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September 12, 2013

APRA’s review of housing loan approval standards

APRA's article "Loan serviceability standards in housing lending" (in Insight Issue Two 2013) identifies areas in housing loan approval standards where improvements are needed. Some of these reflect the National Credit Act responsible lending requirements.

The article summarises a review of ADIs that focussed on the income tests that ADIs use to assess whether borrowers can afford the interest and principal repayments on their loans. A total of 27 ADIs participated in the review, including major banks, regional banks, credit unions and building societies. Together, these ADIs represented around 97 per cent of total ADI housing loans as at March 2013.

According to APRA:

A strong focus on debt serviceability is critical in a low interest rate environment. In particular, low interest rates can mask debt serviceability assessments, creating opportunities for borrowers to increase their leverage. The resulting growth in demand for housing loans can also put pressure on housing lending standards as ADIs compete to maintain or increase their market share. ADIs need to carefully monitor the debt servicing capacity of their borrowers over the duration of housing loans, not just at origination, to ensure that borrowers are able to manage the transition to higher interest rates, when that inevitably occurs.

APRA identified the following as forming a prudent approach to debt serviceability:

  • Clearly documented policies and procedures for evaluating loan serviceability, subject to effective governance arrangements and board oversight.
  • A set of consistent serviceability criteria across all of an ADI’s mortgage products.
  • Application of an interest rate buffer to stress new and existing loan commitments, which is regularly reviewed in relation to the interest rate cycle and key economic indicators.
  • Inclusion of an interest rate floor in serviceability assessments, based on the average mortgage interest rate over an appropriately long time period, being at least one cycle in interest rates.
  • Use of a borrower’s declared living expenses as a more representative measure of their actual living expenses than the Household Expenditure Measure (HEM) or the Henderson Poverty Index (HPI) indices.
  • Where the HEM or HPI indices are used, the addition of a margin to the relevant index linked to a borrower’s income, and regular updating of these indices.
  • Formal procedures to verify a potential borrower’s existing debt commitments and to identify possible undeclared debt commitments.
  • A framework that clearly defines overrides/exceptions and includes the documentary requirements for override/exception decisions and how overrides/exceptions are to be identified, reported and monitored.
  • Regular override/exception reporting to the appropriate level of management and to the board.

APRA identified hindsight reviews (or independent reviews of compliance with serviceability policy) of housing loan portfolios as good practice

The review also identified that, in a minority of ADIs, the mortgage documentation supporting the serviceability assessment was incomplete and that there were inaccuracies in the income verification process.
(more...)

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Posted 12th September 2013 by David Jacobson in responsible lending

August 13, 2013

Centrepay and household goods rental deductions

Centrepay is a free direct bill-paying service offered to customers receiving Centrelink payments. It was originally developed for the indigenous housing sector to help pay rent and utilities. Today it is a $2 billion a year operation used by almost 600,000 Australian residents.

The Report of an Independent Review of Centrepay has highlighted concerns that the use of Centrepay deductions for household goods rentals (and other sectors such as funeral benefit plans) often results in the customer overextending him or herself financially, and sometimes this results in insufficient funds then being available for basics such as food.

The Report recommends that the Centrepay system be reworked to ensure a better focus on its customers. For example it recommends that a new partial hierarchy of Centrepay deductions be instituted based on criteria of ‘essential services’ (rent and utilities) so that they always are deducted first (rather than relying on the current system of first authorisation lodged/first deduction paid).

It also recommends that mechanisms be established to more adequately scrutinise affordability of goods and services purchased through Centrepay, and the sustainability of payments, at the deduction authorisation stage.

The main concern about household goods rental providers is that their provision of consumer durables and appliances via rental contracts often cost the customer far in excess of the value of the goods.

A Centrepay customer without a credit card or an acceptable credit history who is in need of a fridge or a bed, typically has only two options available: rent the goods or approach a short term/high interest lender.

(more...)

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Posted 13th August 2013 by David Jacobson in responsible lending

July 19, 2013

ASIC reviews debt consolidators

ASIC Report 358 Review of credit assistance providers’ responsible lending conduct relating to debt consolidation (REP 358) has found that Australian credit licensees which provide debt consolidation services are at risk of not complying with their responsible lending obligations.

