January 23, 2012

Case note: Tonto Home Loans v Tavares -liability of lender for fraudulent introducer

There are an increasing number of legal actions relating to enforcement of loans where the conduct of intermediaries (eg brokers, loan originators and managers), who have been interposed between the lender and borrower, is relevant.

In Tonto Home Loans Australia Pty Ltd v Tavares [2011] NSWCA 389 (heard together with FirstMac Ltd v Di Benedetto; FirstMac Ltd v O’Donnell) the Supreme Court of New South Wales Court of Appeal held that although a broker (Streetwise Loans) was not the agent of Tonto Home Loans Australia Pty Ltd in one case and Permanent Trustee Company Ltd, in two other cases, the circumstances in each case lead to the conclusion the loan contracts were unjust under the Contracts Review Act 1980 (NSW). Tavares and Di Benedetto were relieved of all liability under their loans and the O’Donnells were given 75% relief.

No finding was made of unconscionability.

ASIC intervened in the trial and was a respondent in each appeal.

The 3 cases related to investments in Streetwise Properties by borrowers introduced by Streetwise Loans who were introducers for Tonto Home Loans. Judge Allsop described the matter as one “where a lender uses contracted so-called “mortgage originators” which in turn use their own networks of so-called “sub-introducers” to find and bring forward potential borrowers and one of those sub-introducers engages in deceptive, indeed dishonest, conduct that leads to the borrowers borrowing funds from the lender and providing mortgage securities in return. In each case, the borrowers, after a body of conduct directed towards them involving a mixture of falsehoods and pressure and their own imprudence, entered the borrowing arrangements and provided the funds obtained to a company associated with the sub-introducer, which funds were ultimately lost.”

Streetwise’s director was subsequently found guilty of fraud.
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Posted 23rd January 2012 by David Jacobson in responsible lending

December 8, 2011

COSL Position Statement on responsible lending

The Credit Ombudsman Service Limited (COSL) has published a position statement giving guidance as to how it will deal with a complaint that a consumer was provided with an unsuitable credit product.

The 27 page document sets outs COSL’s views on the law but emphasises that it is not a court but a dispute resolution scheme.

Its view on the enquiries that must be made regarding a consumer’s capacity to repay a loan is summarised as follows:

5.5 We are of the view that the information required to form a view on a consumer’s ability to repay a credit contract will be more than just a snapshot of their current financial position. It should include information that allows the person making the assessment to form a view on whether the consumer’s financial position could change during the term of the loan (and if so, how).
5.6 We do not propose to provide a checklist of the inquiries that should be made.
5.7 The obligation should be approached on the basis that it is necessary to make as many inquiries as are necessary to adequately understand the consumer’s financial position. It is valid to start with a checklist, but it is likely that other inquiries will also need to be made and these will vary from consumer to consumer; responses to initial inquiries may prompt further inquiries and so on until the person making the inquiries is satisfied that they have a full understanding of the consumer’s financial position.
5.8 Although an application for credit may satisfy a credit provider’s own policies for affordability, it does not necessarily mean that it meets the responsible lending standard in the legislation.

COSL also has regard to the complexity and risk of the product and the consumer’s capacity to understand the product.

If COSL finds that there has been a contravention of the responsible lending obligations, it may require the following actions, among others, to be taken:
(a) waiver or refund of fees and charges by the credit provider in return for the repayment of the principal sum lent under the credit contract;
(b) refund of any fees paid to a credit assistance provider who assisted the consumer into the unsuitable credit contract;
(c) variation of the repayments required under the credit contract so as to make them possible for the consumer without hardship; or
(d) release of the consumer entirely from the credit contract including any mortgage or security (subject to unjust enrichment).

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Posted 8th December 2011 by admin in EDR, responsible lending

November 23, 2011

ASIC review of micro lenders responsible lending conduct and disclosure obligations

ASIC’s Report 264 Review of micro lenders responsible lending conduct and disclosure obligations (REP 264) has found that while the majority of micro lenders are aware of and taking steps to comply with their responsible lending obligations, ASIC identified some instances where micro lenders were at risk of not being able to demonstrate they had met their responsible lending and disclosure obligations.

