Australia: Mortgage Market Developments

Rapid changes continue impacting the mortgage industry. Here's a quick summary on some recent developments.

Mortgage early exit fees

ASIC has issued Consultation Paper 135 which considers whether mortgage early exit fees are unconscionable or unfair contract terms. Submissions are due by 9 August 2010.

ASIC intends to issue a Regulatory Guide after it has considered responses to the Consultation Paper.

Despite some emotive comments in the press, CP135 is not a general attack on deferred establishment fees (DEFs) or early repayment fees (ERFs).

The key propositions in CP135 are:

• establishment and early repayment fees should approximate costs and loss
• only true establishment fees should be classified as establishment fees (or deferred establishment fees when payment is postponed)
• better disclosure will assist establishing that fees are not unfair or unconscionable.

It is important to recognise that the law impacting on DEFs and ERFs has not materially changed. However, the commercial climate has changed because of:

• increased awareness of the ability to refer disputes to EDR
• increased risk of class actions (a major threat to smaller lenders)
• a more active regulator (ASIC).

The MFAA has formed a working party to make a submission. Lenders and managers who have credit contracts containing DEFs and ERFs should review their contracts.

Uniform responsible lending standards

The new name on everybody's lips is 'Fact Find' – a reference to documents used to collect information to enable compliance with the responsible lending (unsuitable loans) provisions.

As we have been told many times (too many times), the assessment process comprises:

• enquiries about the borrower's requirements and objectives
• enquiries about the borrower's financial situation
• verification
• assessment.

The controversial issue is whether it is appropriate to ask specific additional questions, or if it should be left to loan writers to make a case by case judgement on what kind of enquiries and verification are appropriate.

The big impact from responsible lending will not be felt until 1 January 2011 when ADIs and RFCs are subject to the requirements.

The MFAA has established a working party to try to agree upon some common standards. Significant inefficiencies, cost, and risk will arise if every lender adopts a different approach.

Credit representative or licensee?

The ASIC figures on how many businesses registered under the NCCP Act does not give a good guide to how many businesses are likely to end up being licensed. A significant number of businesses have yet to decide whether to proceed with a licence application or become a credit representative.

A clearer picture will probably not emerge until December as registered businesses make a decision on which way to go.

In the meantime, the MFAA has released a free licensing kit for its members. Small businesses should have no problem lodging their licence applications without external assistance.

Gadens Lawyers Compliance Services (contact Lauren Scicluna on (02) 9931 4925 or lscicluna@nsw.gadens.com.au) can assist small, medium, and large businesses who need assistance in applying for the licence and maintaining compliance once licensed. The services include compliance plans, training, and business processes.

The Gadens Compliance Services allows you to choose how much or how little you do. The service provides a fixed price, flexible cost solution.

Small broking businesses

Small broking businesses which elected to register pending a final decision on whether to obtain a licence generally have not needed to appoint any credit representatives. This is because their loan writers are either directors or employees of the company that has been registered.

These businesses need to remember that if they decide to become credit representatives, both the business and any loan writers will need to be appointed as credit representatives. It will be insufficient for the company only to be appointed because whereas a registered/licensed person's directors and employees are automatically authorised, that is not the case for credit representatives.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.