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February 29, 2012

Credit Representatives’ Manual

Langes has published a manual specifically for credit representatives.

If your employees have been appointed as a credit representative of a third party or you appoint external representatives this Manual will help them understand their role, responsibilities and potential legal liabilities.

You can download an extract here.

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Posted 29th February 2012 by David Jacobson in legislation

February 24, 2012

ASIC challenges Amex on default interest rates

ASIC has announced that as a result of concerns raised by ASIC, American Express Australia Limited has agreed that from 28 February 2012 it will change its approach to the charging of a higher ‘default’ rate of interest to credit card customers who have defaulted in their payment obligations.

According to ASIC "AMEX’s policy was to increase the interest rate on the whole balance where a card holder had defaulted in making their minimum monthly repayment three or more times over 12 months or on one repayment for more than 3 months. The increase in rates for affected customers was up to 6% for a 12-month period. ASIC was concerned that this policy was potentially in conflict with the restrictions on the charging of default interest under the National Credit Code."

It is not clear whether the rate was only increased for borrowers actually still in default or included those with a history of default. It is also not clear whether the increase applied to the whole of the balance or only the amount in default or whether it was simply a rate increase permitted under the contract following a review.

Section 30 of the National Credit Code permits a credit contract to provide for a differential rate according to whether the debtor is in default under the contract if the higher rate is imposed only in the event of default in payment, in respect of the amount in default and while the default continues.

Disclosure of the rate and how it is applied must be made in accordance with section 17(11) of the National Credit Code.

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Posted 24th February 2012 by David Jacobson in legislation

Credit card key fact sheets transition

The key facts sheet requirement for credit cards will commence on 1 July 2012.

Some interesting transitional issues will potentially arise in respect of offers made before 1 July that are accepted on or after 1 July by conduct (ie use of a card) rather than by signing a form.

The National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Act 2011 and the National Consumer Credit Protection Amendment Regulations 2011 (No. 6) will require a consumer be provided with, or given access to, a Key Facts Sheet before entering into a credit card contract. If a consumer applies to a licensee for a credit card contract under which the licensee would be the credit provider, the licensee must not enter into, or offer to enter into, the contract unless the application is made using an application form that includes a Key Facts Sheet for the contract that contains up-to-date information.

A credit card contract is a continuing credit contract under which credit is ordinarily obtained only by the use of a credit card.

Entry by a licensee into a contract without an up-to-date Credit Card Key Facts Sheet having been provided to the borrower will not be a strict liability offence. If the Key Facts Sheet in the application is no more than 3 months out of date the up to date information must be given separately.

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Posted 24th February 2012 by David Jacobson in legislation

RBA links lending standards to financial stability

In an interesting speech the Reserve Bank's Head of Financial Stability Luci Ellis has credited Australia's prudential standards and consumer protection laws with helping to avoid US-style problems in Australia's home mortgage market.

The speech contains some interesting graphs and summarises the key principles for sound mortgage lending practices: serviceability, term, amortisation without undue hardship, collateralisation (loan to valuation ratio) and the extent of subordination.

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Posted 24th February 2012 by admin in responsible lending

February 22, 2012

Case note: credit licence application refused

In THG Developments Pty Ltd and Australian Securities and Investments Commission [2012] AATA 8 THG unsuccessfully applied to the Administrative Appeals Tribunal for the review of a decision of ASIC to refuse THG’s application for an Australian credit licence.

THG proposed in its licence application that "Credit representatives will make the loan in their own name as a representative pursuant to our licence". ASIC decided to refuse THG’s application for a licence.

ASIC contended that if THG’s credit representatives were to act in such a way, they would be ‘credit providers’ engaging in ‘credit activity’ who, pursuant to s 29(1), would each require a credit licence and without such a licence they would be contravening the Act.

THG’s proposal apparently involved THG providing administrative services and compliance training to lenders and bringing lenders and potential borrowers together, perhaps, in the future, through an internet portal. There was no evidence of how THG would ensure compliance by the lenders. When a lender entered into a credit contract with a borrower, THG would take a percentage of the interest charged by the lender.

The Tribunal concluded:

If the interpretation for which THG contends is correct, there would be no responsible lending obligations on credit representatives when they lend to consumers (other than the limited obligations referred to above) and those consumers would have none of the protections established under Part 3-2 of the Act. That this would undermine the operation of the national consumer credit regime and supports the interpretation propounded by ASIC, namely, that any authorisation of a credit representative by THG must be as agent for THG and not as a credit provider on their own account and in their own name. In other words, for the responsible lending obligations to have full force and effect, where a credit representative is entering into a credit contract, the representative must do so as an agent of the licensee. In our view, this argument is compelling.

Section 37(1) of the Act requires that ASIC must not grant a licence if (s 37(1)(b)) it has reason to believe that an applicant is likely to contravene its obligations under s 47 of the Act if the licence is granted. Section 47 sets out the general conduct obligations of licensees, including in s 47(1)(d) that it comply with the credit legislation and in s 47(1)(e) that it take reasonable steps to ensure that its representatives comply with the credit legislation. Thus, ASIC, having formed the view that THG was likely to contravene its obligations under s 47, was required to refuse THG’s application for a licence.

The Tribunal is therefore satisfied that for the reasons stated above, ASIC’s decision to refuse THG’s application for a licence was correct and should be affirmed.

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Posted 22nd February 2012 by David Jacobson in licensing

February 21, 2012

Case note: when is a loan unconscionable?

