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August 21, 2013

Case study: complexity of loan package products

Developing a loan package product requires attention to detail and co-ordination between product managers, IT and marketing in order to ensure that customers get what they are promised.

Under CUA's Rate Breaker Package when a person borrows $250,000 or more they are entitled to a home loan interest rate 1%p.a. lower than the average of the advertised standard variable rates of the Big 4 Banks and other benefits.

But ASIC reached the view that CUA's advertisements were misleading as they did not accurately reflect the loan package product terms.

ASIC's view was that the ads gave the impression that the discount applied to the life of any loan under the 'Rate Breaker Package' banner. This was not the case.

The terms and conditions of the Package:

  • enabled CUA to change the 1% discount at any time; and
  • stipulated that the interest rate could not fall below a minimum rate of 3% per annum.

The advertisements featured on television, in cinemas, the CUA website, and on public transport in Sydney, Brisbane and Melbourne.

The terms and conditions either did not feature in the advertisements or where they did feature, they were not sufficiently displayed.

CUA has entered into an enforceable undertaking with ASIC which includes requirements that CUA will:

  • ensure that all consumers who entered into a Rate Breaker Package loan up to 31 August 2013 will, for the duration of their loans, receive a discount of no less than 1% off the average of the variable interest rates advertised by the 'big 4' banks, except were it to be less than 0% (CUA had issued 2083 Rate Breaker Package loans as at 23 July 2013).
  • sufficiently highlight both the 3% per annum minimum interest rate and its ability to change the 1% discount rate in all future advertising of the Rate Breaker Package; and
  • notify existing Rate Breaker Package customers of its undertaking to honour the 1% interest rate discount by 30 September 2013.

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Posted 21st August 2013 by David Jacobson in legislation

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

August 1, 2013

Deciding on your credit licensing structure

Credit startups and licensees dealing with them need to deal with a complex consumer credit licensing regime.

Should brokers have their own licence or be authorised as credit representatives by a licensee?

Whether a person (whether an individual or company) needs to be appointed as a credit representative depends on whether they are engaging in a “credit activity”. The National Credit Act defines "credit activity" widely in section 6: it includes providing a “credit service”. A person provides a credit service if the person provides credit assistance to a consumer or acts as an intermediary: section 7.

ASIC recently announced that Yellow Brick Road Finance Pty Ltd (YBR) has changed the way it authorises companies and individuals to offer loan advice through branches operated under its Australian credit licence.

YBR had directly authorised over 100 individuals working in YBR branches as credit representatives. ASIC considered that the national credit licensing framework also required YBR to authorise the companies which operate the branches. This was because the companies also act as intermediaries between the licensee and the consumer.

Yellow Brick Road is now in the process of authorising the corporate entities directly under its licence, and those entities can sub-authorise employees or they can be directly appointed under YBR’s credit licence.

A body corporate can be appointed as a credit representative and sub-authorise credit representatives. But a partnership cannot be appointed as a credit representative and cannot sub-authorise credit representatives.

Directors and employees of body corporate credit representatives who engage in credit activities on behalf of a licensee must be authorised, either directly by the licensee or by the body corporate credit representative, as a credit representatives of the licensee.

If a director or employee of a body corporate credit representative is directly appointed as a credit representative by the licensee, the director or employee must individually be a member of an external dispute resolution (EDR) scheme. However, if a body corporate credit representative sub-authorises a director or employee of the body corporate credit representative as a credit representative of the licensee, then the director or employee is not required to maintain their own EDR membership (see section 65 and regulation 16 of the National Consumer Credit Protection Act 2009 (National Credit Act)).

ASIC expects that measures for monitoring and supervision of representatives will include carrying out appropriate background checks before new representatives are appointed.

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Posted 1st August 2013 by David Jacobson in licensing

July 29, 2013

Rent to buy or lease?

The National Credit Code recognises two types of hire agreements:

  • One is a consumer lease by a natural person or strata corporation under which the renter pays rent to the lessor and at the conclusion of the hire period, the renter must return the goods to the lessor. There is no ownership right given to the renter during the lease agreement or at the conclusion of the agreement. A variation of this confers on the renter a right to make an offer to buy, which the lessor in its discretion can accept or reject.
  • The second type of hire agreement the National Credit Code recognises is the hire purchase type agreement (or sale by instalments) pursuant to which the hirer does have a right, at the conclusion of the term to either acquire the goods by the payment of a balloon payment, payment of an agreed sum such as $1 or to receive the goods for no consideration.

The parties have different rights and obligations under the National Credit Act depending on the type of agreement.

ASIC recently announced that Dale Cleves Music Pty Ltd, trading as Winston Music, has stopped advertising its musical instrument rental agreements as 'rent to buy' and 'choose to purchase' following ASIC concerns it was misleading.

ASIC was concerned that:

  • the terms of the rental contract did not give consumers the right or obligation to purchase the instrument. Instead they provided that the consumer may make an offer to purchase the instrument which Winston Music may or may not accept, and
  • they incorrectly advertised these arrangements as ‘rent to buy’. Unless a consumer has a right or obligation to purchase the goods under a goods rental contract, it is misleading to advertise the arrangement as being ‘rent to buy’.

Winston Music has stopped using the phrases 'rent to buy' and 'choose to purchase' in its advertising, including in signage on its delivery truck, website, and its telephone on-hold system.

Winston Music has published a corrective notice regarding the advertising on their website, and has also sent a copy of the corrective notice to current customers.

The Code does not apply to a consumer lease for a fixed period of 4 months or less or for an indefinite period or to a consumer lease under which goods are hired by an employee in connection with the employee’s remuneration or other employment benefits.

