ASIC helps Australian consumers understand new credit laws

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From July 1, 2010, ASIC will take over responsibility for consumer credit and finance broking from the states and territories under the National Consumer Credit Protection Act 2009 (National Credit Act).



For the first time, home loans, personal loans, credit cards, consumer leases, overdrafts and line of credit accounts, among other products and services, will be regulated under a single, nationally consistent regime.



The new legislation includes a range of measures that are designed to better protect the interests of borrowers and improve standards across the industry.



For the first time, credit providers, intermediaries and brokers will be licensed and subject to specific consumer protection regulation, including new ‘responsible lending obligations.



They must also belong to an ASIC-approved independent dispute resolution scheme so that borrowers can pursue complaints for free. However, the best protection, as always, is a well-informed consumer.



Information for borrowers



ASIC has recently released a package of materials to help Australians from all walks of life use credit wisely, make better borrowing decisions and take control of their debt, including a new booklet, Credit, loans and debt: stay out of trouble when you borrow money and 15 factsheets covering topics like home loans, debt management and what to do if you’re in trouble, interest free deals, payday lending and other high-cost credit.



All this information is available in a ‘one-stop-shop’ for consumers on FIDO, ASIC’s website for consumers and investors.



Visit ASIC’s consumer credit portal at www.fido.gov.au/credit for more information.



Licensing of providers of consumer credit



From today, anyone who wants to engage in credit activities (including brokers) must be registered or licensed with ASIC, or be a representative of someone who is registered or licensed (that is, they must either have their own licence or come under the umbrella of another licensee as an authorised credit representative or employee).



Individuals and businesses who are registered have up until 31 December 2010 to apply for an Australian credit licence. This means consumers should only deal with someone who is registered or licensed. If they aren’t registered, or do not hold a licence, they are likely operating illegally.



There is currently an exemption from registration and licensing for credit assistance provided through some businesses (for example, retail stores and car yards).

While the store may be exempt, the actual credit provider must still be licensed or registered. If borrowers are unsure who the credit provider is, they should ask the salesperson or broker.



To find out if a credit provider or broker is registered or licensed, search ASIC’s online database or phone ASIC’s Infoline on 1300 300 630.



New ‘responsible lending’ obligations



The National Credit Act introduces new ‘responsible lending’ obligations for registered persons and credit licensees:

to verify the customer’s financial situation,
assess capacity to repay without substantial hardship, and
not offer credit products that are unsuitable.
These new obligations come into effect for smaller credit providers and intermediaries like mortgage and finance brokers from today. From 1 January 2011, these obligations will apply to all credit providers.



This includes a requirement from 1 January, that anyone engaging in credit activities must give consumers a Credit Guide (with information including their licence number, fees and details of your right to complain) before they provide them with any credit assistance.



Where consumers should go if they have a problem



From today, credit providers, credit assistance providers and intermediaries who have registered for licensing must belong to an ASIC-approved independent dispute resolution scheme.



Consumer disputes about credit services should be directed to the credit provider’s independent dispute resolution scheme. This will either be the Financial Ombudsman Service (FOS) (www.fos.org.au) or the Credit Ombudsman Services Litd (COSL) at www.creditombudsman.com.au).



Both schemes can be contacted by calling 1300 780 808.



Complaints about illegal or unfair conduct by the credit provider, or concerns about providers operating without being registered or licensed, should be directed to ASIC (rather than the states and territories) at www.asic.gov.au/complain or by calling ASIC’s Infoline on 1300 300 630.



For example ASIC has specific information about non bank lenders like GE Money. See information below:

ASIC acts on GE Money’s (GEM) insurance and debt collection practices
Have you been harrassed about debts you owe GE money (GEM)? – contact information
Copy of the new Enforceable Undertaking relating to GE Money’s (GEM) debt collection practices
Read more about GE Money (GEM) debtor harassment and your rights

For more information about the new laws, see www.asic.gov.au/credit



For information about using credit products and what to do if you can’t pay your debts, see www.fido.gov.au/credit

 

[Rolf Latham]

National regulation finally,..........its a GREAT thing.