In Australian Securities and Investments Commission v Australian Lending Centre Pty Ltd (No 3) [2012] FCA 43 the Federal Court of Australia upheld ASIC's claim that Australian Lending Centre Pty Ltd and Sydney Lending Centre Pty Ltd engaged in unconscionable and misleading conduct in certain transactions between 2005 and 2008 by having its clients sign broking contracts for business loans when they knew the clients wanted personal loans.

Apart from the business loan issue, the transactions examined involved asset lending (when a borrower had no capacity to meet the repayments on the loan and that the loan had no identified exit strategy) and borrowers who had special disadvantage or a disability.

ASIC alleged that the conduct was unconscionable in equity so that it was entitled to declarations that the defendants had been involved in contraventions of section 12CA of the Australian Securities and Investments Commission Act 2001 (Cth) (‘the ASIC Act’) which prohibits conduct in relation to financial services which is unconscionable within the meaning of the ‘unwritten law’. It also alleged that it was entitled to declarations that section 12CB had been infringed which prohibits conduct which is ‘in all the circumstances, unconscionable’.

Justice Perram observed that:

"In my opinion, it is not, without more, unconscionable to offer to arrange a loan for a person who is financially distressed. But where, as here, that offer contains within it an attempt to lock the client into a business loan arrangement and thereby inappropriately increase the risk of the Code’s non-application the conduct involved may properly be described as involving an unfair tactic."

Justice Perram also considered the applicability of the ASIC Act to unadvanced loans:

"It is apparent from the way in which the expression ‘financial product’ is used in s 12BAB (which defines the concept of ‘provide a financial service’) that the products involved include not only those which presently exist but also those which will in the future exist. For example, s 12BAB(8) makes clear that arranging for a person to apply for, or acquire, a financial product will be ‘dealing’ in the financial product and by reason of s 12BAB(1)(b) that, in turn, will be the provision of a financial service. .... I accept, therefore, ASIC’s pleaded case that ALC was providing a financial service because it was providing ‘financial product advice’ (s 12BAB(1)(a)) and also providing ‘a service that is otherwise supplied in relation to a financial product’ (s 12BAB(1)(g)). As to the former, ‘financial product advice’ is defined in s 12BAB(5) to mean ‘a recommendation or a statement of opinion, or a report of either of those things, that: (a) is intended to influence a person or persons in making a decision in relation to a particular financial product or class of financial products...’. "

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Posted 21st February 2012 by David Jacobson in legislation, responsible lending

February 6, 2012

Credit relief given by ASIC

ASIC's report on relief decisions for June to September 2011 includes the following information about relief under the National Credit Act and National Credit Code:

  • ASIC granted conditional relief from the requirement to hold a credit licence for the provision of loans to members, or eligible persons preparing to be members, of a ministry. ASIC granted this relief because it considered that if relief was not granted, there was a potential consequence that the loan program would be withdrawn, or there would be an increase to interest rates and credit fees and charges. This would have a detrimental effect on the ability of members, or eligible persons preparing to be members, of a ministry to obtain and repay the loans. Relief was also granted from the responsible lending obligations. ASIC also granted partial relief from the National Credit Code to mirror the conditions of the employee loan exemption in s6(11).
  • ASIC granted relief to two credit providers from the prohibition on mortgage exit fees in s23(1) of the National Credit Code and reg 79A of the National Credit Regulations in relation to a form of credit contract, known as an ‘equity finance mortgage loan’ or ‘shared appreciation loan’ (EFM loan), that requires payment by the consumer of a percentage of an increase in value of secured property upon termination of the loan, instead of a traditional interest charge. ASIC granted conditional relief on the basis that:
    1. the payments did not penalise consumers for early termination of the EFM loan because they were calculated in the same way at both the loan expiry date and in the event of early repayment, and so did not appear to discourage consumers from switching credit providers; and
    2. if relief was refused, there was a risk that these loan products, which provide flexibility to consumers by offering an alternative to traditional interest bearing loans, would no longer be available.
    ASIC imposed conditions on the relief to ensure that the terms of the contract that specified the method of calculation of the payments could not be varied during the term of the contract and the pre-contractual statement and the contract document prominently disclose information about how the payments would be calculated, including worked dollar examples, and a warning that the payments may constitute a significant lump sum amount in the event of a significant increase in the value of the residential property or if the contract remains in force for a lengthy period of time.
  • ASIC refused to grant licensing relief to an entity that provides a direct debit and credit card billing and payment service. ASIC decided not to grant relief because it considered that the applicant could rely on the exemption in reg 24(9) of the National Consumer Credit Protection Regulations 2010 for a clerk or cashier that engages in a credit activity in the ordinary course of activities as a clerk or cashier. To the extent the applicant may engage in additional credit activities outside this exemption, ASIC was not satisfied that the licensing requirements would be disproportionately burdensome.

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Posted 6th February 2012 by admin in legislation, licensing

February 2, 2012

COSL Annual Report: systemic issues

The Credit Ombudsman Service Limited (COSL) has published its 2010-2011 annual report on its operations.

It identified complaints relating to financial hardship, deferred establishment fees, default listings and motor vehicle leases as systemic issues.

The single largest source of complaints was financial hardship: 34% of all complaints it received related in some way to financial hardship, specifically the failure of a lender to agree to a payment variation on grounds of financial hardship.

The underlying causes of the financial hardship complaints were identified as unemployment or reduced income (30%), cost of living, including other debt (21%), followed closely by illness of the borrower or their family member (19%), business failure (14%), interest rate increases (8%), relationship breakdown (7%) and natural disasters (1%).

In about 72 per cent of those cases the borrower had been served with a default notice or the lender had commenced legal proceedings, repossessed the security or issued a notice to vacate.

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Posted 2nd February 2012 by David Jacobson in EDR