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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

May 21, 2013

COSL on credit repair agencies

The Submission by the Credit Ombudsman Service Limited (COSL) on the Draft Credit Reporting Code has expressed concern about 'credit repair' agencies which offer to 'fix' consumer’s credit records for a minimum average fee of around $1,000 per listing when in fact access to credit records and correction of credit records is free of charge.

COSL has proposed that a credit reporting bureau (CRB) or the credit provider (CP) should not deal with any agent of a consumer who is charging a fee to the consumer for access/repairing their credit record.

The agencies obtain the authority of the consumer to access the relevant credit records and then make a complaint to the CRB or the credit provider that certain credit entries are incorrect and should be removed.

The credit agencies often also approach the various Ombudsmen, whose services are available to consumers free of charge, to have the entries removed. About a third of all complaints COSL receives about alleged incorrectly listed credit defaults are from credit repair agents.

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Posted 21st May 2013 by David Jacobson in legislation

May 13, 2013

Responding to hardship requests

ASIC has updated Information Sheet 105 Dealing with consumers and credit (INFO 105) to clarify the obligations of credit providers under new hardship procedures under the National Credit Act which commenced on 1 March 2013. Background

The update clarifies when credit providers are required to make a decision about whether a hardship variation is granted, particularly if there is a delay by the consumer in providing the information required to make a decision.

INFO 105 now states:

If the credit provider requests further information from the debtor, the debtor has 21 days to respond to the request.

If the credit provider does not receive any information from the debtor, the credit provider has 28 days from when the information was due to respond to the hardship notice.

If the debtor provides the information requested by the credit provider, the credit provider has 21 days from when the information was received to respond to the hardship notice.

However, there may be circumstances where it is appropriate to allow for flexibility in meeting the obligations – for example, where the debtor experiences a delay in getting medical reports from doctors, or certain financial information from an employer. The debtor’s circumstances may also make it difficult for them to respond to the information request in a timely way.

For these reasons, where a debtor has shown a willingness to comply with the request but is not able to provide all the information in the timeframe required, we are of the view that a credit provider may exercise their discretion to wait until all the requested information is received. This means that the final 21-day period to respond to the hardship notice will not commence until that information is received.

That discretion should be exercised appropriately and, where it is exercised, lenders should ensure that allowing additional time does not result in an unreasonable delay. We would consider an unreasonable delay may constitute, or be part of conduct constituting, unconscionable conduct. An unreasonable delay may exist where it is clear that no further information is likely to be forthcoming, and the continuing delay is likely to operate to the detriment of the debtor (e.g. through accruing unnecessary fees and interest).

Comlaw has published a consolidated National Consumer Credit Protection Regulations 2010 which incorporates National Consumer Credit Protection Amendment Regulation 2013 (No. 1) which contains the transitional provisions in relation to the hardship procedures.

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Posted 13th May 2013 by David Jacobson in legislation

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

April 22, 2013

Compliance training made easy

ASIC's CPD requirements are all about awareness of important compliance information and being able to identify the important issues.

Langes has been working on a better way to deliver online training content to financial service providers to satisfy their CPD obligations.

As well, HR managers have asked us to add a learning management system (which will provide training records by tracking and recording use by individuals of content) to our CPD platform.

We have now developed a new platform that satisfies these requirements.

How do you access the new site?

Go to http://compliance.langes.com.au/

You can see the course catalogue and preview the content.

Langes new CPD compliance site makes it easy for responsible managers and representatives of financial service providers to meet their CPD requirements flexibly, anywhere, any time.

Our courses consist of “lessons” containing videos, audio, tests and other resources and training material we develop.

We have introduced a “pay as you go” system so you pay only for resources accessed by you.

Alternatively if your HR Manager wishes to co-ordinate training you can have an organisation package.

If you already have your own learning management system, talk to us about providing content.

Or if you’d like us to host your training on our platform, we can import it exclusively for your staff’s use.

To start all you need to do is look at our course catalogue, choose a course and register.

You can choose the course that suits your needs and complete it when it suits you.

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Posted 22nd April 2013 by David Jacobson in licensing, seminar

April 9, 2013

Proposed changes to consumer credit contract disclosures

Treasury has issued a Discussion Paper inviting comments on possible changes to the format, content and timing of disclosure requirements under the National Consumer Credit Protection Act 2009 on both credit providers and lessors.

