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January 15, 2013

Can a lender make an insurance claim for all lending compliance breaches?

Like any insurance claim, you need to check the policy wording carefully.

In BOQ Ltd v Chartis Aust Insurance Ltd [2012] QSC 319 BOQ sought a declaration that its claims made professional services liability insurance policy with Chartis covered its liability arising out of legal action against it by ASIC and borrowers in the Federal Court relating to Storm Financial (which is ongoing) and the costs of defending the claim.

BOQ is being sued under the ASIC Act, the Queensland Fair Trading Act and the Trade Practices Act for unconscionable conduct in respect of loans and as a linked credit provider.

BOQ's agent notified Chartis of the claims against BOQ. In response Chartis denied liability and refused to give an advance for legal costs as the claims were not covered by the policy.

The Queensland Supreme Court decided not to grant the declaration. The decision was based on the judge's interpretation of conflicting policy wording.

UPDATE July 2013: BOQ's appeal dismissed.

The policy provided insurance for Lenders’ liability "arising out of, based upon or attributable to any actual or alleged:

(i) loan, lease or extension of credit except to the extent such Claim arises out of a Wrongful Act in the administration of such loan, lease or extension of credit; or

(ii) collection, foreclosure, or repossession in connection with any actual or alleged loan, lease or extension of credit.”

But the policy excluded liability for losses arising from wrongdoing by the insured. The policy stated that the exclusion only applies if the wrongdoing is established by a judgment against the insured or an admission by the insured. That has not yet occurred.

Chartis also argued that the breaches of contract relied upon were not acts in the administration of any of the loans because they were acts which occurred before either the relevant loan contract or loan was made and an act “in the administration” of a loan means an act in the management of a loan which has been made.

Although the policy did not specifically exclude liability for legal costs arising from defending actions for wrongdoing, the judge decided that was the consistent result. In those circumstances, the insurer was not obliged to advance defence costs until the insurer’s denial of indemnity is determined to be wrong as between the insurer and insured.

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Posted 15th January 2013 by David Jacobson in responsible lending

US foreclosure settlements

We first talked about the US "robo-signing crisis" in 2010 (see here).Untrained workers were signing thousands of mortgage foreclosure docunments without proper supervision.

The US Office of the Comptroller of the Currency (OCC) and the Federal Reserve Board have now announced that 10 mortgage servicing companies subject to enforcement actions for deficient practices in mortgage loan servicing and foreclosure processing have reached an agreement in principle with the OCC and the Federal Reserve Board to pay more than $8.5 billion in cash payments and other assistance to help borrowers.

The sum includes $3.3 billion in direct payments to eligible borrowers and $5.2 billion in other assistance, such as loan modifications and forgiveness of deficiency judgments. The payments involve mortgage servicers operating under enforcement actions issued in April 2011 by the OCC, the Federal Reserve, and the Office of Thrift Supervision.

Eligible borrowers are expected to receive compensation ranging from hundreds of dollars up to $125,000, depending on the type of possible servicer error.

Background

We will discuss the National Credit Act hardship relief changes at out seminars in February.

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Posted 15th January 2013 by David Jacobson in legislation, responsible lending

December 24, 2012

Credit reform phase 2 draft bill released

Treasury has released a draft National Consumer Credit Protection Amendment (Credit Reform Phase 2) Bill 2012 for consultation.

UPDATE 18 February 2013: The Commonwealth Government has decided that any reforms to small business finance will be deferred. This decision is limited to the small business reforms in Phase 2 of the consumer credit reforms.

The exposure draft Bill introduces reforms in relation to:

  • credit provided to small business, including the introduction of a ‘Credit Permit’ regime;
  • credit provided for investment purposes (the introduction of limited responsible lending obligations);
  • private lenders who provide credit contracts or consumer leases through an intermediary;
  • short-term and indefinite term consumer leases, where there is an expectation the consumer will want the use of the leased goods for a period which means they will pay more than the cash value of the goods;
  • anti-avoidance practices.

A 6 month transition period is proposed from the time the Bill is passed.

