Submissions on the Responsible Lending Code Discussion Document

Transcription

1 Submissions on the Responsible Lending Code Discussion Document Submitter: on behalf of: Jonathan Flaws, LLB (Hons) M.Jur Resimac Home Loans Limited A. Background These submissions are made on behalf of behalf of Resimac Home Loans Limited. Resimac is an Australian non-bank lender who provides home loans in New Zealand. It is a wholly owned subsidiary of an Australian lender and entered the New Zealand market following the acquisition of an existing New Zealand mortgage book. Resimac Home Loans Limited is therefore a New Zealand lender whose immediate parent has been through the changes in Australia that resulted in the National Credit Code and who has adapted its business to comply with the Australian Responsible Lending Code. Legal advice The New Zealand mortgage environment already provides greater protection for consumers than in Australia as a result of the involvement of lawyers whose role is to act for borrowers. This is a fundamental difference between the process in Australia and New Zealand. In New Zealand, virtually all borrowers will see a lawyer and receive independent advice when entering into a mortgage. There are two reasons that drive this: Administrative efficiency: New Zealand lenders instruct borrowers lawyers to act on the lenders behalf under a limited brief because it is effective and cost efficient and it ensures borrowers are properly advised. In Australia lenders do not do this and in most States lawyers are prohibited from acting for both the lender and the borrower - hence the Australian practice of lenders either preparing the loan contracts themselves or instructing their own panel lawyers or processing agents to do this and lawyers or agents on behalf of the lender attending to the settlement and registration of the mortgage. Faced with the receipt of documents direct from the lender, Australian borrowers follow the instructions presented to them and sign the documents without seeing a lawyer and return them direct to the lender. Electronic registration requirements: under the New Zealand Land Transfer Act 1952, only lawyers or conveyancers may register electronically on behalf of a party in Australia, their equivalent provision permits a Lender to be a Subscriber to the electronic registration system and to register a mortgage on its own behalf Given the absence of access to legal advice in many mortgages it is appropriate that the National Credit Code and the ASIC Guidelines (such as RG 209) should contain significant detailed prescriptive provisions for lenders.. Conversely, In New Zealand, while a lender must also adhere to the Lender Responsibility Principles as set out in the Act, when it comes to the practical implementation of some of these principles in circumstances in which the borrower is obtaining independent legal advice, the provisions of the Code 1

2 need not be as prescriptive as the Australian model and must allow the lender to rely upon borrowers lawyers to do their job in a professional and proper manner. Hence, the Code should provide that in the case of residential mortgages, if a borrower chooses to instruct a lawyer to act for it, the lender s compliance with certain aspects of certain principles, such as assisting the borrower to make an informed decision other than in the manner set out in section 9C(3) may be satisfied by the lender relying upon certification from the lawyer that the borrower has taken legal advice. The lender should not be required to go into any depth and detail as to what legal advice was provided and should only be required to undertake more detailed inquiries if the lender has reasonable information that indicates that there may be relevant information about the borrower of which the lawyer was not aware or has reason to doubt the certificate provided by the lawyer. Having said that the nature of the legal advice obtained will vary depending on the circumstances in which the mortgage is obtained. In the case of a mortgage to assist with the purchase of a property, the advice may be quite extensive and canvas broader issues relating to the wisdom of the transaction and the structuring of the purchase. In the case of a refinance where no, or limited additional funds are being provide and there is no element of debt consolidation, the legal advice required may be limited. The Code should therefore anticipate that reliance on the delegation to lawyers may well be scalable depending on the requirements and objectives of the borrower. Lenders will always retain responsibilities for ensuring the loan can be repaid without substantial hardship, notwithstanding legal advice. If the loan is merely for refinancing existing debt, the lender, should still enquire and be satisfied that the borrower will benefit from the transaction. As to any other objectives, if the borrower obtains legal advice, the lender should be able to rely upon that fact as evidence of the loan meeting the borrower s requirements and objectives. Trusted, Registered Financial Adviser Although it originates loans in Australia directly and through third party Advisers, at present, it only originates loans in New Zealand through third party distribution. While Resimac accepts that lenders must hold the ultimate responsibility to ensure that the Lender Responsibility Principles are understood and adhered to at all times, in reality certain aspects of the process are delegated to intermediaries. Unlike the Australian Credit Code, there is no direct recognition in the Credit Contacts and Consumer Finance Amendment Act 2014 (the Act) of those parties. There is no explanation for this omission in the Act and Resimac suspects it is because any person providing advice on a category 2 product (such as a credit contract) is already required to be registered as a Registered Financial Adviser under the Financial Advisers Act 2008 and must be a member of a dispute resolution service. The Australia Code encompasses both the regulation of credit service providers and the responsible lending principles and as a result all parties are required to hold an Australian Credit Licence. In contrast New Zealand credit service providers (lenders and Advisers) are already regulated and provided for but there is no link between an Adviser and the Lender Responsibility Principles. Given their role in the mortgage industry in particular (Resimac understands that around 25% of mortgages in New Zealand are originated through independent Advisers compared with close to 50% 2

