Making changes to loan contracts – Part 2: What do you do if a client changes their mind during the course of you providing credit assistance?

May 15th, 2017

Last week we addressed what your compliance obligations would be if a client wanted to make a change to an existing loan contract. Read the article here. This week we’ll take a look at what to do if a client changes their mind on the loan structure in the middle of making a loan application. This is not an unusual situation, so it’s good to know how to make the change quickly and with minimum fuss!

Back to the NCCP Act again!

In the event where a client changes their mind about any aspect of the loan structure, you need to make sure these changes are fully documented according to your responsible lending obligations under the NCCP Act. The requirement to fully document any changes applies to both the compliance documentation and also to your file notes in Mercury. This is the most important thing to remember if you need to make any changes to a loan application before it is approved by a lender.

Switching product types

One scenario could be that the client initially wanted a variable rate, but prior to and/or after submitting the application to the lender, they changed their mind and decided to request a split loan. If something like this happens, you need to ensure that you have fully documented the conversations you have had with the client. This ensures you’re adhering to the below responsible lending requirements:

1. Make reasonable enquiries about the consumer’s financial situation, requirements and objectives; and
2. Take reasonable steps to verify the consumer’s financial situation; and
3. Make a preliminary assessment about whether the credit contract is ‘not unsuitable’ for the consumer.

Therefore, under NCCP you would need to create an updated Preliminary Assessment that includes the lender/product/splits that the client has now requested. Additionally, it is always best practice to keep the previous Preliminary Assessment that you have completed to show the timeline of events.

After completing your Preliminary Assessment, you will also need to provide the client with the updated Credit Proposal Disclosure that reflects the updated proposed lender and product(s) that the client is entering into. The same would also apply here in regards to keeping the previous Credit Proposal Disclosure on file.

Please ensure your file notes / correspondence reflects the discussions you have had with the client throughout the loan application process.

Changing the loan amount

Another common change scenario could be the client’s loan amount changes during the process of providing credit assistance. This is an interesting one. If the loan amount the client is now requesting is LESS than what was previously proposed, then the current Preliminary Assessment and credit proposal disclosure is sufficient. This is because you have already assessed a client’s serviceability based on a higher loan amount, so if the loan amount has now reduced then the client will still meet the serviceability requirements.

It is a different story if the loan amount increases. If this were to happen, you would need to be able to evidence that your client can afford to service the higher loan amount and so a new Preliminary Assessment and Credit Proposal Disclosure would need to be generated.

Making changes to loan contracts and applications are common in the life of a mortgage and finance broker! But remember, your Compliance Support Team is always on hand to help.

If you have any questions, please contact us by clicking the help icon in Mercury or email us directly at compliance@connective.com.au.