A suitable loan? Credit Law Compliance Summit Karen Cox – Consumer Credit Legal Centre (NSW) Inc April 2010
Consumer Credit Legal Centre (NSW) Referrals to other face-to-face financial counselling services Financial Counsellors and solicitors available for advice and casework assistance, co-operative approach to both Casework including negotiations, written legal advice and representation in EDR schemes, courts and tribunals in credit, debt, banking & insurance Web-based resources for the public and other caseworkersEducation resources, presentations and mediaAdvocacy and reform
Credit and Debt Hotline 1800 808 488 Financial Counsellors line Insurance Law Service (National) 1300 663 464 Mortgage Hardship Service – casework, intake via Credit and Debt Hotline Over 15,000 calls last financial year About 4900 referrals to financial counsellors in the last financial year
Lets start somewhere obvious & comfortable........ A couple with large and growing family, sole source of income Centrelink payments, in serious default on their home loan. They answer an advertisement placed by a broker. Explained whole situation honestly. Put in loan with higher repayments than the loan they were in default on. Set up costs almost $30,000, including $15,000 in brokerage.
Credit Card Lending Problems Limit increases on the basis of behavioural scoring without touching base with the customer about their financial situation Limits are too big! Likely reason – assessment of capacity to pay based on ability to meet the minimum repayment Limit increases to borrowers carrying debt month to month
Credit limit available by minimum repayment percentage at repayments of $100 per month Minimum Repayment percentage Credit limit 2%$5,000 2.5%$4,000 3%$3,330 3.5%$2,850 4%$2,500
Time taken to repay debt at $100 per month and interest paid Interest Rate10.8%14.3%20.7%24.5%29.5% Credit Limit Time To pay Int. paid Time To pay Int. paid Time To pay Int. paid Time To pay Int. paid Time To pay Int. paid 2,5002y5m3452y7m4862y10m8003y1m10343y5m1425 2,8502y10m4583y0m6533y5m1,1073y8m14654y3m2119 3,3303y5m6463y8m9384y3m16654y10m23085y11m3690 4,0004y3m9804y8m14665y10m28497y1m440014y1m12813 5,0005y8m1,6736y6m2,6509y9m6,606Indef.Infin.Indef.Infin. Repayment will exceed 4yrs at $100 per month Repayment will exceed 5yrs at $100 per month Interest paid will exceed credit limit (amount borrowed) Debt will never be repaid at $100 per month
ASIC - RG 209 Example 5: Capacity to repay in relation to credit cards For credit cards, there may be some risks associated with assessing a consumer as having the capacity to repay the contract based solely on being able to meet the minimum monthly repayments. If, by paying only the minimum monthly repayments, the consumer is likely to take a long period of time to repay the maximum limit on the card, credit licensees should consider whether this would meet the consumers requirements and objectives (i.e. taking a number of years to repay a relatively small debt, and paying high amounts of interest on this debt).
Housing Market Problems now overwhelmingly hardship A few years ago it was all predatory and irresponsible lending, with ample complaints about the role of brokers – Predatory, intentional exploitation of desperation (equity stripping) – Building/development scams targeting emerging migrant communities – Low doc/no doc lending, often facilitated by brokers/introducers – Relaxation of standards re income stability, repayment to income ratios and valuations – Risk based pricing – Frequent refinancing of consumption debt
Disguising inability to pay Credit card where the consumer can meet the minimum repayments but cannot repay the debt Home loan where there are interest only payments for a specified period followed by principal and interest payments that the consumer cannot afford, Home loan where there are interest only payments for a period, or a repayment holiday (and interest is essentially capitalised) and, the entire loan is repayable as a lump sum at the end of the term (the term may be as short as 1-5 years), Large balloon payment at the end of a car loan or lease. Remember the presumption against the sale of the home being required to pay the loan.
Substantial Hardship Emphasis on requirements and objectives – you must ask. However, in our experience some consumers are very poor at estimating their own expenses. Use both recognised benchmarks and reasonable enquiries.
I can afford it, but......... Interest free promotion to buy $1,000 fridge, credit limit granted $7,000 Borrowers goal is to pay off home loan faster – sold a line of credit with a linked credit card when a principal and interest loan with a redraw facility would have served purpose more effectively Ordinary home purchase structured as an on demand facility A consumer lease when the consumer intends to own the goods
Proceed with caution Debt consolidation Lines of credit secured over the home (associated with misleading mortgage reduction advice, used to disguise affordability problems which dont emerge until credit limit reached, should not be used as reverse mortgages, in general may not meet consumers requirements and objectives if their intention is to pay off their home and they dont!) Reverse mortgages Guarantors and co-borrowers – perennial issue, new defences
Back to predatory lending Possible challenges in using law to respond: Lenders who claim they do not do regulated lending will not be licensed or in EDR The changes to the business/investment purpose declaration provisions are not yet tested No capacity to challenge broker fees as excessive (as in current legislation in some States and planned in States uniform National Finance Broking Bill) More elaborate fraud and documentation of creative requirements and objectives likely No interest rate cap
High cost lending Payday lending Cost of loans may be justified by higher comparative cost of lending and higher risk Problem is that impact on consumers is to exacerbate disadvantage and create a debt trap Other measures such as capping fees separately and preventing repeated rollovers are almost impossible to enforce Without any cap, there is no effective competition and prices will not stop at what can be justified
High cost lending Generally High cost loans are not confined to the small, personal loan market – also prevalent in equity stripping scenarios (e.g. 10% per month and 15% on default secured against home). As cost increases, so does the likelihood of unjust/unconscionable conduct and fraud. Enforcement completely inefficient if done on a case-by-case basis. Price is the one thing that it is hard to fabricate – if you want to charge it, it needs to be written in the contract.