Exposure Draft National Consumer Credit Protection Amendment (Enhancements) Bill Commentary on amendments: Reverse mortgages

Transcription

1 Exposure Draft National Consumer Credit Protection Amendment (Enhancements) Bill 2011 Table A: Main amendments Commentary on amendments: Reverse mortgages Topic Provision Commentary Definition of reverse mortgage 13A Reverse mortgages The definition for reverse mortgages comprises two limbs relating to the timing of repayment and the borrowers age. Both limbs must be met for a credit contract to be a reverse mortgage. The first limb is that full repayment of the debt is not required until: each borrower dies; the dwelling or land is sold; each borrower permanently vacates the home; the credit provider (or associated person) exercises their legal rights under the contract to take possession of the home; a term in the contract ends (such as a fixed term loan); or the borrower reaches a certain age (such as 85 years old). The second limb is that the credit provider has a policy of only entering into the contract with persons aged at least 55 years old. ASIC may also, by a legislative instrument, declare a credit contract to be a reverse mortgage. Such a declaration can only apply prospectively. In regard to the second limb, it may be difficult to prove in civil or criminal proceedings under the

2 Reverse mortgage specific responsible lending conduct Giving projections of equity and other information before providing credit assistance or entering credit contract Credit Act that it is the policy of a lender to only offer their reverse mortgages to people above 55 years old. For example, it may be difficult for a borrower who wishes to enforce the negative equity protection against their lender to prove what the lender s commercial lending policy is. However, it would be relatively easier for the lender to prove since that fact would be within their knowledge. For the purposes of court proceedings, if a plaintiff claims that a credit contract is a reverse mortgage it will be presumed that the second limb is met, unless the credit provider can prove otherwise. This effectively reverses the onus of proof from the plaintiff to the lender. Credit licensees (both lenders and intermediaries such as brokers) will need to conduct additional responsible lending inquiries for applicants of reverse mortgages. This will be in addition to those already required under Chapter 3 of the Credit Act. This obligations will be: using an ASIC approved website to generate projections which show a consumer the effect a reverse mortgage may have on their equity over time and the potential impact of interest rates and house price movements. It will also show the effect on their equity of different types of loan payments (e.g. lump sum vs regular income). the licensee must also give the consumer a printed copy of the projections. This does not apply if the licensee reasonably believes the consumer has been shown the projections and received a copy of them from another person. This will avoid duplication for example, if the lender knows that a consumer has already received a copy of the projections from a broker. tell the consumer certain matters prescribed in the regulations. It is expected these matters will include information about the rights of non-title holding residents, potential effects on pension entitlements and tax. Licensees will only need to notify consumers of these matters and will not be expected to provide advice. giving the consumer a reverse mortgage information statement. as with the projections, licensees will not have to give an Information Statement if they reasonably believe the consumer has already received a statement from another person. Making reverse Licensees who provide, or hold themselves out as providing, credit assistance in relation to reverse

3 Information Statement in other situations Non-title holding resident arrangements mortgage information statement Making reverse mortgage information statement available in other situations 310 After subsection 17(15) of the National Credit Code Provisions for person other than debtor to occupy reverse mortgaged Disclosure if credit contract for reverse mortgage does not protect tenancy of person other mortgages or are a credit provider who offers reverse mortgages must make available to consumers a reverse mortgage information statement in two circumstances. These are: 1. Upon their website (if they have a website); and 2. When the consumer asks for an information statement (and the consumer has given the licensee their contact details) There are two defences provided for a contravention of the second requirement. These are: 1. that the licensee has already, or reasonably believes the consumer has already been given an information statement; or 2. if they are a credit provider, the licensee reasonably believes the consumer would not be eligible for a reverse mortgage from them. If a reverse mortgage contract provides for protections for non-title holding residents, the contract must, at a minimum, allow the debtor at any time to nominate a person who will be allowed to occupy the property under the same rights as the debtor. The debtor may also revoke such a nomination. This requirement only applies if a reverse mortgage contract provides for non-title holding resident protections, and does not limit any other provisions relating to such contractual provisions. Therefore: It does not require credit providers who do not provide for non-title holding resident protections to provide them; and If they choose to provide protections, it does not preclude the credit provider from having additional protections or arrangement (e.g. who is eligible to be nominated by the debtor as a non-title holding resident, etc). If a reverse mortgage contract does not provide for protections for a non-title holding resident, licensees (both credit providers and persons providing credit services) must inform a consumer of this before providing credit services to them or entering into a reverse mortgage contract.