3 in Australia) it is appropriate that the Responsible Lending Code (the Code) should recognise the role of Advisers and provide guidelines to lenders on the nature and extent of any delegation of the lender s duties to Advisers. Third party Advisers need to be distinguished from a person who is tied to one lender, such as in the case of the Mortgage Managers of a bank. The lender has limited control over the third party Advisers, particularly where the third party is acting for the borrower and putting applications before multiple lenders. It is often beneficial for a consumer to have an Adviser assist the consumer to shop around. Therefore Resimac believes it is critical to the success of Code that some provision is made to recognise the role of qualified and professional advisers acting for the borrower. In these submissions this entity is referred to as a Trusted Adviser. This is an Adviser: to whom the lender has delegated certain activities that are reasonable for the lender to delegate; who has entered into a written contract with the lender recording the delegation and the responsibilities of the Adviser; who it is reasonable for the lender to trust to carry out, professionally and in accordance with the standard of care of a prudent and responsible lender, certain of the Lender Responsibility Principles. Without relieving the lender from its overriding duty to adhere to the Lender Responsibility Principles, the Code must permit a lender to delegate certain activities to a Trusted Adviser. The lender should be entitled to rely upon information provided by a Trusted Adviser. If the lender has reasonable grounds to believe the information provided is not reliable or the Trusted Adviser has not acted in accordance with the relevant provisions of the Code, the lender may not be entitled to rely on that information without further inquiry or verification. The Code should specify that a Trusted Adviser is a person who meets the following criteria: Summary The Adviser must be a Registered Financial Adviser, a member of a Dispute Resolution service and a member of an appropriate industry body; The Adviser must be able to provide advice on category 2 products; The Adviser must be familiar with the lender s mortgage products; The Adviser must be accredited to the lender and must have entered into a written Adviser agreement or referral agreement with the lender providing for the following: A clear set of roles and responsibilities; Confirmation of professional indemnity insurance for an amount and on terms deemed appropriate by the lender and with an insurer acceptable to the lender; Warranties and undertakings to comply with the Lender Responsibility Principles in all dealings with the borrower; An indemnity to the lender against loss arising from a breach of the warranties and undertakings and a breach of the agreement; A requirement to maintain an annual programme of continuing professional education including understanding the lender s products. Providing for a lender, when lending on residential mortgages, to rely upon the borrower obtaining legal advice form a lawyer of their own choosing and relying Trusted Advisers in the circumstances described above will not complicate the lending process. This activity is already happening in the 3

4 case of Resimac and other lenders and the above provisions if incorporated into the Code will reflect an existing position. Nor will it make the credit process unduly burdensome from a cost or compliance perspective. In contrast, if this provision is not made, many lenders may consider that in order to be compliant, they will need to make their own inquiries and undertake their own verification and provide additional assistance to borrowers. It is the duplication of these activities that will become unduly burdensome and costly and this will impact the availability of mortgages. B. Response to questions raised in the Discussion Document 1. Do you agree with the proposed criteria for assessing what guidance should be set out in the Code as set out in paragraph 18? Should retaining sufficient flexibility to allow lenders to adapt the guidance to different products and business models be another criterion? Are there any other key criteria to be considered? Resimac agrees with the proposed criteria and also with the concept that sufficient flexibility must be retained to allow lenders to adapt the guidance to different products and business models. In the credit industry one size most definitely does not fit all as some consumers will require more assistance and some will require less. In line with the opening comments, it is essential to include as a key criteria promoting understanding of and adherence to the responsible lending obligations of all intermediaries in consumer credit contracts whether acting on behalf of the consumer or the lender. 2. Are there any particular features of the New Zealand market which would differentiate our approach from international approaches? With respect only to consumer mortgages, a critical feature of the New Zealand market that differentiates us from some other countries is the participation of lawyers who are generally instructed by both lender and borrower to act to register the mortgage. The impact of this difference is that consumers have an easier access to legal advice than on some other jurisdictions. This means that provisions in other jurisdictions that are very prescriptive as to how lenders approach the consumer to ensure they understand the impact of the borrowing need not be so prescriptive here. A certificate from the lawyer acting for the borrower to the lender that the borrower has obtained legal advice should prima facie be acceptable as compliance by the lender with certain obligations. Not all borrowers may need this level of hand holding and the Code should permit lenders a degree of flexibility over the level of advice obtained. 3. We consider that the structure of the Code should reflect the lifecycle of a consumer credit contract, do you agree? Yes 4. Are there lenders/borrowers/agreements or classes of lenders/borrowers/agreements that should be treated differently under the Code? If so, why, in what way and how should any such lenders/borrowers/agreements be defined? Yes. Mortgage borrowers naturally fall into different classes: reverse mortgage borrowers first home buyers 4

