Chapter 3


Chapter 3

The bill's other provisions: hardship variations, reverse mortgages, remedies for 'unfair or dishonest conduct' and consumer leases

3.1        As chapter 1 noted, in addition to the 'payday loan' provisions, the Enhancements Bill also has provisions relating to:

  • hardship variations to assist borrowers to vary repayments under a credit contract in circumstances of financial hardship;
  • reverse mortgages with provisions to assist borrowers to understand
    the implications of reverse mortgages and changes to the acceptable terms and conditions that may apply to reverse mortgages;
  • remedies for 'unfair or dishonest conduct' by creditors in relation to credit contracts, consumer leases and mortgages; and
  • consumer leases and measures to align these leases with regulations applying to credit contracts.

This chapter notes the evidence the committee has received on these matters and presents a number of recommendations to strengthen their operation.[1]

Hardship variations

3.2        Currently, the National Credit Code (clause 72) provides for borrowers to seek variations of credit contracts less than $500 000 in circumstances of hardship such as 'illness, unemployment or other reasonable cause'. The variation may take the form of an extended contract period with reduced payments, postponing for a specified period the dates on which payments are due, or extending the period of the contract and postponing for a specified period the dates on which payments are due.

3.3        The Enhancements Bill would extend the circumstances in which hardship variations may be sought. Specifically, the bill would:

  • enable all borrowers to apply for hardship variations, regardless of the contract value;
  • allow that the hardship notice may be made orally or in writing;
  • not impose limits to the form of hardship variation that the borrower may request;
  • exempt the borrower from stating the reasons why he or she is unable to meet the repayment obligations;[2]
  • exempt the borrower from demonstrating that he or she could meet the changed repayment obligations; and
  • require the credit provider—within 21 days of receiving the request for variation—to notify the borrower that they are prepared to negotiate a contract variation or are refusing the request. If the provider is refusing the request, he or she must provide reasons and details of an approved dispute resolution scheme.

3.4        Anglicare Victoria and Good Shepherd Youth and Family Services supported these provisions to protect debtors in circumstances of hardship and to make it easier to apply for hardship variations.[3] The ANZ noted its support for the government's intention to 'make it as easy as possible for customers to apply for hardship assistance'.[4]

3.5        However, various lending organisations expressed concern with aspects of how these provisions would operate. The Credit Ombudsman Service argued that it would be 'extremely useful, if not critical' to retain a requirement that the borrower must demonstrate that he or she can meet the changed repayment obligations.[5] GE Capital argued along similar lines.[6]

3.6        Abacus[7] and the Australian Bankers' Association (ABA) argued that the 21 day timeframe should not commence before the credit provider receives sufficient information to assess the application.[8] ANZ also supported this proposal noting that the trigger of a 21 day response time commencing immediately upon verbal notification from a customer rather than once sufficient information has been provided:

...is of particular concern in the context of a joint mortgage and where there has been a breakdown in the relationship between the borrowers...In the case of a joint loan, the refusal of one party to provide information can impede our ability to assess both or one of the borrowers for hardship assistance.[9]

3.7        The committee believes that the bill should require borrowers to provide the necessary documentation regarding the kind of hardship variation they are seeking and their capacity to repay.

Recommendation 3.1

3.8        The committee recommends that clause 72 of the National Credit Code be amended to require borrowers to provide reasonable information to assist credit providers to assess their application and to give credit providers reasonable opportunity to seek this information from the borrower where it is not initially provided.

Verbal notification

3.9        Various industry submissions expressed concern that the bill's permission of a verbal notice (rather than a written application) would lead to misunderstandings between the credit provider and the borrower. The ABA, notably, put the following argument to the PJC:

We understand that the oral or in writing hardship note a customer can give is to reduce barriers to access to the hardship teams that our members have. But if someone rings up and is unclear about what it is they are actually seeking then the whole process of getting a better understanding of it is very awkward. It could be just a chance comment in a branch or it could be a chance comment over a telephone that someone does not recognise is someone saying, 'I don't think I'm going to meet my obligations under the credit contract.' If that is not acted upon, inadvertently that triggers a 21-day notice requirement, with a criminal penalty at the end of it if you do not comply...[T]here are problems and we understand the problems with an oral-only notice. Our preference would be for something in writing. In our chart that we have provided to the committee we have suggested that there be some formality around the provision of information by the customer and that the clock should not start ticking until such time as a reasonable level of information has been obtained from the customer. That works well for both parties, bank and customer.[10]