Lending to small business
The Act will apply to lending to a small business.

A person will be prohibited from engaging in small business credit activities unless they hold a credit permit.

In order to obtain a credit permit from ASIC a lender must be a member of an ASIC-approved external dispute resolution scheme.

Small business means a business that:
(a) has less than the following number of employees:
(i) if the business is or includes the manufacture of goods—100 people;
(ii) otherwise—20 people; or
(b) has no employees.

It is also proposed that contracts where the maximum amount of credit exceeds the sum of $5 million will be excluded.

The bill introduces a definition of a "protected small business credit contract". It is proposed to introduce specific responsible lending obligations in relation to this class of contracts to address equity stripping practices through the provision of credit to small businesses in financial distress.

A protected small business credit contract is defined as a credit contract that meets each of the following three criteria:
• the predominant use of the credit is to refinance the liability under an existing small business credit contract;
• the borrower has defaulted in respect of the repayments due under that contract; and
• the contract is secured by a mortgage over residential property.

As the borrower is in default of an existing credit contract, the provider of credit assistance is to be under an onus, in respect of a proposed refinance, to make inquiries to ensure the credit contract is suitable. These inquiries are intended to ensure the borrower has an exit strategy in respect to discharging their liability under the protected small business credit contract.

Investment lending
These reforms are designed to impose limited responsible lending rules to two particular classes of transactions that have particular risks for consumers:
• Loans secured over the family home where the borrower does not appreciate that if the investment does not generate the expected returns, they will need to meet the repayments from other resources and may be at risk of losing their home, depending on their overall financial position.
• Loans to finance investments in products being offered illegally, by a person who does not hold an Australian Financial Services Licence (where there is a consequent risk the entire investment proceeds will be lost by the consumer).

Private lending
The bill will regulate a "credit activity investor" who is an individual (or other small entity) who only engages in credit activities as a credit provider or lessor in accordance with a servicing agreement with an intermediary.

Under this model a credit activity investor would be exempt from the need to hold an Australian credit licence provided:
• They are a member of an ASIC-approved External Dispute Resolution scheme (so that they will be contractually obliged to comply with decisions of the scheme).
• The intermediary is the holder of an Australian credit licence.
• There is an agreement between the intermediary and the private credit providers and private lessors.

A credit contract will still be unregulated when a private individual who is not in the business of providing credit arranges a credit contract directly with the borrower.

Langes is available to advise clients on these proposals.

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Posted 24th December 2012 by David Jacobson in legislation, Phase 2

December 14, 2012

Small amount credit contract regulations

The National Consumer Credit Protection Amendment Regulation 2012 (No. 4) was registered on 12 December 2012.

The Regulation amends the National Consumer Credit Protection Regulations 2010 to specify the details of the obligations introduced by the Consumer Credit Legislation Amendment (Enhancements) Act 2012 to the regulation of small amount credit contracts. (Background)

Small amount credit contracts are for less than $2,000 in value and for a term of at least 16 days but not longer than one year. They do not include continuing credit contracts, contracts where the credit provider is an Authorised Deposit-taking Institution or contracts where the debtor’s obligations under the contract are secured.

The Regulation specifies that from 1 March 2013 licensees who enter small amount credit contracts are required to:

• display warning notices on their premises;
• display a warning on their website; or
• for licensees that communicate by telephone – read a warning to a consumer before providing credit assistance.

The forms of the warnings are set out in Schedules 7 and 8 of the Regulation.

The Regulation requires that a statement, in the form set out in Schedule 10, be completed by the debtor or lessor where a credit provider or lessor proposes to give an employer an authorisation for payments under a credit contract or consumer leases with the debtor or lessor to be paid directly from their salary or wages.

The Regulation also introduces a requirement on credit providers not to enter into a small amount credit contract or offer to enter into a small amount credit contract if the repayments would exceed 20 per cent of the consumer’s gross income, for consumers who would receive at least 50 per cent of their gross income as payments under the Social Security Act 1991.

From 1 July 2013 there are new rules relating to unsuitable credit contracts, fees or charges in relation to a small amount credit contract, the annual cost rate of credit contracts and default in payment by direct debit under a small amount credit contract.