5 borrowers who are refinancing and simply moving from one lender to another in order to obtain a better loan borrowers with a high LVR borrowers for whom English is a second language any other borrower with a characteristic that makes them vulnerable and requires them to be treated with additional care e.g. a person who has appointed an attorney enduring or otherwise to act for them a person who lacks the mental capacity for any reason but nevertheless owns property on which it is appropriate to raise money for their care. (c) (d) (e) Mortgage lenders too may fall into different categories. For example a lender who always deals direct with borrowers may require different guidance on the lender responsibility principles to a lender who only deals with third parties. For example a lender who receives applications from consumers via Trusted Advisers should be required to adhere to certain rules regarding who the lender can trust. If information is provided to the lender on behalf of a consumer by a Trusted Adviser then the lender should be entitled to rely on that information and the verification of that information as prima facie correct. This reliance upon information provided by a Trusted Adviser is consistent with the approach in section 9C(7) which allows a lender to rely upon information provided by the borrower. This will necessitate guidance on how to identify or accredit a Trusted Adviser. Rather than have a hard and prescriptive set of definitions, it may be more appropriate to outline circumstances which, if present would require a borrower or a lender to be treated as within a specified class. It may be that the same party could be within several classes depending on the type of contract or circumstances. A bank, for example should be entitled to rely upon information provided by a Trusted Adviser notwithstanding that it has its own constituency of mortgage mangers for whom it must take full responsibility. A Trusted Adviser who abuses the position should acquire a responsibility at law for doing so. This has not been provided for in the Act and accordingly may be outside the scope of the Code. However, in preparing the Code, a review should be made of the Financial Advisers Act 2008 to require a Registered Financial Adviser to adhere to the Lender Responsibilities when dealing with a category 2 credit product. Failure to do so should result in penalties. 5. Should the concept of scalable guidance apply to the Code? If so, which principles or responsibilities should be scalable? Scalable guidance is essential to ensure that consumers are not unduly restricted in their ability to borrower and lenders not subject to compliance costs that make the provision of credit unaffordable. Applying the numbering in Appendix Two of the Discussion Paper, scalability in relation to the principles should apply as follows. Non scalable principles (i) (ii) The responsibility in 1 and 2 are not scalable. The duty to exercise skill and care is universal and the standard should not adjust depending on circumstances. Similarly, 3(d), (e) and (f) are not scalable. They relate to a basic standard of conduct or performance of a lender. 5

6 (iii) The specified activities in 3 (i), (ii), and (iii) are not scalable. These requirements must always be met. How they are applied in each case may differ but the base principle remains. To the extent that similar principles apply to subsequent dealings or to a guarantor, they too are not scalable. Scalable principles (iv) The responsibility to make reasonable inquiries will always be scalable. The outcome is not scalable, the lender must always be satisfied as set out in 3, for example, but the extent of the reasonable inquiries required to achieve this will be scalable. The type of credit provided and the type of borrower may be the factors determining scalability. (v) The responsibility in 3 to assist the borrower to make an informed decision includes 3 non scalable matters. To the extent, however, that any more assistance than those three matters is required then this principle is most definitely scalable. The degree of scalability will be determined by the nature of the borrower and in some cases the nature of the credit. Assisting the borrower to make an informed decision will always be scalable. (vi) The principle in item 7 enabling the lender to rely upon information provided by the borrower is also scalable. The first issue to determine is whether the lender is receiving information direct from the borrower or from the borrower via a Trusted Adviser. In the latter, scalability relies upon the extent to which the lender is not required to repeat activity such as inquiries and verification carried out by the Trusted Adviser. 6. How prescriptive should the guidance in the Code be? Given that the Code is not binding, a heavily prescriptive Code is more likely than not to be ignored. Over prescriptive explanations may result in lenders establishing their own guidelines based on their view of the principles. They are free to do this in any event, however reasonable standards of commercial practice are more likely to be established and more likely to be beneficial to consumers if all lenders apply the same guidelines. The objective of the Code should be to provide examples and explanation rather than prescribe required courses of action. This approach may not be applicable to all situations and in some cases, prescriptive courses of action may be required. 7. Should the level of prescription differ for different classes of lenders/borrowers /agreements? If so, which classes and why? Yes. If the concept of the responsible borrower is accepted then to the extent that an agreement is made with a responsible borrower, the level of prescription can be reduced. In order to adopt this concept, a lender needs to be able to identify a responsible borrower. To do this the lender will need to give weightings to the following matters: (i) (ii) (ii) the history of trading between the parties; the historical behaviour of the borrower; the nature and extent of the borrowing and the security provided; 6

7 (iii) (iv) the extent to which the borrower can demonstrate or confirm a level of comprehension sufficient to enable the lender to have comfort that the borrower is likely to be able to make an informed decision; whether the borrower falls into a class that deems the borrower to require special or additional assistance e.g. age, English as a second language. Advertising questions 8 14 Resimac in New Zealand does not engage in direct advertising to borrowers. To the extent that it advertises, it is to Trusted Advisers and potential Trusted Advisers. The section on advertising states that advertising has a large bearing on the consumer s decision to borrow. That may apply in the case of consumer goods and unsecured consumer lending but when it comes to a decision to raise money on a mortgage, there are other factors at play. For lenders who originate through Trusted Advisers, the advice and direction given by the Trusted Adviser has a large bearing on the consumer s decision. In these cases, there may be no, or very little direct advertising to the prospective borrower. The advertising, if any, is provided by the Trusted Adviser. To the extent that the lender markets its product benefits and features it does this to its constituency of Trusted Advisers. Indeed, advertising may be the wrong expression and perhaps the expression should be marketing meaning the way in which a lender promotes its credit product. A lender receiving applications from Trusted Advisers may well promote its products in a manner that is clear concise and neither misleading deceptive or confusing. And yet the way in which the product is presented to the borrower by the Trusted Adviser may be quite different and breach these principles. In the case of mortgages, the lender has no direct control over the information provided by a Trusted Adviser to the borrower. Yet if the information provided to the borrower is misleading, deceptive or confusing, the lender, under the Lender Responsibility Principles may be liable. Provision should be made in the Code to address the situation where a lender does not advertise directly to borrowers but product information is provided to the borrower by a Trusted Adviser. The provision should provide that where a lender has provided a product description to a Trusted Adviser that is clear and concise and is not misleading, deceptive or confusing then the lender has satisfied its Advertising Responsibility. Registered Financial Advisers, under the Financial Advisers Act regime must take responsibility for ensuring that product descriptions provided by lenders are passed on to borrowers. Trusted Advisers must take responsibility for any additional information they provide to a borrower. In other words, the advertising responsibility can be satisfied by the lender providing a compliant product description to the Trusted Adviser for the borrower. Assisting the borrower to make an informed decision 15. Apart from complying with disclosure obligations, how do/should responsible lenders assist borrowers to understand the terms of the credit agreement? How should any guidance cover different modes of providing credit? (e.g. online applications) Should certain information be required to be given orally for face-to-face or telephone interactions with customers? Disclosure should not be confused with understanding. 7