ASIC defined ‘debt consolidation’ as ‘securing new or additional credit for the purpose of using that credit to pay off other pre-existing credit contracts or to reduce the total number of payments being made. The types of credit contract that may be affected include, but are not limited to, home loans, credit cards, personal loans and payday loans’.

It is a service that falls within the definition of ‘credit assistance’ in section 8 of the National Credit Act in that it involves a credit assistance provider suggesting or helping a consumer apply for a new credit contract or increase in the limit of an existing contract.

ASIC reviewed 82 clients files across 17 licensed providers.

The most common debt consolidation solutions presented to consumers were:
(a) extending loan terms (often resetting to 30 years) to reduce the monthly repayment commitment (50% of all files);
(b) switching consumers to interest-only loans; and
(c) placing consumers into new credit contracts on different rates (often lower rates, but in some cases on higher rates than pre-consolidation).

The Report concludes that:

  • in 30% of files reviewed, the credit assistance provider failed to record or keep sufficient information to identify the consumer’s pre-existing credit contracts
  • credit assistance providers in general did not appear to document in their client file whether potential significant risks and costs of debt consolidation had been discussed with consumers
  • inadequate recording of the consumer's requirements and objectives
  • inquiries about and verification of the consumers financial situation not being recorded properly
  • some assessments of loan suitability being made on credit terms that were different from the eventual loan application, and
  • some assessments of loan suitability where the amount recorded for consumer expenses was contradicted by other information on the licensee's file.

ASIC identifies the risk of rolling all existing loans, credit cards and other debts into a new loan with a longer term (often 30 years) and secured over the family home as including:

  • higher long-term costs of repayment resulting from extending the loan term
  • transferring default risk of previously unsecured debt onto the family home
  • moving consumers to an interest-only loan without an appropriate exit strategy
  • leaving pre-existing contracts open, enabling a consumer to redraw on them at a later stage and
  • fall further into debt problems, and
  • additional costs such as broker fees and new loan establishment fees.

Entities which specialise in assisting consumers to manage multiple payment obligations and advise on debt agreements under the Bankruptcy Act or payment management plans were excluded from the review because they did not arrange new credit as a way of dealing with pre-existing credit obligations, and their activities were generally not subject to the National Credit Act.

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Posted 19th July 2013 by David Jacobson in legislation, responsible lending

July 3, 2013

Small amount credit contracts clarified

ASIC has made a Class Order [CO 13/818] at the request of Treasury to provide interim relief which reflects intended changes to the National Credit Act requirements for small amount credit contracts (SACCs) pending the making of regulations, nowithstanding changes to the Credit Act and Code which commenced on 1 July 2013.

Change to the definition of SACCs

The credit limit of $2000 for a SACC will be modified to include contracts with a credit limit of "more than $2,000 because of fees or charges included in the amount of credit provided under the contract".

This will permit credit contracts where the amount of credit that is received 'in hand' by the consumer is $2000 or less to be treated as SACCs, rather than as medium amount credit contracts (MACCs), notwithstanding that the credit contract also finances the upfront fees and charges associated with the credit contract. This will enable those contracts to comply with the cost caps and additional provisions for SACCs rather than the cost caps for MACCs.

Direct debit processing fees or charges

A direct debit processing fee or charge is added to the existing list of permitted fees or charges for SACCs provided it meets the following conditions:
(a) the fee or charge is charged to the debtor by a person other than the credit provider under a written agreement between the debtor and the person;
(b) the fee or charge is for processing payments of amounts due under the contract that is charged or calculated on the same basis as for persons who are not debtors under a small amount credit contract (or a contract that is treated as a SACC under the class order);
(c) the amount of the fee or charge has been clearly disclosed to the debtor in writing.

Background
A small amount credit contract (SACC) is a credit contract under which, in general terms, the amount of the loan is $2000 or less, and the term is 16 days to one year. Only the following prescribed fees or charges can be charged on these loans:
a) a monthly fee – 4% of the amount lent;
b) an establishment fee – 20% of the amount lent;
c) Government fees or charges;
d) enforcement expenses;
e) default fees (the lender cannot recover more than 200% of the amount lent).

