on the Credit Contracts and Consumer Finance Amendment Bill Exposure Draft

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1 Submissions on the Credit Contracts and Consumer Finance Amendment Bill Exposure Draft Submitter: Jonathan Flaws, LLB (Hons) M.Jur Background I am a partner of Sanderson Weir, Auckland, a law firm that specializes in providing advice to banks and non bank mortgage lenders. I am also the executive director of First Mortgage Services, a corporate provider of mortgage document processing and settlement services in both Australia and New Zealand. The Australian arm of FMS holds an ASIC credit license to enable it to engage in credit activities in Australia. These comprise acting as a mortgage servicer for lenders of reverse mortgages. As a result, I have a close understanding of the operation of the credit laws in both countries and have seen, first hand, the implementation of the responsible lending regime under the Australian legislation. The role of independent legal advice in mortgage lending These submissions are made with respect to mortgages of residential property by consumers, which is my area of practice, and does not extend to other lending areas, such as unsecured consumer lending. While the lending regime in Australia and New Zealand may appear similar, there are some significant differences and in order to implement an effective responsible lending regime in New Zealand, it is important to be aware of these differences and ensure that requirements adopted by Australian to cover jurisdiction specific specific concerns are reconfigured appropriately New Zealand. The most significant area of difference is that virtually every mortgage borrower in New Zealand will instruct a lawyer to act for him/her when borrowing even when refinancing. In Australia virtually every borrower refinancing does not instruct a lawyer and receives the loan and mortgage documents direct from the lender or its settlement agent. The nature of the land registration system in New Zealand preserves the role of lawyers only lawyers and conveyancers are able to sign and certify a mortgage for registration. This means that in the majority of cases here, a borrower will call in and visit a lawyer before signing. For this reason, the Australian responsible lending regulation is predicated on there not being any independent third party between the borrower and the lender and as a result needs to be more prescriptive. The presence of lawyers in mortgage transactions means, in my view, that while it is still appropriate to provide responsible lending guidelines to ensure lenders consider more closely the interests of their borrowers, the presence of independent legal advice provides a second line of defense against unscrupulous mortgage lenders. A good example of the role of lawyers in lending transactions can be found in the area of reverse mortgages. My firm acts for reverse mortgage lenders in both New Zealand and Australia. In New Zealand, before the first mortgage was written, I assisted the NZ Law Society to publish a set of guidelines for lawyers to assist them to advise their clients when taking out a reverse mortgage. My lender clients make it mandatory for their borrowers to obtain comprehensive legal advice before settlement.

2 In contrast, Australian law societies have not adopted a similar stance and the standard of legal advice from lawyers advising reverse mortgage borrowers is more varied. While it is not possible for legislation to guarantee the competency of lawyers, the law, as outlined in the case of GE Custodians v Bartle, appears to benefit a lender regardless of the lawyer s competency provided a lawyer is instructed by the borrower. The proposed changes to section 124 require a Court to have regard to whether, before entering into the agreement, the borrower obtained legal or other professional advice. The NZLS is developing a process by which lawyers may be accredited as specialists in areas of law. It may be appropriate to encourage this by providing that the Court can also have regard as to whether or not the lawyer or professional was appropriately qualified to give the advice sought. Borrowers should always be entitled to choose not to instruct a lawyer or a conveyancer or to provide the professional with a limited brief to only act in respect of certain elements of the transaction such as settlement and registration. In this case, the lender will not have the benefit of being able to ask the Court to give weight to the intervention of independent legal or professional advice. Responsible Lending 1. How well do you think the responsible lending principles in the Bill (new section 9B) reflect the principles which should apply? In general, the responsible lending principles appropriately reflect the principles that should apply subject to the following: In section 2(a) reference is made to reasonable care and skill but for what purpose? This should be tagged to direct the care and skill in applying the responsible lending principles There is no definition of substantial hardship. In some cases, a borrower may be aware that there is a risk of substantial hardship but might also be prepared to accept that risk. For example, a person returning to the country may not be able to obtain a loan other than from a non bank lender for a limited term. The borrower understands that there is a refinancing risk but is prepared to take this as he/she expects their financial position and ability to borrow to change over time. The substantial hardship should be limited to repayments during the term and should not apply to any final repayment provided the borrower has taken independent advice and is aware of the risk. Section 2(f)(ii) requires the lender to form the view that the agreement is otherwise appropriate for the borrower. In my view this is asking more of the lender than is reasonable. The Australian provision refers to the lender making an assessment that the loan is not unsuitable. At first blush this is a double negative and seems a rather silly thing to ask a lender to assess. However, suitable / not unsuitable or appropriate / not inappropriate are two ends of he spectrum. In reality it is hard for a lender to be certain at the positive end whereas it is easier to be certain at the negative end of the spectrum. To be able to say that it is appropriate (or suitable) assumes that the lender has all of the knowledge and understanding of the borrower s requirements and objectives. The lender will only ever be able to have some of this for it is unlikely borrower s will tell them everything. Therefore a lender can probably never say with certainty that this loan is appropriate.