Past Jan 1, no longer does one need 3 differernt broker contracts.

But in amongst the lovey dovey feel good stuff that we are looking after the consumer, there are some interesting anti competitve, and restraint of trade issues that arent obvious in the sales job being done by ASIC and others.


You can tell where the balance of power is, and its not on the side of the those representing the most affected consumer though......

There is currently an exemption from registration and licensing for credit assistance provided through some businesses (for example, retail stores and car yards).

They also need to add that to a large extent, ADIs ( banks that are licensed to take a deposit) are also largely exempt from compliance with the responsible lending obligations unitl jan 1 2011................which is why we send a lot of lo doc business direct to a branch.

The upside for brokers and consumers alike, is that the "nudge nudge wink wink say no more " branch approval will become much less of an issue than it has in the past.

Since july 1, 2 exceptionally interesting cases have landed on our lap.

A PAYG 90 % lend with a big 4 lender without the client having funds to complete that didnt service by near 4000 per month . That client is now unconditional, problem now is they have come to us for coming up with the 10 % from other equity, its technically possible on his equity position but in reality, ......... and now this guy is looking at doing his deposit. That sort of approval could not happen through 3rd party even under the old regime, nor would any decent broker waste their time even if they could.


A self employed 70 % resi based lend on a block of units. Negative serviceability to the tune of over 3500 a month, and a recently paid credit card repayment default of over 5000.............NIL funds to complete. Again that client has come to us to try and raise the 30 % plus costs from existing equity. She is in bigger trouble than the first guy, because this lady will need 120 % lend against existing equity .... , with a basket case CRAA.


The real BIG HOLE for the little guy in the implementation of the NCCP is that the "on the never never" interest free cards / facilities are not coming into regulation until 2014 so that the retailers can train their staff , slow learners obviously, and car yard finance until when ?

When we see potential clients that are in "mortgage stress", its not the mortgage thats caused the trouble. Its all the other "add on" rubbish starting wth the 135 month top line "foxtel" to the 400 bucks a month flexi rent, to the 500 a month never pay interest furn package, then added to the car loan at 15 % of

The message that could be taken from that is that ASIC thinks the community sees mortgage brokers as more snakey than a used car salesperson flogging their finance product, and that dodgy brokers ( and banks) cause more financial damage than their sharkey car finance cousins.

In closing, we do a fair bit of work with one bank whose name I wont mention. In the last 4 weeks

1. Client doing a 90 % investment lend non gen savings. We struggled to make it work, but the 16 page fact find revealed that they had a lot of discretionary expenditure that we could cut back. They already had approx 70 k of unsecured debt and we figured the lender may have a concern. Anyway, we put the deal up. After conditional approval the client is approached by the bank with a sales job for a 19 k credit card limt .............

2. Client building an owner occ. Docs go out. Client has some qs on the docs and scans me a copy. 95 % lend that looks like, seems weird, we only asked for 90. Check LMI premium, yup its right. So we get right to the end of the loan offer and lo and behold there is a premium of 17 600 there for "mortgage protection isnurance, added to the loan of 333 k.m

Further investigation revealed that the client was contacted by the bank and a 5 minute sales job ensued around " you can have the mortgage protection insurance for $ 17 a week, and this will provide xyz coverage or up to 5 years from loan settlement. I always suggest to client they look at some form of insurance, so the client figure that this was good value.

What this bank did not disclose over the phone was

1. That 17 a week wasnt over the 5 years the policy applied. It was for the full 30 year mortgage, with 17 500 added to the loan from day one, with 26 500 payableover the 30 years, thus the actual cost per week is 102.00

Whats more interesting is that the banks commission on that 17500 was 20 % or 3500..............our upfront loan comm was 1665 plus GST

We are only a weeny business, so I wonder what other stuff goes on out there.