A medium amount credit contract (MACC) is a credit contract under which, in general terms, the loan is from $2001 to $5000 and the term is 16 days to 2 years. MACCs have a cap determined by an annual cost rate (interest plus fees and charges) which must not exceed 48 per cent, with the formula allowing for an additional $400 fee to be charged. Other credit contracts (e.g. where the loan is for more than $5000) have a cap where the annual cost rate must not exceed 48 per cent.

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Posted 3rd July 2013 by David Jacobson in legislation, responsible lending

May 22, 2013

Reverse mortgage regulations

The Consumer Credit Legislation Amendment (Enhancements) Act 2012 amended the National Credit Act (including the National Credit Code) to introduce a number of reforms to the regulation of reverse mortgages.

National Consumer Credit Protection Amendment Regulation 2013 (No. 2) was registered on 21 May 2013.

From 22 May 2013 credit licensees must use the prescribed method to make projections of their home equity (ASIC's reverse mortgage calculator) and to give those projections to consumers in the prescribed way.

From 1 June 2013 the Regulation:

  • introduces additional responsible lending obligations so that a credit licensee’s assessment of whether or not a reverse mortgage is unsuitable must include reasonable inquiries about the borrower’s potential future needs;
  • introduces a presumption that a reverse mortgage is unsuitable if it involves a loan to value ratio (calculated by dividing the amount of credit owed under the credit contract for the reverse mortgage by the value of the reverse mortgaged property x 100) above those prescribed (depending upon the borrower’s age);
  • prescribes the reverse mortgage information statement (which must be given to all consumers before the licensee makes a preliminary assessment in connection with a reverse mortgage);
  • prescribes the form of disclosure that must be given to a borrower if a credit contract for a reverse mortgage does not provide protections for persons who are not borrowers to reside in the mortgaged property; and
  • prescribes how credit providers must keep records of nomination and withdraws of a borrower’s consent for a person to reside in the mortgaged property.

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Posted 22nd May 2013 by David Jacobson in legislation, responsible lending

April 29, 2013

FOS’s approach to dealing with customers in financial difficulty

FOS has published 4 documents setting out its Approach to Financial Difficulty by consumers.

The publications are:

  • How FOS approaches financial difficulty taking into consideration legal principles, industry codes and good industry practice
  • FOS's power to vary regulated credit contracts
  • Working together to find solutions
  • Dealing with common financial difficulty issues

The documents contain some interesting approaches designed to resolve a dispute but which are not always in the interests of all parties including affected third parties.

For example:

  • if an FSP is not a subscriber to the relevant industry code (eg Code of Banking Practice, Mutual Banking Code), FOS still expects them to follow the code’s guidelines which relate to financial difficulty because it is good industry practice.
  • FOS says it has the power to vary regulated credit contracts that are regulated by the National Credit Code (NCC), but it will only use this power in circumstances where a variation will see the repayment of the loan in a reasonable period.
  • In some disputes if it is clear that financial difficulty cannot be overcome with further assistance, even in the longer term, and the only realistic solution is the sale of an asset such as a home or investment property, FOS will encourage the parties to agree on a reasonable timeframe for the consumer to sell the asset voluntarily.
  • FOS accepts that a credit provider is under no obligation to waive debt on the grounds of financial difficulty alone. If the parties agree to temporarily suspend repayments the FSP does not have to agree to waive interest or debt.
  • When a loan is held in joint names, FOS argues that an FSP may agree to a short-term arrangement to vary a contract as requested by one joint borrower, even if the co-borrower may not be willing to agree to any variation. This may happen, for example, where there has been a marriage breakdown.
  • FOS says that an FSP should not insist on getting the consent of guarantors, caveators or second mortgagees as a condition of granting a contract variation. An FSP should also not delay in assessing a hardship request, or consider itself limited in the types of assistance it can offer, just because there are guarantors, caveators or second mortgagees involved in the contract. If, however, there is a Deed of Priority in place with a second mortgagee, FOS says it may be appropriate to obtain their prior consent if required by the Deed.
  • FOS says bankruptcy alone is not sufficient reason for an FSP to decline hardship assistance for a secured debt. However, FOS says the individual needs to show they would be able to repay the debt if a contract variation was granted.
  • FOS says it is important that the FSP forms its own view on any repayment proposal. Although a lender may consult with its Lenders Mortgage Insurer (LMI), it is FOS's view that the FSP should come to its own decision about the consumer’s ability to repay the loan or it may fail to give real and genuine consideration to a hardship variation.