8 (c) (d) (e) (f) (f) Complying with the disclosure obligations is an essential compliance requirement for the lender but it does not mean this assists the client to understand the terms (which must be assumed to mean all of the terms ) of the credit agreement. A borrower, however needs to be provided by law with all of the terms. This includes a copy of the mortgage memorandum. Resimac incorporates the ADLS Inc. all obligations memorandum of mortgage terms and conditions into its mortgages and provides borrowers with a copy of these terms. By its very nature, this form is fair to both parties but is not easy for a lay person to read and immediately understand. The Lender Responsibilities requires that terms need to be in clear and concise language. Where a lender, such as Resimac relies upon a form prepared by the industry body for lawyers, it should be entitled to rely upon that form as compliant. Disclosure of terms should not be considered a requirement to assist understanding; it is a requirement because when a contract is entered into, the party bound to perform under it must have the ability to access the contract terms to determine how to act in order to perform that parties obligations. What is critical for the borrower to understand and under the Lender Responsibilities be assisted to understand are: (i) (ii) (iii) the key or critical terms of the contract; how those terms meet their requirements or are likely to meet their requirement; the consequences that they will incur if they do not perform. Put another way, by entering into any credit contract, the borrower is assuming risk. The borrower needs to understand the nature and impact of that risk. The informed decision to be made is do the benefits to the borrower from the credit justify the risk assumed?. There are three components to making this decision. 1. The lender needs to disclose the key factors in the contract that make up that risk. These can be referred to as contract specific disclosure ; 2. But there are other key factors outside of the contract that also make up that risk. These can be referred to as that generic financial literacy ; 3. Then there is the specific situation and requirements of the borrower These can be referred to as borrower specific factors. As well as including the borrower s objectives and requirements, these also include the level of education in financial matters and the experience in dealing with credit of the particular borrowers. Contract Specific Disclosure. The Australian Credit Code requires pre contractual disclosure (which invariably includes the credit contract) to be set out and for information to be provide in a prescribed form. This requires a financial table containing required information or details about the credit to be set out in a particular order. In my view that is counterproductive as it splits up information that is better read together as one piece of information. Lenders should be left to adopt their own style of contracts. They should also be left to determine how best to order and present the key information required to be disclosed by Schedule 1. To ensure a degree of uniformity in disclosure, Resimac recommends that a disclosure schedule or table of disclosure contents be included. This may either include key information or provide an index or table to help find the key information. This schedule or table of contents should be set out in the same order as Schedule 1 of the Act. 8

9 Resimac documents use this device. It benefits the lender it can see at a glance that it has complied with its disclosure obligations. It benefits the borrower it is directed immediately to the place where the Key Information can be found. In many cases the Key Information may well be the only contract specific information that the borrower reads and understands. If it is accepted that Schedule 1 contains the essential key information required to assist the borrower to make the informed decision, then this achieves the first part of the lenders assistance to the borrower. (g) Generic financial literacy The assistance required under this component will very much depend on the nature of the borrower and the nature of the credit. Many borrowers will have sufficient financial literacy to understand the generic credit and risk generic information they need to take into account when making an informed decision. An experienced and financially literate borrower may need no additional assistance. In comparison an inexperienced borrower who has had little or no exposure to this generic information before and who may be entering into a mortgage with a high LVR for the first time may need more assistance. It is in this area that the Code can provide essential guidance to lenders to ensure that they can establish efficient procedures for determining which borrowers require assistance and the level and nature of this assistance. There will always be an element of subjectivity on the part of the lender in making determinations but the Code should provide sufficient guidance to give a reasonable lender confidence that a determination made within the parameters set out in the Code will not be re-opened. In many cases, these determinations will not be made by the lender but by the Trusted Adviser who is the person who will be interviewing and meeting the borrower. The Code should provide that a lender may be rely upon a determination made by a Trusted Adviser unless the lender has reason to believe it is wrong. The first step should be to rank or categorise borrowers. The factors to be applied should be: Amount of credit a person borrowing a small amount to purchase consumer goods is in a different category to a person borrowing a significant sum to buy a home. Security given - an unsecured loan that does not expose any property of the borrower to loss may require less generic assistance however a large secured loan to a person with limited ability to repay may require generic assistance. LVR in the case of a mortgage a high LVR borrower may require generic financial assistance. Tight servicing ability The threshold of substantial hardship acknowledges that there may still be hardship. A person who can only repay with hardship may require generic financial assistance. Experience Many borrowers regard their loan as being for a term equivalent to the fixed rate term. When it ends they shop around for a lender with a better fixed rate for the next period. A person refinancing their home mortgage to get a better deal or interest rate should not require any generic advice. A person refinancing for debt consolidation purposes, however, may require generic financial assistance. Confirmed comprehension If a borrower can demonstrate or confirm comprehension of basic financial principles then that person need not require any generic financial assistance. 9