3.10      Both the ABA and the Australian Finance Conference argued that the option for hardship variations to be made verbally should be removed from the bill. The committee agrees: to avoid misunderstanding, this provision should be removed from the bill to ensure that applications are made in writing.[11] In addition, the government should ensure that there is publicly available information to advise borrowers of their rights and obligations in relation to hardship variations.

Recommendation 3.2

3.11      The committee recommends that 'orally' be removed from subclause 72(1) to require hardship applications to be made in writing.

Recommendation 3.3

3.12      The committee recommends that the government work with industry stakeholders to develop a plain English, user-friendly information pack about borrowers' rights and obligations in relation to hardship variations. The government and industry should consider including a link to the information on the MoneySmart website about financial counselling assistance. Industry should be required to provide a copy of this information pack on their websites and at customer service centres.

Reverse mortgages

3.13      A reverse mortgage is a facility enabling a home owner to take equity out of their home either as a regular ongoing cash payment or a lump sum, or a combination of both. It is a way that home owners can access funds for their retirement and without a credit check given that the borrower does not need to make any payments. The home must be sold to repay the mortgage when the borrower dies.[12]

3.14      Currently, reverse mortgages are regulated under the NCCP Act and subject to the same provisions as all other credit contracts. The Redfern Legal Centre noted in its submission to this inquiry that there are no additional responsible lending conduct obligations or requirements in relation to reverse mortgages.[13] The Centre also observed that there are no disclosure requirements specific to reverse mortgages nor any maximum limits on a borrower's liability in relation to a debt.[14]

3.15      The bill proposes a number of changes to reverse mortgages:

  • introduce a 'no negative equity guarantee' to prohibit credit providers from requiring or accepting loan repayments exceeding the market value of the property (subject to certain exceptions);
  • require borrowers to receive legal advice before entering into a reverse mortgage contract;
  • require credit providers to disclose the way the reverse mortgage would apply to non-title holding occupants;
  • require credit providers to attempt to contact borrowers in person where the reverse mortgage is in default; and
  • exclude the following circumstances from constituting default under the loan:
    • the borrower failing to inform the credit provider that another person occupies the property;
    • the borrower failing to provide the credit provider evidence of who lives at the property;
    • the borrower leaving the property unoccupied while the property was the borrower's principal place of residence;
    • the borrower failing to pay a cost to a person other than the credit provider (for example, rates);
    • the borrower failing to comply with a provision of the credit contract, if the credit contract is unclear about what is required; and
    • the borrower breaching another credit contract with the credit provider.

3.16      In addition, the bill would introduce a requirement that credit providers give borrowers: an equity projection calculated through an ASIC-approved website;
a reverse mortgage information statement; and a notification of additional information to assist the borrower whether or not to enter into a reverse mortgage contract.

3.17      The PJC report raised four issues of concern relating to the bill's provisions on reverse mortgages:

  • the obligation to provide equity projections;
  • the circumstances constituting default;
  • repayments; and
  • the definition of reverse mortgages.

The obligation to provide equity projections

3.18      Consumer advocates and industry representatives were broadly supportive of these changes. There were, however, some concerns with technical aspects of the bill's provisions on reverse mortgages. SEQUAL and Australian Seniors Finance raised concerns in their submissions to the PJC that a 'face to face' meeting to show borrowers an equity projection may not always be practical.[15]

3.19      The committee believes that it is important that there are separate regulations governing reverse mortgages. This noted, the committee agrees with the PJC that there should be some flexibility in the method of providing projections. The key is that the credit provider must ensure that the borrower receives and understands the projection before the reverse mortgage contract is entered into.