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Posted 29th July 2013 by David Jacobson in legislation

July 24, 2013

Which EDR scheme for securitised loan disputes?

The Financial Ombudsman Service Limited (‘FOS’) and the Credit Ombudsman Service Limited (‘COSL’) have agreed on a process when one receives a complaint or dispute against financial service providers (‘FSP’) which may be more appropriately dealt with by the other scheme where the loan which is the subject of the complaint or dispute is part of a securitisation programme.

In a securitisation programme, the programme funder or servicer (also known variously as programme manager, fund manager, wholesale lender or wholesale funder) may be a member of one scheme while the securitisation trustee may be a member of the other scheme.

A complaint or dispute about a credit facility which has as its lender of record a securitisation trustee (‘securitised loan’) should, as a general rule, be directed by the scheme which receives the complaint or dispute to whichever scheme the programme funder or servicer (‘counter-party’) (or ‘white label’ lender) belongs to.

The complaint or dispute will be referred back to the scheme to which the trustee is a member if the counterparty is unable or unwilling for any reason to deal with a complaint or dispute which involves an application to vary or set aside a credit contract on grounds of financial hardship, an application to postpone enforcement proceedings, an allegation that that the loan or the fees are unjust or unconscionable or an allegation that the credit contract is ‘unsuitable’.

Special rules apply to a complaint or dispute received by it about a securitised loan under a PUMA programme funded by Macquarie Bank.

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Posted 24th July 2013 by David Jacobson in EDR

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 17, 2013

Proactive credit dispute resolution

COSL's July 2013 news contains some interesting statistics:

According to COSL 74% of all complaints closed by it in the past 12 months (which were within its jurisdiction) resulted in favourable outcomes for consumers. These include payment variations on grounds of financial hardship, fee reductions and refunds, monetary compensation and non-monetary orders (such as amending or removing a credit listing or returning a security asset to the consumer’s possession).

How can you resolve complaints before they reach COSL?

COSL itself strongly encourage FSPs to promote their internal dispute resolution (IDR) complaint handling process to their clients by prominently referring to the IDR process and contact details in documents and other material that are sent to clients.

COSL says 50% of the phone calls it receives are from people who think they are calling their FSP. This is because the FSP's EDR contact details appear in the Credit Guide and in the Form 12A (Information about debtor‘s rights after default) as well as in bold caps at the end of documents such as the Form 5 Information Statement.

COSL encourages FSPs to review any of their template letters which mention COSL and ensure that their own IDR process is given prominence.

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Posted 17th July 2013 by David Jacobson in EDR

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

June 19, 2013

Checking your “credit legislation” compliance

Before you sign your annual compliance certificate this year you need to check whether your supporting sign offs actually extend to all "the credit legislation" as defined in the National Credit Act.

Section 47(1)(d) of the National Credit Act requires credit licensees to "comply with the credit legislation".

Credit legislation is defined in section 5 as not only the Credit Act and Code but also Division 2 of Part 2 of the ASIC Act and "(d) any other Commonwealth, State or Territory legislation that covers conduct relating to credit activities (whether or not it also covers other conduct), but only in so far as it covers conduct relating to credit activities."

This includes for example the Privacy Act credit reporting provisions and the AML/CTF Act and the State Fair Trading Acts.

Credit licensees are required to lodge with ASIC a compliance certificate (and pay the required fee) no later than 45 days after the licensee’s licensing anniversary in each year: section 53 National Credit Act.

ASIC has published a list of questions asked and information required

The questions include:

"As at the annual compliance date, did the licensee have adequate arrangements and systems in place to ensure that it complied with the conditions of its licence?"

"As at the annual compliance date, did the licensee have adequate arrangements and systems in place to ensure that it complied with the credit legislation?"

The certificate concludes with a declaration that "to the best of its knowledge, the information supplied in this certificate is complete and accurate (it is an offence to provide false or misleading information to ASIC)".

Langes can assist with advice on your compliance obligations and systems and a review of your compliance implementation. Call your local office.

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Posted 19th June 2013 by David Jacobson in legislation, licensing

May 27, 2013

Explaining credit products

From time to time we are asked by credit providers why another credit provider does not comply with a legal requirement for their apparently similar product.

The first thing we look at is the type of credit product in question: is it a fully drawn loan (small amount, short term, medium amount or other), continuing credit (card or line of credit), hire purchase or a consumer lease?

If other credit providers are confused then it is likely that consumers will not understand the type of credit being offered and could be mislead.

Whether credit is offered in a store or online, it is essential that the differences are clearly explained to a consumer in all advertising.

Accurate descriptions of the product offered are becoming more important as the Credit Act becomes more prescriptive in the disclosure rules for different types of credit and the terms that can be used.

ASIC recently announced that Nimble Australia Pty Ltd, previously known as Cash Doctors, has changed its advertising following ASIC concerns it was potentially misleading.

ASIC said that in 2012 and early 2013 Nimble made statements both on its website and in the press that its credit contracts were ‘short term’. These statements did not clearly explain that the Nimble product was a continuing credit contract with an indefinite term.

ASIC was also concerned that statements Nimble made comparing its product with a credit card were inaccurate: its website stated that a loan could not be redrawn unless it had been paid in full and that Nimble’s loans were different from a credit card in that respect. In fact, Nimble’s loans can be redrawn before they are paid in full, like a credit card.

ASIC said that Nimble has removed references to ‘short term’ and comparisons with other credit products from its website and will stop using continuing credit contracts at the end of June 2013.

If you are developing new credit products, talk to Langes about the different requirements before you start marketing.

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Posted 27th May 2013 by David Jacobson in legislation
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