10 The second step is to provide or provide access to obtain generic financial information and assistance if this is required. The assistance provided will depend on the circumstances. Lenders should be free to determine an appropriate level and nature of generic financial assistance. The test for whether the level they determine is sufficient would not be whether the borrower made an informed decision but whether it is reasonable to assume that a person provided with this level of assistance and provided with the contract specific information would be able to make an informed decision. The nature of the assistance will vary. In some cases, the lender may require the borrower to attend one of their own seminars. In others they may require the borrower to complete an online course. They may determine that the provision of generic information or provision of a direction to sorted.org.nz, the website of the Commissioner for Financial Literacy and Retirement Income may suffice. Then there is the role of the Trusted Adviser. In the same way that in New Zealand a lawyer instructed by the lender to act in respect of the registration of a mortgage holds a limited brief from the lender while at the same time holds a brief from the borrower, a Trusted Adviser too has duties and responsibilities to both parties. For a lender, such as Resimac, where loan applications are presented by Trusted Advisers, the Trusted Adviser is the person who will be able to assess the degree of need for additional assistance and, in many cases, will be the person best suited to provide this assistance. That is the reason they are a Registered Financial Adviser and that is their duty under the Financial Adviser Act Therefore in the case of lenders like Resimac, the duty to provide greater assistance to the borrower to assist them to make an informed decision is most definitely a role that can be and should be properly delegated to the Trusted Adviser. The Code should provide that where a lender receives an application from a Trusted Adviser it can rely upon a certificate from the Trusted Adviser that it has determined the extent of assistance required by the borrower to make an informed decision beyond that specified in section 9C(3) and has arranged for that assistance to be provided. The lender must be able to rely upon this certificate unless it has reasonable grounds to believe that the certificate should not be relied upon. (h) Borrower Specific Factors The borrower specific factors that make up the informed decision are generally outside the control of the lender. A lender cannot control or assist the borrower to balance these out when making the decision to borrow 16. What are/should be responsible lenders practices where English is not a borrower s first language? This too will be scalable. In the case of a mortgage the ultimate assistance will be to provide a full translation of the loan contract into the borrower s language. That, however is unrealistic, costly and unduly burdensome for most lenders. A lender should require that the borrower only sign the contract after discussing the contract with a translator who is able to translate the contract and provide information in the borrower s main language. A translator s certificate to the effect that this has been done should be sufficient. 10

11 17. What opportunities do/should responsible lenders provide to borrowers to ask questions about the agreement? Would providing access to frequently asked questions be sufficient? In some cases, providing a set of FAQs will suffice in others it will not. The Code should indicate the factors a lender can take into account when determining the extent to which it provides a question and answer facility for particular types of contracts. Where a Trusted Adviser is used, the lender should be able to rely upon a certificate from the Trusted Adviser that the borrower has had the opportunity to ask questions about the agreement and has asked questions which have been answered, where appropriate by the Adviser. 18. What practices do/should responsible lenders undertake to ensure that credit agreements are in plain English, clear, concise and intelligible? This is also a scalable responsibility. In some cases, the lender may be able to determine for itself. In others, the lender should be able to rely upon advice received from its lawyers or another appropriately qualified professional to confirm that the language is clear concise and intelligible. The Code should set out as the FMA has done a style guide indicating the principles to be applied when drafting contracts. Adherence to that style guide should be confirmation that the contract is in plain English and is clear, concise and intelligible. 19. How do/should responsible lenders assist borrowers to understand the implications of the credit agreement? For example, if technical or legal concepts are referred to, should the agreement explain the implications of those concepts? One of the dangers of requiring a lender to explain technical or legal concepts is that the lender will become bound by that explanation. It is not for the lender to provide an interpretation of such concepts. For a start, clear concise and intelligible plain English should avoid such terms. If a legal or technical term is unavoidable the borrower should be advised to obtain legal advice (for a legal term) or be directed to third party web sites explaining any non-legal term or concept. Lenders should be able to rely upon the recommendation or direction. 20. Can you point to good examples of credit agreements that are in plain English, clear, concise and intelligible? a copy of the standard Resimac Home Loan agreement is attached 21. What are/should be responsible lenders processes in relation to independent budgeting or legal advice for borrowers and guarantors? In which circumstances should the lender require or recommend independent legal advice? (c) (d) Please refer to the comments in response to question 15(g). In the case of mortgages, lenders should always recommend independent legal advice. Based on the Supreme Court comments in GE Custodians v Bartle, the lawyer instructed by the lender to act under a limited brief to attend to the signing and registration of the mortgage should be regarded as independent. The Code should contain a section commenting on when a lawyer is independent in respect of a party. For example, the lawyer acting for the borrower may not be sufficiently independent to provide advice to a guarantor. All guarantors should be advised to obtain both legal advice and financial advice on the financial condition of the borrower. The only circumstances where a lender should require either or both legal and financial advice is where the repayment of the loan will cause either or both the borrower or guarantor hardship (as opposed to substantial hardship in this latter case the credit should not be provided). 22. What do/should responsible lenders do to assist guarantors to make informed decisions? 11