4 Excluded default clauses than Changes to tenancy protection in credit contracts for reverse Records of nominations of persons who occupy reversed mortgaged Provisions that must not be included in credit contract for reverse mortgage It is expected a form will be prescribed under the regulations for this purpose. A purported change to a reverse mortgage contract is void to the extent that it: removes a provision required by 310 (above) varies the ability of a debtor to nominate a non-title holding resident or varies the rights they are provided under the contract. Credit providers must keep records of any nomination or revocation by a debtor of a nomination for a person to occupy the reverse mortgaged property. A credit provider will not be permitted to enter into, or change a reverse mortgage contract to allow them a basis to begin enforcement proceedings for any of the below circumstances: the debtor: failing to inform the credit provider that some else lives in the property, or failing to provide evidence they or a nominated resident occupies the property; leaving the property unoccupied (but only whilst it is still their principal place of residence); failing to pay a cost they are required to pay apart from the contract (e.g. council rates, insurances); a provision which does not make clear what the debtor must do to comply with the obligation (i.e to prevent ambiguous clauses); cross default (defaulting on another credit contract with the same lender); or an act or omission by the debtor prescribed by regulations.

5 Requirement for independent legal advice Mandatory default procedure Statutory negative equity protection (both before and after Independent legal advice before entering contract 350 and 355 At the end of subsection 88(1) and 88(2) of the National Credit Debtor may terminate credit contract for reverse mortgage if liability exceeds value of reverse mortgaged Recovery of debt exceeding debtor s equity in reverse mortgaged property that is sold The regulations may make arrangements regarding the credit provider entering into a reverse mortgage without the debtor having received independent legal advice. Before commencing enforcement proceedings, a credit provider must contact (or make reasonable attempts to contact) the debtor (or their lawyer, or a person who has a power of attorney over the debtors financial affairs). This contact must occur between the when they issue a default notice and the expiry of the default notice (i.e. 30 days from the date of the notice). The contact must be in person or by telephone and should confirm that the debtor received the default notice and inform term of the consequences of failing to remedy the default. If a debtor voluntarily pays out a reverse mortgage contract and the loan amount exceeds the market value of the property (calculated in accordance with the regulations), the debtor may terminate the contract if the amount they repay is at least equal to the property s market value. Such a termination would discharge all the debtor s liabilities and the mortgage over their property. After a property is sold, a credit provider must not recover any amount from the debtor which is above the proceeds of the sale (reduced by any amount prescribed by the regulations). This requirement does not apply if: 1. Sale is by the debtor and the proceeds are less than the property s market value 2. The property s market value was reduce by deliberate damage by the debtor or a person resident in the property with the debtor s consent; 3. Fraud or misrepresentation by the debtor relating to the reverse mortgage before, when or after

6 they enter into the contract; or 4. Circumstances prescribed by the regulation exist. If one of the above conditions applies, the credit provider can only recover from the debtor the amount they would have been entitled to if the debtors conduct had not occurred, rather than the full amount of negative equity under the loan. To begin these enforcement proceedings the credit provider must: Obtain a valuation of the property in accordance with the regulations; Provide a section 88 default notice which states: that the sale did not extinguish the debtor s liability The amount that they will be seeking from the debtor above the amount of the proceeds of sale; and The reason why they will be requiring the debtor to pay negative equity (must be for one of the four reasons above). If the credit provider is aware the debtor has a practice lawyer acting for them, the credit provider must also provide the lawyer with the section above section 88 notice. Table B: Minor amendments Topic Provision Commentary Definition of reverse mortgage 110 Amendment to section 5(1) 150 Subsection 204(1) of Provides that the term reverse mortgage has the same definition as in the National Credit Code

