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October 21, 2011

Consumer Credit Enhancements: Reverse Mortgages

Schedule 2 of the Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 contains amendments to the NCCP Act (including the National Credit Code) which relate specifically to contracts for reverse mortgages, commencing on 1 July 2012.

What do you need to do?

If you provide reverse mortgages (as defined) then your procedures and systems will change.

A reverse mortgage is defined for the purposes of the Code as an arrangement which involves a credit contract and a mortgage over a dwelling or land securing a debtor’s obligations under the contract and either:
• the arrangement is an arrangement of a type which ASIC has declared to be a reverse mortgage ; or
• the arrangement meets the following two conditions:
– the total amount the borrower owes under the contract or mortgage may exceed the maximum amount of credit they may be provided under the contract without them being required to reduce their liability to a figure less than that maximum amount; and
– the arrangement meets any prerequisites prescribed by the regulations (with it anticipated that this regulation-making power may be needed to exclude other classes of credit contracts where the protections applicable to reverse mortgages are not appropriate).

Bridging finance contracts are excluded from the definition of reverse mortgages as these are also credit contracts where the outstanding balance of the contract can increase until the final repayment, but where the protections applicable to reverse mortgages are not necessary.

The provisions in the Bill include new obligations for persons who engage in credit activities in relation to reverse mortgage contracts. The key elements of these requirements are:
• introducing a ‘no negative equity guarantee’ protection through a prohibition against credit providers requiring or accepting repayment of the loan for an amount which exceeds the market value of the mortgaged property (subject to certain exceptions);
• mandating that holders of an Australian credit licence must undertake the following conduct before they make an assessment or a preliminary assessment under
sections 123, 124 or 128 of the NCCP Act:
– using a website approved by the Australia Securities and Investments Commission (ASIC), show a consumer projections of the potential effect a reverse mortgage may have on the equity they have in their home;
– provide the consumer with a print out of these projections;
– notify the consumer of additional information that will assist them to decide whether to enter into a reverse mortgage, and, if so, on what terms; and
– give the consumer a reverse mortgage information statement;
• prohibiting credit providers from specifying that certain types of conduct can constitute a default under a reverse mortgage contract;
• disclosure of the way in which non-title holding residents will be treated under a reverse mortgage contract;
• prohibiting credit providers from entering into a reverse mortgage contract unless the consumer has received legal advice regarding the contract (with commencement of this obligation deferred to a date to be prescribed by regulation); and
• new requirements on credit providers where they have given a default notice to the debtor, including an obligation to take reasonable steps to contact the debtor in person, to make sure they understand they are in default and therefore provide them with an opportunity to rectify the default.

ASIC's moneysmart website provides a visual demonstration of possible outcomes.

The draft Regulations provide that it will be presumed that a credit contract will be unsuitable for a borrower under the following circumstances:
• that the credit contract is not a reverse mortgage;
• the borrower is at least 55 year of age and is not in full-time employment when the credit contract will be entered into ;
• the amount owing under the contract can only be repaid by selling the borrower’s principal place of residence; and
• if reasonable inquiries about the consumer’s requirements and objectives establish that the consumer would use the credit provided under the contract predominantly to pay for regular or recurring household expenses, or to pay for expenses relating to the health of the consumer, or another resident of the property aged over 55 years old. This would not include the consumer’s use of the credit provided under the credit limit in the contract as part of discharging the consumer’s obligations under another credit contract that is secured by a mortgage over the consumer’s principal place of residence.

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Posted 21st October 2011 by David Jacobson in legislation, Phase 2, responsible lending

October 12, 2011

Preparing for the National Credit Act enhancements: hardship and restricted terms

As discussed previously the Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 contains provisions for:

  • “Enhancements” (particularly relating to hardship variations), which commence on 1 July 2012;
  • Reverse mortgages, which commence on 1 July 2012
  • Consumer Leases, which commence on 1 July 2012
  • Small amount credit contracts, which commence on 1 July 2012 and
  • Caps on interest rates and costs for all other credit contracts which commence on 1 July 2013

The enhancements contained in the Bill include:

  • broadening of the grounds of variations that can be requested by consumers on the basis of financial hardship (including removing the $500,000 cap and extending the right to regulated residential investment loans) and changes to procedures in respect of borrowers applying for hardship variations;
  • requiring credit providers to finalise an outstanding hardship application before commencing enforcement procedures,subject to limited exceptions;
  • introducing a remedy for unfair or dishonest conduct by providers of credit services;
  • restricting the use of specified terms and regulating representations eg independent ;
  • providing ASIC with power to appear on credit applications in its own right as well as on behalf of consumers;
  • technical drafting corrections (correcting headings and cross-references).

This note discusses what you need to do in response to the enhancements relating to hardship and use of certain words. Future notes will discuss the other amendments.

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Posted 12th October 2011 by David Jacobson in legislation, Phase 2

October 6, 2011

National Consumer Credit Regulations updated

ComLaw has published a consolidated National Consumer Credit Protection Regulations 2010 (incorporating amendments up to 1 October 2011 including National Consumer Credit Protection Amendment Regulations 2011 (No.4), the disclosure rerquirements, but not including National Consumer Credit Protection Amendment Regulations 2011 (No.5) (the Home Loan Key Fact Sheet Regulations).

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Posted 6th October 2011 by David Jacobson in legislation

October 3, 2011

Deferral of changes to door-to-door selling of credit

The Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 does not contain the extension on restrictions of to door-to-door selling of credit proposed in the Exposure Draft.

Currently section 156 of the National Credit Code prohibits the canvassing of credit at places of residence, without prior invitation.

The Exposure Draft extended that prohibition to uninvited visits to sell goods or services on credit or by consumer leases.

At a recent seminar, a Treasury representative said that further consultation is to be undertaken before deciding on whether the changes would be made.

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Posted 3rd October 2011 by David Jacobson in legislation

FOS reviews its financial difficulty EDR processes

The Financial Ombudsman Service's latest circular responds indirectly to criticisms by Financial Service Provider members that FOS is taking too long to resolve consumer claims, especially those lodged after default notices and legal proceedings have issued, resulting in a postponement of enforcement proceedings.

The new Chief Ombudsman, Shane Tregellis, discusses delays in receiving mail from FOS as well as announcing a call system upgrade.

Concerns about EDR system shopping by consumers (where for a example a licensee and a credit representative are members of different EDR schemes) are discussed in an article about FOS's agreement with COSL about which scheme will apply in such circumstances. FOS also sets out its approach when a dispute involves 2 separate FOS members.

FOS has also made it clear that in deciding financial difficulty disputes FOS will form an opinion about what is fair in all the circumstances, having regard to:

a.Legal principles;
b.Applicable industry codes or guidance as to practice;
c.Good industry practice; and
d.Previous relevant decisions of FOS or a predecessor scheme

FOS members may find it useful to undertake its elearning course on its terms of reference and case management in order to efficiently deal with the EDR process as well as review its Operational Guidelines.

The best way to shorten (or avoid) a lengthy EDR process is to improve the effectiveness of your IDR process.

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Posted 3rd October 2011 by David Jacobson in EDR