12 This too is a scalable responsibility. Some guarantors e.g. parents, may need little assistance. The same style of ranking should apply for guarantors as I have set out above for borrowers. 23. What information do/should responsible lenders give a borrower to assist them to make an informed decision on credit related insurance? Resimac does not provide credit related insurance. 24. How do/should responsible lenders ensure that any advertising of credit-related insurance products distributed by the lender is not misleading, deceptive or confusing? Resimac does not provide credit related insurance. 25. How do/should responsible lenders ensure that borrowers have sufficient time to make informed decisions? This question is not overly relevant to mortgages. There is, by their very nature, a degree of time implicit in the settlement process that means borrowers have time to make informed decisions. Given that the majority of mortgages are signed before lawyers, the issue is not overly relevant. 26. What processes and practices do/should responsible lenders undertake to assist informed decision for agreements when the application and approval is undertaken remotely? If the application is dealt with by a Trusted Adviser then the responsible lender will be delegating to the Trusted Adviser the responsibility of assisting the borrower to make an informed decision 27. What other matters should the Code address in relation to assisting informed decisions? A lender should be encouraged to review its procedures for providing assistance and the content of such assistance on a regular basis and whenever there is a change to the law or industry practice that might result in a need to change the form or content of that assistance. Making Reasonable Inquiries 28. What information do/should responsible lenders require from a borrower when they apply for credit? How much reliance should a lender place on a credit check? (c) (d) The nature and extent of information required from a borrower when they apply for credit will be scalable depending on the amount and the type of credit requested. Attached as Annexure A is a copy of a Fact Finder form used by Advisers in Australia to comply with their obligations to collect information to enable the Adviser to make the assessment required under the National Credit Code. The information in this document is sufficient to collect from the borrower when making the application. Attached as Annexure B is an extract from the Resimac New Zealand Procedures and Underwriting Guidelines (Underwriting Guidelines) explaining the information obtained from the borrower and the verification undertaken. This document been adapted from the Australian Guidelines prepared by Resimac Australia and already includes a section on responsible lending that adopts an assessment process based on the Australian Code requirements. Although the assessment that the loan is not unsuitable follows the Australian Code wording, it is sufficiently close in concept that by applying the principles and procedures set out in the current Underwriting Guidelines, Resimac will be able to meet the principle set out in 9C(3) namely be satisfied (or not as the case may be) that it is likely that: the credit or finance provided under the agreement will meet the borrower s requirements and objective; and the borrower will make payments without suffering substantial hardship. (e) Section 13 Credit Assessments of the Underwriting Guidelines reflects the prescriptive provisions of the Australian code that require an assessment to be undertaken. In the New 12

13 Zealand mortgage industry, lenders have traditionally carried out such an assessment and even if a prescribed form is not included in the Code, they will invariable create their own procedures. The inclusion in this section of comments on responsible lending was made in anticipation of the Code and is based on the Australian Code. It will be adapted to reflect the provisions of the Code when it is published. (f) A credit check is just one of the pieces of information obtained by a lender. It is, however, an essential indicator of past and predictor of future financial behaviour. It is not the only such indicator but it will always be given a great degree of weight. 29. What do/should responsible lenders explain to the borrower in relation to the purpose of the checks and assessments of affordability? Attached as Annexure C is s a copy of the declaration that Resimac obtains from a borrower and the accompanying privacy statement. The declaration requires the borrower to consider the basic elements that they are comfortable that they can repay the loan without difficulty and that there are unlikely to be any change in circumstances that might affect this. The privacy statement is an explanation of the reasons for collecting information from the client and how this is to be used or shared with others for the purposes of the credit - both now and in the future. 30. How do/should responsible lenders assess whether the information a consumer has provided is correct? In what circumstances do/should responsible lenders be able to rely on information provided by a borrower? Section 13 of the Underwriting Guidelines sets out the requirements that Resimac has put in place to obtain verification of information. In the majority of cases, information is collected and verification undertaken by a Trusted Adviser. Notwithstanding this, Resimac, at present, may require that before an unconditional loan offer is made, one of its staff will contact the borrower and discuss the application with them to ensure that the information provided by the Trusted Adviser reflects the borrower s position. Resimac will also phone the borrowers employer to confirm the income information provided. This is effectively a case of Resimac applying a degree of scalability to this principle. Rather than apply this principle across the board it may in the future carry out spot checks on its Trusted Advisers. In the case of a newly accredited Trusted Adviser, they may be subject to greater scrutiny. 31. How does/should a responsible lender s checks differ for existing customers and new customers? Each new loan is treated on its own merits. A borrower s financial position changes over time and while existing information held by the lender may assist to provide some of the information required, confirmation that the information is still current will often be required. As a result the treatment of a new and existing borrower by a mortgagee may not differ to any great extent. 32. How do/should responsible lenders consider whether credit does/does not meet the requirements and objectives of the borrower? Sections 13.4 through to of the Underwriting Guidelines cover this question. 33. How should the lender responsibility to be satisfied that it is likely that the credit will meet the borrower s requirements and objectives be balanced against not unduly restricting consumer choice? In the case of mortgages where borrowers have lawyers acting on their behalf, reliance by the lender on a certificate from the lawyer is a satisfactory balance against unduly restricting customer choice. 13

