The National Consumer Credit Protection Act (NCCP Act) was enacted in 2009 and the National Credit Code commenced operation on 1 July 2010. However, there are still transitional issues under the Act to be aware of, as well as proposals for further reform, many of which are likely to come into effect soon.
Mortgage exit fees ban enacted but Senate Committee calls for overturn
NCCP regulation 79A (flagged in our Regulator article 15 February 2011) has now been made and provides that, for home loans written on or after 1 July 2011, any fee or charge on termination of a home loan contract will be prohibited unless the fee or charge:
- relates to the early termination of a credit contract for a fixed rate loan and is payable as a result of a change in the cost of funds to the credit provider; or
- only reimburses the credit provider for the reasonable administrative costs of terminating the credit contract. A cost is a reasonable administrative cost only if it does not exceed a reasonable estimate of the average reasonable administrative cost to the credit provider of terminating that class of credit contract.
On 6 May 2011 the Senate Economics Committee Inquiry into Competition in the Banking System released its report. The report considered mortgage exit fees, and stated:
The Committee believes that banning exit fees will lead to higher upfront fees, including for borrowers who never incur exit fees. It is notable that the only financial intermediaries that accepted the abolition of exit fees were the major banks.
The Committee recommended:
[T]he Government reconsider its decision to ban exit fees, before the amended regulations come into effect, with a view to allowing enough time for the effectiveness of the existing ban on unfair and unconscionable exit fees (as implemented through ASIC Regulatory Guide 220) to be assessed. If it proceeds with the ban, it should only apply to authorised deposit-taking institutions.
The impact of this report is yet to be seen however we do not expect that the government will back away from Regulation 79A, particularly given the report comes from a minority party led Committee.
Lenders should therefore continue to ready themselves to meet the requirements of Regulation 79A for all home loans entered into from 1 July 2011.
Credit card and home loan reform - Bill referred to Senate Committee
The proposed National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Act 2011 was released in draft form in March 2011.
The content of the draft bill reflects the government’s position on credit cards as set out in its election campaign as part of its “Fairer, Simpler Banking” policy and includes new pre-contractual disclosure obligations and prescribed payment orders . This pre-empted the outcome of discussions put forward as part of Treasury’s Green Paper on credit law reform released in July 2010 (see previous Regulator article). The Bill also proposes new disclosures which must be provided to potential home loan borrowers.
This Bill has now been referred to the Senate Committee on Economics for review.
Responsible lending - the goal posts continue to shift
There is continued movement in regulators’ guidance as to what is considered to be acceptable practices for responsible lending. Just as ASIC updated its Regulatory Guide on responsible lending with amendments which were generally helpful to business, the Financial Ombudsman Service (FOS) has released guidance which seems to significantly cut across ASIC’s statements and indicates a very conservative approach will be taken in relation to responsible lending disputes.
For example, ASIC has updated Regulatory Guide 202 in March 2011 to state:
We recognise that, in certain circumstances, credit providers will be able to verify a consumer’s financial situation without receiving information from the consumer. For example, a bank could look at a consumer’s regular deposited salary, the timing of credit card payments, and the payment of other expenses. However, credit providers should take care relying on such information, which may not reflect the consumer’s entire financial position—for example, if the consumer holds credit cards with other financial institutions.
The use of sophisticated automated systems and tools for testing the reliability of information about income provided by an intending borrower may play a role in satisfying the requirements to take reasonable steps to verify such information.
At around the same time FOS released a circular stating:
As a minimum, FOS considers there should be evidence of the consumer’s capacity to repay such as:
- verification of PAYG income by reference to payslips or
- verification of self-employed income by reference to tax returns and bank statements.
This requirement, in our view, is not scaleable, but rather a mandatory consideration.
Australian Credit Licensees will need to consider carefully what kind of weight to give to such guidance and how it will affect positions and risk-based decisions they had reached previously.
To ensure that responsible lending practices can continue to be justified, including in the face of regulatory scrutiny, existing process lending decisions should be regularly reviewed and customer defaults should be monitored to ensure that where there is a pattern of default behaviour or insufficient information not previously identified then this is taken into account in adjusting lending practices.
Disclosures - extension of assisted compliance time
NCCP Regulation 28N provides some relief from NCCP Act disclosure document requirements in some circumstances, but is currently due to cease to apply from 1 August 2011 (this was extended from 1 April 2011 in response to industry concern). The Regulation is also affected by two Class Orders 10/1230 and 10/1269.
The benefits of the Regulation are:
- to provide an exemption from the requirement to provide disclosure documents which contain details of EDR schemes if that information has been given in writing in the previous 90 days (exemption doesn’t apply to quotes)
- to provide for a modified regime for providing quotes – an exemption will apply if a contract setting out the maximum amount payable has already been entered into before the credit assistance is provided and no fee or charge to for the credit assistance is imposed.
As the final disclosure requirements, including the specific detail as to what will be included in credit assistant provider’s documents, have still not been finalised we expect there to be further push from the industry to have this time extended. Without this it will be very difficult for industry participants to have their systems ready to meet disclosure obligations they are still not aware of by 1 August 2011.
Annual compliance certificate - get your ducks in a row
Australian Credit Licensees must, no later than 45 days after the anniversary of the date their licence came into force, lodge an annual compliance certificate with ASIC.
Failure to lodge a certificate will result in civil and criminal liabilities on the licensee as well as on each person whom the certificate may be signed by. For corporations this is the corporation’s CEO or, if there is no CEO, a person responsible for managing affairs of body corporate and with authority to make decisions in relation to allocation of resources so that the body corporate complies with NCCP Act
If the body corporate is an ADI, however, then the relevant person is the CEO or person who satisfies criteria to be fit and proper to hold responsible person position under APS 520.
Therefore Australian Credit Licensees should be reviewing the questions to be answered in the certificate and preparing Board papers to bring these matters to their Board’s attention.