The Regulation prohibits loan-splitting in order to circumvent the cap on the maximum amount of costs which can be charged under a credit contract.

It also prohibits a credit provider from recovering charging third-party fees (for example, fees charged by a third party for providing access to the credit through cashing a cheque), where the third party has been introduced to a consumer to provide a service in relation to a small amount credit contract.

The Regulation also prohibits a credit provider from obtaining a return greater than that permitted by the cap by, in relation to medium amount credit contracts, introducing new fees after the contract has been entered into, and, in relation to other credit contracts, charging a fee such as a deferred establishment fees by arranging for the consumer to repay the amount owing earlier than specified in the contract.

The Regulation imposes requirements on a credit provider to refrain from seeking a repayment due under a small amount credit contract when there have been two successive defaults in seeking a payment through a direct debit. The regulation requires the credit provider to make reasonable attempts to contact the debtor to clarify why the direct debit is being rejected. The intention is to prevent the debtor’s liability to other persons increasing through dishonour fees incurred from repeated attempts to secure payment through the direct debit authority, at a time when the debtor may not be aware there are insufficient funds in their account to meet the payment.

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Posted 14th December 2012 by David Jacobson in legislation

December 12, 2012

Consumer leases and reverse mortgages regulations

The National Consumer Credit Protection Amendment Regulation 2012 (No. 3) was registered on 11 December 2012.

This regulation amends the National Consumer Credit Protection Regulations 2010 and specifies the details of the obligations introduced by the Consumer Credit Legislation Amendment (Enhancements) Act 2012 to the regulation of reverse mortgages and consumer leases.

Reverse mortgage negative equity protection

The provisions relating to the method for calculating the market value of a reverse mortgaged property, when a property either has or has not been sold commences on 12 December 2012.

Under the Credit Enhancements Act a reverse mortgage borrower will not have to pay more than the market value of their home as repayment for a reverse mortgage (even if the amount of interest that has accrued would result in the balance of the debt exceeding that value).

Consumer leases disclosure

The provisions relating to consumer leases commence on 1 March 2013.

The Credit Enhancements Act include additional disclosure requirements of lessors and requirements on lessors to obtain consent before taking possession of rental goods.

A consumer lease is defined as a contract for the hire of goods by a natural person or strata corporation under which that person or corporation does not have a right or obligation to purchase the goods but where they would pay an amount in excess of the cash value of the goods.

The Regulations specifies the content of disclosure requirements for lessors in the Credit Act, as follows:

  • Periodic statements of account – setting out that the lessee will not own the goods at the end of the consumer lease, the lessee will not have an obligation or a right to purchase the goods at the end of the lease, of amounts owing and particulars of any payments;
  • End of lease statements – setting out the date the lease ends, the total amount paid by the consumer under the lease, when and how the goods may be returned or collected by the lessor, the amounts the lessee is liable to pay if the goods are not returned and whether the lessor is prepared to sell the rental goods, and if so, an estimate of the sale price and contact details for the person whom the sale of goods can be negotiated;
  • Written notices about a change by agreement to the consumer lease – setting out the date and particulars of any changes, repayment details, amount(s) payable to third parties, the period of time the lease is increased by and the proposed new expiry date of the lease;
  • Statements of amount payable on termination of the lease – setting out the total amount to be paid to terminate the lease, the amount to be paid of the rental goods are not returned, whether the lessor is prepared to sell the rental goods, and if so, an estimate of the sale price and contact details for the person whom the sale of goods can be negotiated;
  • Notices about direct debit defaults; and
  • The consent to enter residential property to take possession of rental goods.

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Posted 12th December 2012 by David Jacobson in legislation

December 7, 2012

Issues for credit comparison websites

ASIC has warned operators of credit comparison websites of the need to ensure they comply with their obligations under consumer protection laws as discussed in Regulatory Guide 234 Advertising financial products and advice services: Good practice guidance (RG 234) .