3 In contracts, a lender will generally have sufficient information to be able to determine that the loan is or is not inappropriate (or not unsuitable). Just how appropriate or suitable it will be is very subjective and in the hands or understanding of the borrower only. I would recommend that the language be altered in line with the Australian expression and require a lender only to determine that the loan is not unsuitable or not inappropriate. We can learn to live with the apparent double negative.. 2. Should any additional principles be included in (or removed from) the principles of responsible lending? The principles are predicated on the borrower being legally competent and able to understand the information being put forward. There is no onus on the lender to take reasonable steps to ensure that the borrower is capable making an informed decision. While I don t advocate requiring that lenders go out of their way to ensure borrowers are legally competent and capable of making a decision, it would be appropriate to require a lender to take reasonable steps to ensure that borrowers are sufficiently qualified to make a decision. For example, if a person is acting on behalf of the borrower such as a power of attorney the lender should be under some obligation to verify that the person named as borrower and entering into the covenants to repay, is both aware of and consents to the application. This would obviously not apply to a person holding an enduring power of attorney where the borrowing is for the benefit of the donor. A lender should not have to go to great lengths to establish competency of the borrower and should be able to rely on information provided but it should be a principle that the lender be satisfied on reasonable grounds that the borrower is legally competent to enter into the transaction and is capable of understanding it. 3. Should a responsible lending code be developed by the Minister of Consumer Affairs in consultation with affected people, or by a code committee as with the Code of Professional Conduct for financial advisors? My preference would be for a code committee of appropriately qualified persons representing, the NZBA, NZLS and consumer groups. 4. Should a responsible lending code be developed by the Minister of Consumer Affairs in consultation with affected people, or by a code committee as with the Code of Professional Conduct for financial advisors? Elaboration and guidance is preferable to prescriptive. This is because what is prescriptive in one circumstance may be inappropriate in another. I would prefer to see guidance applied across a variety of lending products rather than simply have one size fit all. For example, in the case of reverse mortgages, reasonable enquiries about a person s financial circumstance may be limited to ensuring they are able to continue to pay their rates and insurance premiums and keep the property maintained. A full investigation of their financial circumstances may not be required. New Purpose Clause

4 5. Do you agree with the new CCCFA purpose clause emphasising consumer protection and the market behaviours stated in new section 3(2)(a) and (b)? Yes 6. Should any additional purposes to those in new sections 3(1) and 3(2) be included (or be removed) in order to ensure that the CCCFA is interpreted in a way that meets its objectives? It is becoming more and more difficult for young people to purchase their own home. An unintended consequence of emphasising the protection of consumer interests may be to drive lenders to make it more difficult for borrowers to meet their lending requirements. This in turn would restrict the supply of credit. It would be appropriate to balance 3(1) with a proviso that acknowledges that in achieving the purpose, the Act should not unduly restrict the ability of properly informed consumers to obtain credit. Disclosure 7. Looking at amended sections 17, 22 and 23, is there any justification for consumer credit contract disclosure being made after the contract is made? No. If a lender cannot provide the information prior to the contract being entered into then there is cause for concern. With respect to disclosure, I would welcome changing the disclosure requirements with respect to the initial unpaid balance so that it is clear that this is the balance as at the end of the day on which the first advance is made. It makes sense for the borrower to be told what is owing at the end of day one after all of the fees and costs have been deducted. Many lenders including many of the major banks, read the disclosure requirements to allow then to show the initial unpaid balance as zero on the grounds that the loan will not be advanced until after the disclosure is signed. Therefore on the date shown in the disclosure document as the effective date of the statement, there is no unpaid balance. This is of no help to the consumer. What I would prefer is for the initial unpaid balance to be as at the date of first advance and assuming that the information available on the date of preparation of the disclosure statement has not changed. This allows lee way for an interest rate that could change between signing and settlement. 8. Looking at amended section 27, do you envisage any unintended consequences that from extending the cooling off period from 3 working days to 5 working days? Yes. In the case of mortgages, I have never seen this provision used, but I can envisage a situation where a borrower switches to a new lender and the old lender continues to put pressure on to change back. With only a 3 day cooling off period this is hard to achieve, but with 5 it may become easier. My preference would be for the cooling off periods to apply differently to different types of consumer contracts. It could stay at 3 for mortgages of residential property but be put out to 5 for other types of credit. Publication of Standard Terms and Costs of Borrowing

