for a variation to their existing contract.

Suggesting that a customer remain in an existing credit contract only triggers responsible lending obligations for brokers (credit assistance), not lenders.

It is an unfortunate result that brokers and lenders are required to conduct another credit assessment simply due to the way a variation is documented.