Recommendation 3.4

3.20      The committee recommends that clause 133DB be amended such that the credit provider is not restricted in the method of providing projections. The clause should require credit providers to ensure that a potential borrower receives and understands the projections before entering into a reverse mortgage contract.

Circumstances constituting default

3.21      SEQUAL and ASF also expressed concern with subclause 18(3) of the bill which excludes certain circumstances for the factors that constitute default under a reverse mortgage. They noted that as the bill is drafted, the following circumstances would not constitute default:

  • failure on the part of the borrower to inform the credit provider of changes in occupancy;
  • failure by the borrower to pay costs to third parties (such as rates); and
  • the property being left unoccupied.

3.22      The ASF argued that failure to notify the lender of changes to occupancy means that a client might not reside in the home for years, raising a negative equity issue for the provider.[16] Similarly, SEQUAL noted that removing the requirement of borrowers to inform lenders that they no longer occupy the property is 'in contradiction to the essence of the trigger for repayment of Reverse Mortgages'.[17]

3.23      SEQUAL recommended that to address these concerns, the exception for failure to meet third-party costs such as rates could be 'limited to a reasonable period of time of rate non-repayments'. Further, it suggested that the clause be amended 'so that default only occurs if the property is left vacant without the lender's approval for a reasonable period of time provided that at all times that period of vacancy does not otherwise cause a fault (e.g. Valid property insurance cover etc.)'.[18] The committee agrees that clause 18A of the bill should be clarified to provide protection for credit providers.

Recommendation 3.5

3.24      The committee recommends that government consult with industry to ensure that clause 18A only excludes matters that are of a minor nature and that do not pose a measurable risk to the credit provider's interests.

Repayments

3.25      Clause 86A of the bill would allow borrowers to end the reverse mortgage at any time by paying the market value of the property. Some submitters noted that this provision could lead to borrowers 'playing the market' to avoid repaying the entire amount owing. SEQUAL advocated for safeguards to be introduced to mitigate the risk that borrowers would 'play the field' to avoid repaying the entire amount owing.[19]

3.26       The committee agrees that it is important that safeguards are in place to ensure that the 'no negative equity guarantee' does not provide the opportunity for borrowers to 'play the field'.

Recommendation 3.6

3.27      The committee recommends that Subdivision B, Division 1, Schedule 2 be amended to ensure that sales, particularly between related parties, stand the market test of fair market value.

Clarifying the definition of reverse mortgages

3.28      The other issue relating to the bill's reverse mortgage provisions is the bill's definition of a reverse mortgage. The Australian Banker's Association expressed concern that the definition would encompass forms of lending that are not intended to operate as reverse mortgages, including overdrafts and lines of credit. The committee endorses the following recommendation made by the PJC.

Recommendation 3.7

3.29      The committee recommends that the definition of reverse mortgages at item 2 of Schedule 2 be amended to clearly exclude other forms of credit arrangements that provide the option of interest only repayments.

Remedies for unfair or dishonest conduct

3.30      Part 2, Schedule 1 of the bill introduces a new category of conduct for which consumers may seek civil remedies: 'unfair or dishonest conduct by credit providers' (clause 180A). This conduct is based on the circumstances of the consumer credit transaction, and where one or more of the following factors are at play, the court must consider it likely that the conduct was unfair or dishonest:

  • the consumer was at a special disadvantage;
  • the consumer was a member of a class of persons whose members are more likely to be at a special disadvantage;
  • a reasonable person would consider that the conduct was directed at the class of persons more likely to be at a special disadvantage and of which the consumer was a member;
  • the consumer was unable, or considered themself to be unable, to enter into
    a credit contract, mortgage or consumer lease; or
  • the terms of the contract were less favourable than the consumer could have obtained from another provider.

3.31      In terms of the credit provider, the relevant circumstances are:

  • whether the credit provider could determine, or significantly influence the contract terms;
  • whether the credit provider's conduct involved a technique that should not
    in good conscience have been used or manipulated the consumer.

3.32      Various submitters supported the introduction of remedies for 'unfair and dishonest conduct' by credit providers, including Aussie[20], the Consumer Action Law Centre[21], the Consumer Credit Legal Centre (NSW) Inc.[22] and Good Shepherd Youth and Family Services[23].