The discussion paper includes disclosure templates for comment.

The proposals are based on the following policy objectives:
• Making changes that will improve consumer understanding.
• Highlighting key pricing information in a new Table, called the Financial Summary Table.
• Repealing existing unnecessary disclosure requirements.

The intention is to minimise changes to the content of the matters required to be disclosed, and to allow the majority of matters to be disclosed separately from the Financial Summary Table.

The Discussion Paper includes draft Financial Summary Tables for the following products:
• home Loans — with a draft Information Statement in respect of Lenders Mortgage Insurance;
• credit cards, including store cards;
• personal loans, including car loans;
• reverse mortgages; and
• consumer leases.

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Posted 9th April 2013 by David Jacobson in legislation

April 8, 2013

Operational risks in compliance: BOQ fixes IT error

In recent years IT "glitches" have resulted in customer account charging errors and consequent Credit Code breaches (eg The Rock Building Society in 2010).

With growing reliance on technology it is critical that product specifications are clear so that software programmers understand the requirements. The output must be checked against the product design to ensure they match.

ASIC has now announced that Bank of Queensland Ltd (BoQ) will refund customers after a system error resulted in a failure to link Mortgage Offset Accounts (MOA) to some eligible home loan accounts over a number of years.

UPDATE 16 August 2013:BOQ ASX Announcement

Current estimates are that the error affected approximately 6000 customers and total refunds will be in the order of $12 million.

BoQ discovered the problem and reported it to ASIC. BoQ has agreed to appoint an independent expert to review its remediation processes to ensure that:

  • all affected customers are identified and appropriately compensated, and
  • BoQ's compliance systems are adequate to prevent a similar error occurring in future.

BoQ has already compensated some customers and will ensure that the remaining affected customers are contacted and advised of their compensation.

Even well-run businesses which have training programs and compliance policies are at risk if compliance is not monitored and breaches fixed.

Monitoring requires staff with skills and resources to identify potential risks and "join the dots".

Sometimes breaches are only identified following customer complaints.

And if a breach is detected there must be a prompt appropriate response. Ignoring a breach or covering it up can lead to further breaches.

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Posted 8th April 2013 by David Jacobson in licensing

April 4, 2013

Consumer credit hardship regulations finalised

National Consumer Credit Protection Amendment Regulation 2013 (No. 1) was registered on 3 April 2013.

This regulation:

  • Provides transitional arrangements to comply with the new hardship procedures introduced in the Consumer Credit Legislation Amendment (Enhancements) Act 2012. The Regulation provides a transitional exemption until 1 March 2014 for credit providers and lessors from the obligation of recording the fact that the credit provider and debtor have agreed to change the contract in a hardship variation.
  • Introduces an exemption from the requirement to give written notice where the credit provider or lessor has agreed to any arrangement that defers or reduces the obligations of a debtor for a period of no more than 90 days.
  • Prescribes new forms to be sent to consumers by credit providers and lessors following default by a consumer and transitional arrangements for use of those forms.

The new forms are:
• Form 11A – to be provided by a credit provider where a consumer has arranged to make a payment under a contract by direct debit and there has been a default in payment.
• Form 12A – to be provided by a credit provider where a debtor has defaulted in respect of their obligations under the contract.
• Form 18 – to be provided by a lessor where a consumer has arranged to make a payment under a contract by direct debit and there has been a default in payment.
• Form 18A – to be provided by a lessor where a lessee has defaulted in respect of their obligations under the contract.

The Regulations make transitional arrangements for the sending of default notices as follows:
• If the credit contract was entered into before 1 March 2013, and the notice is given on or after 1 March 2013 – the credit provider can send either the existing notices (Forms 11 and 12) or the new notices (Forms 11A and 12A).
• If the credit contract was entered into on or after 1 March 2013, and the notice is given before 1 December 2013 – the credit provider can also send either the existing notices (Forms 11 and 12) or the new notices (Forms 11A and 12A).
• If the credit contract was entered into on or after 1 March 2013, and the notice is given on or after 1 December 2013 – the credit provider can only send the new notices (Forms 11A and 12A).

Background

You can watch a 40 minute video about the changes to credit collection procedures here.

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Posted 4th April 2013 by David Jacobson in legislation

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
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