Whilst “micro lenders” is not statutorily defined, in the report the term ‘micro lender’ is used for lenders who provide loans not involving real property, such as short-term loans of small amounts and payday loans.

The review involved 19 micro lenders and looked at 168 loans between 1 July and 31 December 2010. These 168 files included 19 loans offered by micro lenders over the internet and 8 loans offered for car finance. The majority of micro lenders reviewed (16 of the 19) offered loans of terms not more than 12 months, while 6 micro lenders offered credit for amounts of $1500 or less. While a small number of the lenders did offer credit card contracts or home loans, none of the files reviewed were for those credit products.

ASIC’s review found that, while micro lenders were generally able to demonstrate they were meeting their responsible lending and disclosure obligations, there were occasions where the micro lenders reviewed were not consistent in their approach to and/or record keeping for their obligations. Problems included instances of lenders not recording the actual purpose of the loan, undertaking very limited verification of a consumer’s financial circumstances, and not taking steps to clarify conflicting information in loan applications.

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Posted 23rd November 2011 by David Jacobson in responsible lending

November 18, 2011

ASIC report on brokers’ responsible lending and low doc loans

ASIC has published Report 262, Review of credit assistance providers’ responsible lending conduct, focusing on ‘low doc’ home loans.

The report examined the procedures of 16 mortgage brokers providing credit assistance for home loans between July and December 2010 (the first six months of the new responsible lending regime).

It found that while they are generally aware of the new responsible lending obligations and taking steps to comply, it identified some risks of non-compliance with the responsible lending requirements, particularly where credit assistance was provided for loans promoted as low documentation (low doc).

Consistent with the regulatory requirements, files reviewed generally recorded inquiries into a consumer’s credit requirements and objectives, inquiries into and verification of a consumer’s financial situation, and/or assessment of whether a consumer would be able to meet their obligations under the proposed credit contract without substantial hardship.

Some of the compliance risks ASIC identified in its review included instances of brokers not recording:

  • a consumer’s requirements and objectives beyond the immediate purpose of the home loan (eg buy a home)
  • steps taken to verify a consumer’s income, or relying only on statements from a consumer to verify income, when providing credit assistance for home loans promoted as low doc
  • inquiries into a consumer’s actual living expenses or steps taken to verify a consumer’s ongoing fixed expenses; and
  • how a consumer’s ability to make repayments under the proposed credit contract had been assessed.

ASIC has announced that a further review of how credit providers in the home lending market are now meeting their responsible lending obligations will commence in coming months.

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Posted 18th November 2011 by David Jacobson in licensing, responsible lending

November 7, 2011

Credit card key facts sheet regulations

The National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Act 2011 contains additional rules that apply to credit licensees that are credit providers under credit card contracts.

The rules relating to the key facts sheet requirement for credit cards will commence on 1 July 2012.

They are set out in the National Consumer Credit Protection Amendment Regulations 2011 (No. 6) which were registered on 7 November 2011.

The changes will:

•insert new restrictions on a licensee approving the use of a credit card in excess of the credit limit for the credit card contract.
•require credit card providers to allocate repayments to higher interest debts first.
•prohibit a licensee making a credit limit increase invitation unless expressly consented to by the consumer, subject to a transitional provision.
•require lenders to inform consumers about the implications of only making minimum repayments through a personalised minimum repayment warning on monthly statements.
•require a consumer is 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. But 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.

Lenders will be permitted to seek and obtain consents from consumers to receive credit limit increase invitations prior to 1 July 2012 so they can rely on those consents for the purpose of making an unsolicited credit limit offer after commencement.

The consumer may withdraw the consent at any time.

A licensee must keep a record of consents the licensee obtains and withdrawals of such consents.

The Regulations require a licensee who is the credit provider under a credit card contract to notify the consumer not later than 2 business days after the day on which the licensee becomes aware that the consumer has used the card in excess of the credit limit for the contract unless the consumer pays the excess within 2 business days and the credit provider has not already issued the notice.

If a credit card is used to obtain cash, goods or services in excess of the credit limit for the credit card contract, the licensee who is the credit provider under the contract is prohibited from imposing any liability to pay fees or charges, or a higher rate of interest, on the consumer who is the debtor under the contract because the credit limit was exceeded unless:
(a) the licensee has obtained express consent from the consumer covering the imposition of the fees or charges, or the higher rate of interest; and
(b) the consent has not been withdrawn.