3.33      The Consumer Action Law Centre, for example, argued that these provisions may give greater protection for consumers who may find it difficult to prove unconscionability under the Australian Securities and Investments Act 2001. However, the Centre did recommend that clause 180A should be amended to focus on the consumer's 'special disadvantage' and should be replaced with the broader term 'disadvantage'. [24] Good Shepherd Youth and Family Services also proposed amending this requirement of 'special disadvantage', proposing instead that the court establish that the dishonest conduct 'led to the taking of the financial product'.[25] In its submission, the ANZ commented that any finding of unfairness or dishonesty 'should be based on the nature of the actual conduct engaged in by the defendant, rather than on the consumer's particular circumstances'.[26]

3.34      The committee believes that proposed clause 180A should require a causal nexus between the credit provider's conduct and the harm suffered by the consumer. Reference only to the borrower's circumstances, without reference to the credit provider's knowledge of those circumstances, could create a disincentive for credit providers to lend to disadvantaged persons.[27]

Recommendation 3.8

3.35      The committee recommends that clause 180A be amended to require a court to find that the credit provider was aware of, and sought to take advantage of, the consumer's 'special disadvantage'.

Recommendation 3.9

3.36      The committee recommends that the circumstances that may constitute unfair or dishonest conduct at paragraph 180(3)(f)–(g) be amended to only apply where the credit provider is aware of the borrower's special advantage and seeks to exploit this.

Consumer leases

3.37      A consumer lease is a contract for the hire of goods under which the lessee does not have a right or obligation to purchase those goods. Currently, the National Credit Code only partially covers consumer leases: it does not provide protections to parties for consumer leases that do not provide an option to purchase, or to leases that do not require the consumer to pay more than the cash price of the goods.
The Explanatory Memorandum notes that this situation—with some leases covered by the Credit Code and others not—can lead to a situation where lessees mistakenly believe they have the ability to buy the goods.[28]

3.38      Schedule 5 of the bill proposes to align the regulation of consumer leases with the regulations applying to credit contracts under the National Consumer Credit Protection Act 2009 and the National Credit Code. Most submitters who commented on the Schedule noted their support for providing lessees under consumer leases with the same protections as debtors under credit contracts. The Redfern Legal Centre, for example, argued that 'addressing this gap in consumer credit laws is important to prevent unscrupulous industry participants from taking advantage of the loophole in order to bypass their obligations under the Act'.[29] In its submission, the Centre gave the following example of where this unscrupulous activity currently occurs.

Lauren is a mother of five. When her car broke down, Lauren went to a well-known car dealership to buy a second hand car. After speaking with the sales representative, Lauren signed a contract and drove off with a second hand vehicle. Lauren soon ran into difficulties meeting her repayments. She came to Redfern Legal Centre for advice. Lauren was shocked to learn that she had in fact signed a consumer lease, and that at the end of the lease she would not own her vehicle. This had not been made clear to her when she went to the dealership with the intention of buying a car.[30]

3.39      The Consumer Action Law Centre and the Consumer Credit Legal Centre (NSW) Inc. argued that the regulations under clause 175D must require periodic statements of account to include a clause drawing the lessee's attention to the fact that the goods remain the property of the lessor at the end of the lease. As the Consumer Action Law Centre noted:

[o]ne of the most common complaints we hear from consumers regarding consumer leases is that they were misled or otherwise unaware that had entered into a consumer lease (rather than a credit contract) and that they would not own the goods at the end of the lease term.[31]

3.40      The committee agrees that, in addition to the provisions in Schedule 5 of the bill which align the protections of consumer leases with those of credit contracts, there is a need to inform consumers in cases where a consumer lease does not transfer title to the lessee.

Recommendation 3.10

3.41      The committee recommends that the regulations under Part 2, Division 2, clause 175D of the National Consumer Credit Protection Act 2009 require the statement of account to contain a clear statement that the lessee will not own the good at the completion of the lease.

 

Senator Mark Bishop
Chair

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