14 Ultimately the decision to borrower, provided it is an informed decision made by the borrower freely and not under duress or the influence of others, should be the primary indicator that the borrowing is likely to meet the borrower s requirement and objectives. It is only in circumstances when the financial facts indicate an obvious mismatch that a lenders determination of this matter should override a borrower s wish to proceed. A clear indicator of this would be if the borrower s stated objective was to borrow to enable the property to be refurbished in preparation for sale and the borrower requested a 5 year fixed rate loan. In these circumstances the loan type would clearly not meet the objectives because if it were repaid early break costs could be payable 34. What proportion of credit applications are processed without the involvement of financial advisers permitted to give personalised advice in relation to category 2 products under the Financial Advisers Act 2008? Will regulation under both the lender responsibilities and the Financial Advisers Act impose significant costs for lenders? In the case of Resimac, the proportion of such credit application is nil. That is, 100% of all applications are processed with the involvement of such financial advisers. (c) (d) (e) (f) Provided the Code recognises the role of such financial advisers and permits lenders to delegate some of their responsible lending activities to Trusted Advisers along the lines set out in the opening paragraphs of this submission the apparent dual regulation referred to in this question will not impose significant costs to lenders. Indeed, it is probably incorrect to refer to it as dual regulation. The Australian Code captures all parties involved in a credit service and requires regulation as the holder of a credit licence under their National Credit Code. It also imposes specific assessment roles and criteria for brokers and then repeats the assessment for lenders. In this respect, by covering all of these parties under the Code, it provides duplication of roles and responsibilities and it could be argued that this imposes significant costs for lender. In contrast, splitting the licensing and regulation of providers of a credit service and the responsible lending principles between two pieces of legislation does not necessarily involve the same duplication and therefore the same duplication of costs. The Act imposes the Lender Responsibilities on lenders. For this reason, a responsible lender will put in place provisions to ensure that the principles are followed at all stages of the credit process. Resimac, as a responsible lender, already provides training and underwriting guides to its Trusted Advisers. All of its Trusted Advisers must be accredited along the lines set out in the opening submissions. It does not follow that because there is multiple regulation/ licensing of parties, there is dual regulation of content or responsibilities. Resimac currently and in the future will continue to accept responsibility for ensuring that an Adviser who puts an application to it falls within the category of a person that it can trust to do so properly and in accordance with the lender responsibility principles. In other words, to the extent that the Code will guide Resimac when it comes to the content of responsible lending, Resimac will require the same guidelines and same principles to apply to its Trusted Advisers. What is being submitted is that this process be recognised in the Code. A lender must be able to rely upon information put to it by a Trusted Adviser (being a Financial Adviser under the Financial Advisers Act 2008 who meets the criteria set out in the opening paragraphs) in the same way that it can rely upon information provided by a borrower under section 9C(7). If the Code so provides, then there will be no imposition of significant costs for lenders. If it does not, then lenders may feel obliged to repeat the activities. 14

15 35. How do/should responsible lenders deal with the potential conflicting incentives posed by payments of commission/bonuses and the need to be satisfied that it is likely the credit agreement meets the requirements and objectives of the borrower and will be repaid without substantial hardship? This question assumes that lenders will feel compelled to accept the information provided by Trusted Advisers without question and will err in favour of doing a deal for the sake of ensuring the Adviser gets paid a commission than protecting the interests of the consumer. The Lender Responsibilities are the other side of the credit risk coin. Lenders have always been under pressure from mortgage advisers to approve deals that are simply not good credit decisions. They are used to declining loans that don t meet their own criteria. To this extent the tension highlighted by the question already exists. Lenders already deal with this issue. In the case of Resimac, it has implemented and documented a robust credit decision process which includes delegated underwriting authority; management sign off; a credit committee; exception authorisation; a process for ensuring and reviewing quality assurance ; the segregation of duties/reporting lines for persons holding delegated authority to approve loans and other decision makers; and an audit, risk and compliance committee This process has been designed to ensure that the Lender Responsibilities are applied at all levels. If a credit agreement doesn t meet the requirements and objectives of a borrower it cannot be automatically approved. In the same way that the interest of an Adviser in being paid a commission is not a factor taken into account when a loan application falls outside the internal credit criteria of Resimac, so too does it not feature in any decision where the loan doesn t meet the requirements or objectives of the borrower. 36 What factors should be taken into account in considering what should constitute substantial hardship? The factors that Resimac currently take into account from a credit risk perspective are substantially the same as for substantial hardship. For example, the factors set out in RG are substantially incorporated within the Resimac Underwriting Guidelines. Hardship is, of course, not the same as substantial hardship. Most first home buyers with a high LVR will be under a degree of hardship compared to their position prior to home ownership. It is a matter of degree. If the hardship is such that it is likely that it is not sustainable then it would fall into the category of substantial hardship. The Australian Code indicates that if the only method of repayment is the sale of the primary residence then that is an indicator of substantial hardship. For example, in some instances a responsible borrower, such as an ex pat returning from overseas who has a well-paid job may not qualify under the criteria of a major bank. They may seek an interest only loan for a period of five years with an intention of refinancing the property or selling the property and upgrading. Refinancing or selling is indeed a clear stated objective. That does not mean that because the property is their primary residence, repayment by these means will result in substantial hardship. 37. Should substantial hardship be assessed by reference to any particular indicators or reference budgets? 15

