National Consumer Credit Reform

February 24, 2012

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 If the Key Facts Sheet in the application is no more than 3 months out of date the up to date information must be given separately.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

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.

UPDATE 22 June 2012: Special leave application to appeal to High Court by Tonto and FirstMac refused with costs

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.
(more…)

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Posted 23rd January 2012 by David Jacobson in responsible lending

January 16, 2012

CBA changes comparison rates

ASIC has announced that the Commonwealth Bank of Australia (CBA) has agreed to change advertised comparison rates for its Wealth Package loans in response to ASIC concerns the comparison rates used in ads were incorrect and potentially misleading.

ASIC was concerned CBA’s home loan ads promoting its Wealth Package loans did not include the Wealth Package $350 annual fee in the advertised comparison rate.

Section 166 of the National Credit Code and Regulation 100 require the comparison rate to include each fee or charge (if any) payable by the debtor at the time each repayment is made, being a credit fee or charge (other than a government fee, charge or duty) that is ascertainable when the comparison rate is disclosed (whether or not the credit fee or charge is payable if the credit is not provided).

A fee or charge is not ascertainable and need not be included in the calculation if their imposition or amount is dependent on events that may or may not happen.

The Home Loan Key Facts Sheets personalised comparison rate is based on the normal comparison rate calculation except for the loan amount and term nominated by the consumer and any other information required by a lender.

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Posted 16th January 2012 by David Jacobson in legislation

Updated NCCP Act and Regulations

Comlaw has published an updated National Credit Act and Regulations (as at 1 January 2012).

The National Consumer Credit Protection Act 2009 incorporates the home loan key facts sheet provisions of the National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Act 2011 but not the credit card provisions.

The National Consumer Credit Protection Regulations 2010 includes the National Consumer Credit Protection Amendment Regulations 2011 (No. 5) (the home loan key facts sheet regulations) but not the National Consumer Credit Protection Amendment Regulations 2011 (No. 6) (for credit cards).

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Posted 16th January 2012 by David Jacobson in legislation

January 12, 2012

Reminder: Responsible Manager seminars February 2012

Our Responsible Manager seminars will be held in Brisbane, Sydney, Melbourne and Adelaide in February.

Topics have been selected for their relevance for Responsible Managers. It is a practical guide to the most recent changes and topical issues affecting financial services and credit licensees, including latest cases, legislation, regulatory developments and other tips on how to prove compliance to ASIC.

Attendance will count towards CPD points.

More information and to register

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Posted 12th January 2012 by David Jacobson in licensing