Gadens Lawyers worked with the Mortgage & Finance Association of Australia (MFAA) to lodge a detailed submission in response to an exposure draft of proposed amendments to the Uniform Consumer Credit Code.
While the amendments are stated to be targeted at fringe lenders, they have significant consequences for the mainstream mortgage market.
Remove the conclusive presumption provided by a business purpose declaration
Many of our members and clients have adopted uniform procedures for code and non code loans. However, the spectre of a class action by regulators will be a significant impetus for "adverse steering" – ie trying to construe loans as unregulated. This will be a significant retrograde step. It would create a reason for mainstream lenders to start adverse steering in order to protect their position, being a practice which until now has been confined to fringe lenders.
Show charges "in the nature of interest charges" as an annual percentage rate
The requirement is unclear and its application will be misleading for consumers. What charges are in the nature of interest? Must contingent charges be disclosed?
Provide that fees, charges, and interest rates may be reviewed if unreasonable and link to underlying cost
Changing the test from "unconscionable" to "unreasonable" is not opposed. However, the link to underlying cost is opposed.
Applications to re-open transactions can be made by government consumer agencies
Opposed, as this creates too much uncertainty for lenders and will create a bias in favour of adverse steering.
Fees paid by borrowers to associates of the lender must be included as a charge by the lender in determining whether the interest rate exceeds the maximum for the exemption of short term loans to apply
Supported but only if the maximum for interest and charges in NSW, ACT, and Victoria is first removed or adjusted. The impracticability of these caps for short term lending is well known, and it is likely to force short term lending underground where it will be harder to assist distressed consumers.
Clarify pawnbroker exemption
Prohibit mortgages over essential household property
Further information about direct debit arrangements
Lenders need to collect repayments by direct debit. The absence of a direct debit will increase the incidence of default which may incur default fees and increase hardship.
Retrospective operation of the proposed legislation
As drafted, the amendments apply to loans made prior to the commencement of the amendments. We strongly oppose what is effectively retrospective legislation. It is important that the finance industry is not sent a message that retrospective legislation is a risk of conducting business in Australia. Such a message could have unexpectedly wide adverse ramifications on the Australian financial markets. Instead, the amendments should apply to credit contracts having a disclosure date after the amendments commence.
If, despite our submissions, the proposal to allow the regulator to re-open individual or classes of credit contracts proceeds, we will lobby strongly for a system of private and public rulings. It is inefficient, for the mortgage industry and consumers alike, for the regulator to have power without indicating how it will be exercised – this is equivalent to "regulation by ambush".
We have a long history of successful negotiations with the regulators to find outcomes which are good for the industry and consumers and have no reason to doubt that such a solution will be found in this case.
In the years following the global financial crisis of 2008 many Australian investors lost their life savings as financial products failed and the Australian Stock Exchange shed over 3,000 points.
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