Langes advises financial services providers on dispute resolution with FOS and COSL.

In its Systemic Issues update FOS identifies issues arising from its reviews of FSP's policies and procedures relating to financial difficulty.

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Posted 29th April 2013 by David Jacobson in legislation, responsible lending

March 19, 2013

ASIC review of monitoring and supervision of brokers’ credit representatives

ASIC has released Report 330 Review of licensed credit assistance providers’ monitoring and supervision of credit representatives (REP 330) which looks at the processes of credit licensees for ensuring their representatives' compliance when providing credit assistance for home loans (i.e. mortgage broking).

ASIC reviewed 18 credit licensees who had a total of 9,869 credit representatives, approximately 40% of all credit representatives notified to ASIC as at 1 October 2011.

The review's 8 recommendations are:

  • Credit licensees’ compliance and training documents should be specifically tailored to reflect the nature, scale and complexity of a licensee’s particular business;
  • Credit licensees should have appropriate practices and procedures in place not only to ensure that their credit representatives are appropriately qualified, initially, to be appointed as a credit representative, but also to ensure that they remain appropriately qualified on an ongoing basis;
  • Credit licensees should have appropriate practices and procedures in place to be able to directly provide consumers with a copy of the preliminary assessment, if requested to do so, within the timeframe prescribed by legislation;
  • Credit licensees should be able to identify all instances of credit assistance provided by each of their credit representatives, including where credit is not ultimately provided, with best practice being able to also identify the volume of loans from each credit representative by other potential risk indicators (e.g. loan type or loan purpose);
  • Credit licensees should have appropriate practices and procedures in place to undertake compliance reviews of their credit representatives;
  • When reviewing credit representatives’ compliance with the responsible lending obligations, credit licensees should assess the credit assistance provided against their own responsible lending policies, rather than only checking whether an application meets the credit provider’s guidelines;
  • Credit licensees should have processes in place not only to address specific compliance issues with individual credit representatives, but also to identify and address potential systemic compliance issues through regular updates to their training material, compliance plans and risk management systems;
  • Credit licensees should have processes in place not only to address the causes of specific compliance issues with their credit representatives, but also to identify and rectify consumer detriment arising from those compliance issues.

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Posted 19th March 2013 by David Jacobson in licensing, responsible lending

March 15, 2013

Case note: elderly borrowers under the National Credit Code

In Karamihos v Bendigo and Adelaide Bank Limited [2013] NSWSC 172 the NSW Supreme Court ordered that a loan refinance contract was unjust under the National Credit Code. Judge Pembroke ordered that the contract be set aside and that the borrowers should be put in the same position that they would have been in if they had not taken on increased borrowings, with credit for the payments already made by them.

Bendigo had refinanced, through brokers, a BOQ loan for $966,000 with a new loan for $1.2 million over 25 years secured over their home.

The borrowers were in their 70s. English was their second language. Even though the Bank's own policy required additional measures for borrowers over 60, the credit assessment was based on an "exit strategy" which relied on the borrower's own value estimate of a commercial property and that it would be sufficient to discharge all debts they owed; it was not. The commercial property did not secure the loan.

One of the documents the borrowers signed was headed 'Representations by Mortgagors'. It contained a representation and warranty by Mr and Mrs Karamihos that they 'had been advised to take independent legal advice before signing the mortgage and [that] we have had an opportunity to do so'. In fact, Mr and Mrs Karamihos received no independent legal or financial advice and were not told by anyone that they should do so. They signed the loan documents and the related papers at home in the presence of their daughter who received $100,000 from the loan.

Judge Pembroke's analysis is a useful recap of the law and its application to the facts.

"In May 2007, Mr and Mrs Karamihos were already elderly. Mr Karamihos was 72 years old and his wife was 73 years.....