The final regulations do not contain a requirement relating to the disclosure of interest free calculation models.

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Posted 7th November 2011 by David Jacobson in licensing, responsible lending

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

September 19, 2011

ASIC guidance on responsible lending disclosure obligations

ASIC has published Information Sheet 146 Responsible lending disclosure obligations: Overview for credit licensees and representatives relating to the disclosure obligations commencing on 2 October 2011.

The 9 page Information Sheet covers:
• the obligations of licensees
• the different types of disclosure documents licensees may have to give to consumers
• the circumstances that trigger a requirement to give those disclosure documents
• special requirements and exemptions that apply to some entities, or licensees that engage in credit activities through those entities
• the type of information that needs to be included in the disclosure documents, and
• instances where these documents can be combined.

The following table is a useful summary provided in the Information Sheet.

Table 1: What credit disclosure documents do I need to provide?

I am a:

Credit guide

 Quote

 Proposal document

 Written assessment
Credit provider, assignee or lessor

 YES

(see s126, 127 and 149)

N/A

 

 N/A

 

 YES

(Final assessment: see s132 and 155)

Credit assistance provider

 YES

(see s113 and 136)

YES

(see s114 and 137)

YES

(see s121 and 144)

YES

(Preliminary assessment: see s120 and 143)

Credit representative

 YES (see s158)

 

 N/A

 

 N/A

 

 N/A

 
Debt collector (if a licensee or credit representative)

 YES (see s160)

 

 N/A

 

 N/A

 

 N/A

 

Note: All references in the table are to the National Credit Act.
There are some exemptions that may apply in certain situations: see Table 2.

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Posted 19th September 2011 by David Jacobson in responsible lending

September 5, 2011

Home Loan Key Facts Sheet Regulations

The National Consumer Credit Protection Amendment Regulations 2011 (No.5) were registered on 5 September 2011.

The Regulations set out the operational detail of the home loan provisions in the National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Act 2011 which commences on 1 January 2012.

The Act requires lenders to provide consumers with personalised Key Facts Sheets for home loans.

What home loans require a Key Facts Sheet?
Section 133AA(1) of the Act defines a standard home loan of a licensee as a standard form of credit contract under which the licensee provides credit:
(a) to purchase residential property; or
(b) to refinance credit that has been provided wholly or predominantly to purchase residential property.

Regulation 28LA prescribes that a standard form of credit contract is a contract for a home loan that obliges the consumer to make repayments that repay principal and interest for the full term of the home loan with one of the following types of interest rates:

  1. Variable rate home loan:The interest rate on the entire loan balance may vary at the lender’s discretion
  2. Fixed rate home loan: The interest rate on the entire loan balance is fixed for the whole or part of the loan

Interest only loans and “split loans” are not covered.
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Posted 5th September 2011 by David Jacobson in legislation, responsible lending

September 1, 2011

ASIC reviews exit fee guidance

ASIC has released a new version of Regulatory Guide 220 Early termination fees for residential loans: unconscionable fees and unfair contract terms(RG 220).

The updated guidance takes into account the effect of the National Consumer Credit Protection Regulations 2010 which regulate termination fees for loans secured by residential property.

The guidance in RG 220 is now only relevant to credit contracts secured by residential property:

  • with early termination fees, that were entered into before 1 July 2011, or
  • that contain early termination fees which are not prohibited by the regulations (e.g. break fees on fixed rate loans).

Background

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Posted 1st September 2011 by David Jacobson in licensing, responsible lending

August 22, 2011

Lenders’ Mortgage Insurance One-Page Fact Sheet

The Treasurer has announced the introduction of a mandatory one-page fact sheet to help consumers understand the costs and benefits of lenders’ mortgage insurance when they take out a home loan.

The aim is to allow consumers to compare quotes side-by-side, including the difference in premiums and rebate schedules.

Treasury has advised against the introduction of a scheme to allow the transfer of lenders’ mortgage insurance between lenders because it would be expensive, extremely complex to implement and administer, and would likely benefit less than 1 per cent of all borrowers.

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Posted 22nd August 2011 by David Jacobson in responsible lending