5 9. Looking at new sections 9H and 9I: a) Will making standard terms and costs of borrowing available at creditors premises and on their websites be sufficient to improve transparency and improve competition? The reality is that very few borrowers will read and absorb standard terms and conditions before making a decision to borrow. Therefore publication of standard terms and conditions will not improve transparency and improve competition. What would be of much more use would be to provide a set of credit questions to lenders and ask them to answer the questions in plain English and publish the answers on the web site and make available at premises. This could become confusing if there are multiple loan products provided. However this is a good reason to keep the questions simple and limited in the same way that the key information in Schedule 1. It could also be a requirement that information is given in respect of indicative products of indicative amounts. This would make more sense that a full set of terms and conditions that are unlikely to be read by many. b) To what extent will these provisions promote shopping around by borrowers and effective competition among lenders? More and more borrowers are shopping around on the internet and the ability to compare standard indicative loans between lenders will enable shopping around and increase effective competition. Perhaps the best question to include an answer would be are these terms fixed or negotiable. Fees 10. Looking at the amendments to sections 40, 41, 43, 44, 45, 51, 52 and new sections 44A and 52A: Section 40 default fee comment There is often confusion over default fees and what is reasonable. There are generally two default types a rate that applies to the amount in default for the period in default or a higher lower rate applying to the whole loan amount until the default is rectified. The application of a default charge to the amount in default for the period it is in default is fair and easy to understand particularly where there are principal and interest instilments. The Higher rate/lower rate provisions, however, was common for interest only loans where there was a grace period for correcting a default. this was included in the Credit Contracts Act In some circumstances, this may be a fairer and more appropriate mechanism for default. I would like to see two clear alternatives. The default rate on the amount in default for the period in default or the increased rate on the whole loan amount. You should not be able to have both, or to even choose which one to apply. I would also suggest that the higher rate lower rate should be limited to applying only to interest only loans and then to include a statutory grace period of either 7 or 14 days.

6 a) To what extent do the amendments and additions adequately describe the process by which an unreasonable fee may be altered? This appears to set out the process adequately. b) Do these provisions meet the objective of making the law clearer about what an unreasonable fee might be? There will always be a difficulty in calculating the costs incurred by a creditor in carrying out an activity. Each lender will have a different method of calculation. I m not convinced the changes make it any easier nor am I convinced that any changes could achieve this. The only way to achieve certainty would be to allow creditors to charge a fee based on a % of the loan amount and regulate the % that would be deemed to be reasonable. This is contrary to the stated intention of the Commission which is to limit fees to costs actually incurred, but there is an element of fairness in applying fees based on loan amount. The argument being that those who can afford to borrow more should be better placed to pay more. in reverse, a low amount borrow is less likely to be able to afford the same level of fees as a high amount borrower. c) Do the provisions leave open any avenue to charge a fee which is unreasonable? I don t believe so. Hardship 11. Looking at the amendments to sections 57 and 58: a) Will the new unforeseen hardship provisions improve access to hardship protections for those in genuine need? Yes b) Are additional changes necessary to protect consumers? No c) Are additional changes necessary to protect lenders from abuse of the provisions? No Unregistered Lenders 12. Looking at the new section 99A, are additional provisions needed to ensure unregistered lenders are not operating in the marketplace or to protect consumers from unregistered lenders? No. The prohibition of recovery for unregistered lenders should be sufficient. Oppressive or Unjust Contracts 13. Do you think the amended Guidelines for reopening credit contracts, consumer leases and buyback transactions will improve the protection of consumers from oppressive credit contracts (amended section 124)?

7 Yes. The more guidance that can be given on what constitutes oppressive behavior, the easier it becomes for both lenders and borrowers to determine if any action or proposed action is likely to be oppressive. It is more beneficial to borrowers if countering oppression is undertaken proactively i.e. by the lender being aware that its proposed conduct is oppressive and therefore not engaging in it than reactive requiring the borrower to seek the Court s assistance to balance out oppressive conduct already undertaken. 14. As an alternative, should we follow the approach to the re-opening jurisdiction in the Australian National Consumer Credit Protection Act 2009, and refer to "unjust" credit contracts rather than "oppressive" credit contracts? No. The difficulty with the use of the word unjust is that it introduces a more emotive and subjective test into financial transactions and there is a natural bias in favour of the consumer. In many cases, an action may be unjust in its outcome notwithstanding that the borrower was very well aware of the potential for the action to occur and entered into the transaction assuming the risk that it would not. For example, when a person gives a guarantee and does not receive any benefit from giving it, you could argue that it is always unjust to enforce the guarantee. Disclosure of Statement of Rights 15. Do you think the amendments to the CCCFA Schedule 1 - Key information concerning consumer credit contract - will sufficiently improve disclosure or should additional information be provided in disclosure documents? Yes. The difficulty with including too much in disclosure documents is that borrowers will not read anything that is too extensive or will just gloss over it. Transitional Provisions 16. Are all the situations where the new law should have an effect on existing contracts covered in the Bill? Yes After Acquired Consumer Property 17. In your experience, will the amendment of section 44 of the Personal Property Securities Act 1999 prevent the practise of "drag-net" securities over all personal property? Yes.