16 What may be substantial hardship for one person may be sustainable hardship for another. The danger in linking the assessment to particular indicators or reference budgets is that it removes the subjective test. Having said that, any indicators or reference budgets in the Code should be caveated that they are indicative only and there will always be an overriding responsibility for a lender, acting reasonably, to determine whether the indicators or references are relevant to the particular borrower being assessed. 38. Should the Code specify a threshold for substantial hardship? If so, what is an appropriate threshold? The response to this question mirrors the response to the previous. Arbitrary thresholds do not permit the flexibility that this determination requires. For example, if the threshold is percentage based, a person with a very high income may be over the threshold in percentage terms but still retain sufficient disposable income to cover living and other expenses outside of repayment of the credit. 39. To what extent do/should responsible lenders take into account likely future market conditions (e.g. interest rate rises) when assessing affordability for the borrower (particularly for long term credit agreements such as mortgages)? Affordability for mortgages should always be assessed applying a margin to the interest rates to take into account future movement. The margin will vary from time to time according to economic circumstances. At present, Resimac considers that a margin of between 1% (for longer term fixed rate mortgages) and 1.75% for variable and short term fixed rates is appropriate. 40. Do/should responsible lenders engage in lending that relies primarily or solely on the value of any security provided by the borrower? Asset lending for the sake of it is not an acceptable practice and is not engaged in by Resimac. 41. Are there circumstances in which it should be presumed that the consumer will only be able to make repayments with substantial hardship? If the Australian provisions in RG209 and in the NCC are followed, it is presumed that if the only way a consumer can comply with the financial obligations is to sell or refinance their primary residence then that is a presumption of substantial hardship unless the contrary is proven. For the reasons set out above (question 36), this should be a rebuttable presumption. 42. What policies do/should responsible lenders have in place to assess whether the security taken is excessive relative to the size and length of the credit provided? A mortgage over property is generally a mortgage over the full value of the property. (c) Section 92 of the Property Law Act 2007 provides for lenders to specify an amount up to which the mortgage has priority for fluctuating advances. This is often specified as an amount that is significantly greater than the actual amount lent. That does not mean that the lender is taking excessive security, simply that unless a subsequent mortgagee enters into a deed of priority limiting the amounts between the parties, the priority sum is the amount up to which the lender may take priority for any future advances. The Act already requires, as a guideline for reopening a credit contract, consideration of the extent to which the security value exceeds the debt. If a subsequent mortgage applied to an existing mortgagee to limit priority to a lower sum than the stated priority amount in the 16

17 mortgage, that mortgagee and the mortgagor would have rights to ask the Court to re-open the contact under the oppressive provisions and effectively re-set the priority. The Act therefore already provides a mechanism to control any excessive security. 43. What other matters should the Code address in relation to making reasonable inquiries to assess whether the credit agreement meets the borrower s requirements and objectives and can be repaid without substantial hardship? It is hard to codify or anticipate each and every other matter that may be relevant. The state of the economy at any given time may be relevant. RG 209 suggest that a person living in an isolated location may have greater living expenses. Equally, in an economic environment when property prices are in a state of deflation, in the same way that a margin is applied to interest rates for servicing calculations, a margin might be applied to reduce the value of the security. Rather than attempt to codify such matters, the Code should simply refer to possible examples and recommend that lenders review their policies from time to time taking into account any market changes. During the life of a consumer credit agreement Dealing during the term of the agreement 44. What practices and processes do/should responsible lenders have in place to assist borrower decision-making in relation to variations to a contract (e.g. credit card limit increases) or refinancing? What types of variations do/should such practices apply to? Generally, the assistance will be a scaled back version of the assistance provided at the commencement of the loan. For a loan increase, the inquiries, verification and assistance may be identical to a new advance. If the variation is a substitution of property, i.e. the sale of one home and purchase of another, the information required may be substantially the same as for a new loan. (c) In the case of additional funding being obtained to release part of the borrower s equity, a responsible lender should be satisfied that the use to which those funds will be put meets the borrower s requirements and objectives. As indicated in the discussion paper, a lender is not, nor should not be, required to make a moral judgement as to the loan purpose. Equally, it is not the lender s role to make a commercial judgement about the nature and suitability of any investment. At best, the lender should recommend that the borrower obtain appropriate financial or professional advice in relation to any investment. In the case of a refinance, the lender should ensure that the borrower is aware of and has taken into account all of the costs associated with the refinance and is satisfied that the borrower will benefit from the refinance. Again this is not a matter of moral judgement and the benefit to the borrower may not just be financial. The refinance may provide the borrower with better terms and a more flexible facility. 45. What practices and processes do/should responsible lenders have in place in relation to whether a credit agreement would likely meet the borrower s requirements and objectives and can be repaid without substantial hardship following a variation or refinancing? What types of variations do/should such practices apply to? see 44 above 46. Other than complying with disclosure requirements, what information do/should responsible lenders provide to borrowers in relation to the credit agreement during the life of the agreement? For example, should lenders provide certain information to borrowers to enable borrowers to make decisions as to whether to exercise their rights under the agreement? 17

18 Where a loan or an account within a loan reaches or is about to reach a milestone such as coming to the end of a fixed interest rate period or the end of an interest only period lenders invariably advise the borrower and if the borrower has options to select another fixed rate period, or indeed any other options relating to the loan, the lender will advise the borrower of the then applicable options. While it may be appropriate to include a mandatory requirement to provide this information in the Code, in the case of Resimac, this is already done. 47. What practices do/should responsible lenders refrain from during the life of the credit agreement? (For example, should responsible lenders refrain from the practice of holding multiple direct debit forms so that one can be re-submitted if a form is cancelled?) A responsible lender should not refuse to consent to a second mortgage being registered against the property provided the second mortgagee enters into an acceptable deed of priority ceding priority to the first mortgage for the principal sum and a sufficient buffer to enable appropriate and reasonable security to be maintained by the first mortgagee. Such consent is of course subject to the loan not being in default and that the entry into that mortgage will not put the borrower under pressure to default. Depending on the circumstances, it may also be and subject to the lender being satisfied that the entry into the subsequent mortgage will not result in the borrower sustaining substantial hardship in order to repay amounts under both mortgages. Similarly, a responsible lender should not withhold consent to matters affecting the title to the security property provided the matter for which consent is sought does not prejudice or imperil the lender s mortgage. Fees Resimac does not wish to make submissions in relation to fees / default nor in relation to credit repossession 18

19

20