ASIC's concerns with some comparison websites include:

  • ensuring they are providing accurate information and not misleading consumers into acquiring unsuitable or more expensive products than they need;
  • only comparing a limited number of brands/products from a limited number of providers. This may not be clearly disclosed which creates the impression that the extent of comparison is much broader than it actually is;
  • using ‘ratings’ and ‘rankings’ for products without a clear explanation of the basis for those ratings and rankings;
  • referring to ‘special offers’ and ‘featured products’ without properly explaining the basis of selection of certain products.
  • for credit comparison websites that advertise loan products, not disclosing comparison rates as required under the National Credit Code.

We will discuss credit advertising issues at our February seminars.

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Posted 7th December 2012 by David Jacobson in legislation

November 29, 2012

Credit reporting update

The Privacy Amendment Bill has been passed and is expected to commence in March 2014. Details here.

Credit licensees can follow developments and read about the changes to credit reporting here.

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Posted 29th November 2012 by David Jacobson in responsible lending

November 27, 2012

Postponement request process flowchart

The enforcement postponement provisions change on 1 March 2013 (Background).

Here’s a flow chart of the steps and time frames. (Click on image to enlarge)

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Posted 27th November 2012 by David Jacobson in legislation

November 23, 2012

Hardship request process flowchart

As the new hardship provisions commence on 1 March 2013 it is important to start reviewing your procedures (Background).

Here's a flow chart of the steps and time frames. (Click on image to enlarge)

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Posted 23rd November 2012 by David Jacobson in EDR, legislation

November 21, 2012

ASIC credit advertising guide updated

ASIC has released updated Regulatory Guide 234: Advertising financial products and services (including credit): Good practice guidance. (RG234)

Credit providers should review your marketing clearance procedures to ensure your advertising complies.

The Guide has been amended to cover advertising in all media including mobile phone messages (e.g. SMS, MMS, text messages) and online banners.

It does not specifically refer to QR Codes, mobile versions of websites or meta tags but the clear intent is to cover all forms of credit advertising.

The Guide includes new examples specifically relevant to credit.

It also includes new sections on interest rates, comparison rates, responsible lending, credit assistance and canvassing of credit at home.

Specific comments are made about credit contracts structured with an initial promotional period, where a discount interest rate applies and/or other fees are waived, before the interest rate and fees revert to a higher level on an ongoing basis.

  • If an advertisement includes details of this interest rate or fees, ASIC says it should state, with equal prominence, the period for which the discount applies.
  • "The advertisement should also describe what the interest rate or fees revert to (e.g. the standard variable rate), but this need not be stated with equal prominence to the discount rate or fees. The degree of prominence required depends on any unusual features of the discount rate or period. For example, we would expect the following reversion rates to be stated more prominently:
    (a) if the advertisement is for a honeymoon interest rate on a home loan and the reversion rate is something other than the lender’s standard variable rate; or
    (b) if the advertisement is for a discount interest rate for a balance transfer on a credit card and the reversion rate is the higher cash advance interest rate rather than the standard purchase interest rate".
  • "The advertisement also need not state the current amount of the discount rate or fees, unless the advertisement puts emphasis on savings that would be obtained during the discount period only, but without clarifying that these savings would not continue during the entire period of the loan".

Comparison rates
ASIC says that "ensuring that the comparison rate is no less prominent than the interest rate does not necessarily mean that they must be presented identically (e.g. both in the same colour and against an identical background). However, if the interest rate is bright and the comparison rate substantially less vivid by comparison, or blended into the background because of a lack of colour differentiation, then even if they are shown in the same font size, it is likely that the comparison rate would be considered less prominent...

Where the advertisement is in the form of an online banner advertisement, it may not always be possible to include the warning on the same page as the comparison rate. It will be sufficient that, at a minimum, the advertisement contains a clear link or reference to the warning, and the reference should be as near to the comparison rate as possible. The reference should use clear language to help make the consumer aware that this is important information that they should consider before making a decision about the product (e.g. ‘comparison rate warning’ or ‘important information about the comparison rate’)."

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Posted 21st November 2012 by David Jacobson in legislation, licensing, responsible lending
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