7 Definition of engage in conduct Definition of practising lawyer Definition of reverse mortgaged property the National Credit Code 120 Amendment to subsection 204(1) of the National Credit Code 130 Subsection 204(1) of the National Credit Code 155 Subsection 204(1) of the National Credit Code Provides a definition for the term engage in conduct. This will include doing or omitting from doing an act. Provides a definition of practicing lawyer. This means a person who is admitted to the legal profession of a federal court or State or Territory Supreme Court and holds a practicing certificate. This definition is inserted for the purposes of provisions which require lenders to notify debtors of certain matters. In the event that the lender cannot notify the borrower (e.g. the borrower has died but the loan is still on foot with a nominated resident occupying the property, or the debtor does not have mental capacity) they will be able to notify the debtors practicing lawyer (if known). This definition of practising lawyer is narrower than the Credit Act definition of lawyer which does not require a person to hold a practising certificate. Provides a definition of reverse mortgaged property. This means a dwelling or land that has been mortgaged to secure a debtors obligation under a reverse mortgage. A mortgage over land would include over the debtors house. A mortgage over a dwelling may include a residence which is not attached to land owned by the borrower such as a unit or apartment. Allowing early repayments 330 At the end of subsection 26(5) of the National Credit Code This is a consequential amendment required which permits a debtor to repay a reverse mortgage early without incurring negative equity. Currently section 26 of the Code provides that a credit provider must accept any payment under a credit contract before it is due, unless the contract prohibits early repayment. Therefore, a credit contract is permitted to prohibit early repayment.

8 Periods for statements of account Statement of pay out figure Excluded default clauses cannot be a basis for a default notice Non-title holding protection provisions are a key requirement 340 and 342 After paragraph 33(2)(a) and 33(2)(b) of the National Credit Code 347 At the end of section 83 of the National Credit Code 360 After subsection 88(7) of the National Credit Code 390 and 391 After paragraph 111(1)(h) and 111(2)(e) of the National Credit Code This amendment provides that s 26 does not apply to early repayments made Provides that the maximum period for a statement of account for a reverse mortgage contract (continuing or non-continuing) is 12 months. This is a consequential amendment required which permits a debtor to repay a reverse mortgage early without incurring negative equity. Currently, section 83 requires accredit provider to give the debtor a written statement of the amount required to pay out the credit contract. This amendment provides that this requirement does not require a credit provider to determine a payout figure that would apply This is a consequential amendment required which excludes certain terms from being a default term in a reverse mortgage contract. If a credit provider issue a default not for an excluded default term that notice is not a default notice. If a reverse mortgage contract makes provision for a person other than the debtor to occupy the reverse mortgaged property, the provisions required to be contained in the contract document under the new section 17(15A) are a key requirement for the purposes of section 111 of the Code. Exposure Draft National Consumer Credit Protection Amendment Regulations 2011 (No. ) Topic Provision Commentary

9 Circumstances in which a credit contract is taken to be unsuitable for a consumer contracts for consumers aged at least 55. Regulation 27 It will be presumed that a credit contract will be unsuitable for a borrower under prescribed circumstances should be created. The circumstances should be: that the credit contract is not a reverse mortgage; the borrower is at least 55 year of age and is not in full-time employment when the credit contract will be entered into ; the amount owing under the contract can only be repaid by selling the borrower s principal place of residence; and if reasonable inquiries about the consumer s requirements and objectives establish that the consumer would use the credit provided under the contract predominantly to pay for regular or recurring household expenses, or to pay for expenses relating to the health of the consumer, or another resident of the property aged over 55 years old. This presumption should operate unless a licensee is able to establish: in the case of a credit provider the credit contract they enter into with the borrower was not unsuitable at the time they conducted their assessment under section 128(c) of the Credit Act; or In the case of a credit service provider the credit contract they provided a credit service in relation to was not unsuitable at the time they conducted their preliminary assessment under section 123(c) of the Credit Act.