I am quite satisfied that the ability of Mr and Mrs Karamihos to read and understand written English was feeble. Their ability to do so in relation to detailed documents relating to the respective legal obligations of borrowers, lenders and intermediaries was virtually non-existent. Nonetheless, Mr Karamihos understood in a rudimentary way the essential elements of a loan and mortgage transaction. As did Mrs Karamihos. Both well understood the need to maintain their monthly repayments and the consequences of default. They had obtained numerous loans over the years - probably far too many - but they were unsophisticated (albeit frequent) borrowers with limited financial acumen, who operated at a relatively simple, homespun level.....

The trouble with old age is that it magnifies the risks associated with borrowing. The larger the loan and the older the borrowers, the greater the risk. The revenue stream on which the maintenance of the loan depends is inevitably more likely to be disrupted by ill health or retirement. The statistical probability of the occurrence of unforeseen events that may affect the viability of the loan necessarily increases. All of this came home to roost for Mr and Mrs Karamihos and for BAB....

The findings of fact that I have made lead inexorably to the conclusion that the contract of loan and mortgage entered into between Mr and Mrs Karamihos and BAB in May 2007 was unjust for the purpose of section 76(1) of the NCC. I have reached that conclusion having regard to the consequence of non compliance by Mr and Mrs Karamihos, namely the loss of their sole residence; the relative bargaining power of the parties; the absence of any negotiation at the time the transaction was entered into, and absence of any practical opportunity for there to be any negotiation. I have also had regard to the fact that Mr and Mrs Karamihos were not reasonably able to protect their interests. They were too elderly and too foolish to know what was in their best interests. And they had no independent legal or financial advice. ....

I am satisfied that Mr and Mrs Karamihos were not able to read and fully comprehend the typed written documents that they were required to sign. Nor did they, in my view, have any apprehension of the risks they faced in the event of unexpected illness, retirement and diminution of earnings. ....

BAB knew that Mr and Mrs Karamihos did not have independent legal and financial advice. And it did not take any active steps to ensure that they understood the nature and implications of the transaction. ....

Most importantly, BAB did not make reasonable enquiry as to whether Mr and Mrs Karamihos could meet their obligations under the loan. .... Its unsuitability was compounded by the bank's incompetence. ...

In this case, there was no fraud by the borrower, just misplaced enthusiasm and an absence of reality. There was no evidentiary foundation for a finding that Mr Karamihos intended to deceive BAB. The bank simply did not make reasonable enquiry; when it knew that enquiry was called for; when it knew that the value of the (commercial property) was an essential element ... of its approval."

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Posted 15th March 2013 by David Jacobson in responsible lending

March 6, 2013

ASIC’s reverse mortgage calculator

From 1 March 2013, before a licensee can assess a consumer’s suitability for a reverse mortgage loan, it must show or give the consumer projections of the value of their property that may become reverse mortgaged property and the consumer’s indebtedness over time if the consumer were to enter into a contract for a reverse mortgage (section 133DB, NCCP Act).

The licensee must give the consumer a printed copy of the projections.

These equity projections must be generated using the reverse mortgage calculator on the ASIC MoneySmart website.

Licensees must also make reverse mortgage information statements available on their websites and on request.

The National Information Centre on Retirement Investments is a government funded organisation which offers a free independent telephone service to help consumers understand reverse mortgage products.

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Posted 6th March 2013 by David Jacobson in legislation, responsible lending

February 28, 2013

ASIC updates RG209 on responsible lending

ASIC has amended Regulatory Guide 209 Credit licensing: Responsible lending conduct (RG 209) to include guidance on the new responsible lending provisions under the Consumer Credit Legislation Amendment (Enhancements) Act 2012.

RG 209 now includes guidance:

  • for small amount lenders when considering the presumption of substantial hardship and protected earning amount requirements
  • in relation to obtaining and considering account statements when undertaking an assessment for a small amount loan
  • on the responsible lending obligations for lessors
  • on the responsible lending obligations for lenders offering reverse mortgages
  • about the new obligation on credit providers and lessors to assess whether a credit contract or consumer lease is unsuitable for a consumer before making an unconditional representation about whether the consumer can enter a credit contract or lease, or increase the credit limit on an existing credit contract.

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Posted 28th February 2013 by David Jacobson in responsible lending
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