FOS case studies: responsible lending and maladministration
Many loan disputes now involve claims of maladministration in lending by a financial services provider: that the loan should never have been made and that the financial services provider should therefore bear all or part of the loss on a defaulting loan.
In its March circular, the Financial Ombudsman service has set out its approach to the responsible lending obligations under the National Credit Act and its implications for a dispute involving claims of maladministration in lending.
The FOS explains that in assessing a dispute it considers not just the National Credit Act but also other legislation (such as the ASIC Act), any case law as it is developed by the courts, ASIC’s guidelines, APRA's standards, industry codes and practices and its own past approach to claims of maladministration in lending.
The article makes specific comments about FOS's expectations of financial service provider's obligations in low doc lending and margin lending and gives case studies for low doc lending and investment lending.
In its view, as a minimum, there should always be evidence of the consumer’s capacity to repay such as:
•verification of PAYG income by reference to payslips or
•verification of self-employed income by reference to tax returns and bank statements.
In the low doc lending case study, the Ombudsman supported the case manager's conclusion that the borrowers should bear two thirds of their loss and the FSP was responsible for one third of the loss. The Ombudsman commented that "There is a legitimate place for low doc loans to cater for those self-employed borrowers who are unable to provide more traditional evidence of their income. However, a customer’s self-declaration of financial details will not protect the FSP from having the loan considered maladministration or unjust if the circumstances were such that the FSP ought to have made enquiries but chose not to do so."
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Posted 11th April 2011
in responsible lending
Carried over instrument lender annual compliance certificate
ASIC has released the form for the annual compliance certificate for unlicensed carried over instrument (COI) lenders (Form COI4). All unlicensed COI lenders must lodge the certificate in hard copy with ASIC no later than 15 August each year. There is no fee for lodgement, but a late fee applies.
Although the form for licensed credit providers will be different, the COI certificate gives a good indication of the matters to be covered in the licensee's certificate.
Langes can help give you the assurance that the certificate you lodge is correct.
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Posted 8th April 2011
Case note: National Credit Code transitional issues
Two different judgments in the case of Perpetual Trustees Victoria Limited v Monas have addressed the National Credit Code transition provisions as well as issues in respect of hardship relief and default notices relating to an action for possession by a mortgagee.
The first decision Perpetual Trustees Victoria Limited v Monas  NSWSC 1156 deals with transitional issues and hardship relief. What is the relevant date for determining the threshold for hardship application? The date of the application or the date of the credit contract? Judge Davies decided that the National Credit Code had not changed the position from the NSW Code: the application date is the relevant date. The result was that neither before nor after the enactment of the National Credit Code was the debtor entitled to apply for hardship relief as the amount of the loan was over the threshold at the application date.
The second decision in Perpetual Trustees Victoria Limited v Monas  NSWSC 57 dealt with the validity of the default notice despite it not containing exactly the words in section 80 of the Credit Code (now section 88(3)(h)).
Judge Hoeben said: "I am of the opinion that in order to comply with the requirements of s80, a default notice needs to provide the information set out in s80(3) but does not have to use the exact words of the section. It may have been prudent to use the exact words of the section, but a failure to do so is not determinative of whether a default notice complies with its requirements."
The default notice was held valid despite not strictly complying with section 80.
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Posted 5th April 2011
by David Jacobson