Whats interesting is that this insurance sale is already covered by existing legislation...............................so where is the consumer protection ????

While the spirit of the legislation is good, the implementation looks like it leaves a lot of be desired, and I will be a lot happier when we get to the end.

I will leave you with this sweet little one.

Some lenders are taking the fact find and responsible lending thing to a higher level. If you have a client that has a regular savings pattern of say 500 bucks a week, they regard that 500 a week as a fixed cost/ expense which can not be used toward servicing ..................wether its discretionary in reality or not. Im sure the over reaction in fear of ASIC compliance will eventually normalise.


ta

rolf

 

[Qlds007]

Rolf agree with every word you have to say and could list a dozen more examples since July 1.

And they wonder some of us mortgage brokers are looking at walking away from the industry and going back to managing our own rental properties and collecting rents.

 

[bcoombs]

Rolf - seriously I'd be taking your insurance example to ASIC. If there are affordability issues with this loan who's lap will it fall on - the brokers for something beyond our control! Not only that its up to us to explain to the customer what the extra amount on top of the loan is for?

I bet if you sent this customer to the corresponding branch for an explanation, the branch would re-write the loan !

Seriously I am pretty annoyed that all broker contracts to the customer protect the customer and NOT our relationship with the client. It will be interesting when fee for service comes in, with the Bank re-writing loans without our fee being paid.

ASIC, the MFAA,FBAA and any number of pathetic Aggregators have failed dismally on this one. They only have to have a quick glance at how many financial planners are selling up, because most of the products are owned by the Banks.

 

[Token Funder]

Rolf - seriously I'd be taking your insurance example to ASIC. If there are affordability issues with this loan who's lap will it fall on - the brokers for something beyond our control! Not only that its up to us to explain to the customer what the extra amount on top of the loan is for?

I bet if you sent this customer to the corresponding branch for an explanation, the branch would re-write the loan !

Seriously I am pretty annoyed that all broker contracts to the customer protect the customer and NOT our relationship with the client. It will be interesting when fee for service comes in, with the Bank re-writing loans without our fee being paid.

ASIC, the MFAA,FBAA and any number of pathetic Aggregators have failed dismally on this one. They only have to have a quick glance at how many financial planners are selling up, because most of the products are owned by the Banks.

To be fair, absent the lobbying of the industry you would be facing a good more grief than is the case now. There is little doubt that the political imperative to "do something" about what was going on in the periphery of the broker industry had the potential to lead to a fairly draconian response.

That said, I'm not convinced many brokers are fully aware of the implications to them of the new Act. Those industry participants who continue to think their job is to "assist" a borrower in presenting a particular view of the deal rather than forming their own, well-researched understanding of the borrowers capacity to meet their obligations over the medium term are in for a (potentially expensive) shock.

And having spent some time with ASIC over last few months, there's little doubt they will be looking for some "proof" they are making a difference sooner rather than later.....

 

[Rolf Latham]

\

That said, I'm not convinced many brokers are fully aware of the implications to them of the new Act. Those industry participants who continue to think their job is to "assist" a borrower in presenting a particular view of the deal rather than forming their own, well-researched understanding of the borrowers capacity to meet their obligations over the medium term are in for a (potentially expensive) shock.
.

From the advice I have been receiving, and to take a literal interpretation of that advice, if you cant show the borrower can get out of a financial pickle without selling their PPOR, you are in trouble, That is regardless if that person is ever in trouble, a detail audit would show u are in breach.

The only sure way to ensure that you wont be in this position is to only deal with borrowers that have more than one property or other major asset, in other words, are at least moderately sophisticated.

Do NOT work with first home buyers that have less than 15 to 20 % deposit (10 % for the purchase and 10 % as buffer).

Do Not do any lo doc work, unless you can see the equivalent of unlodged but already prepared rtns and get verification from the independent prepaper.

Thats not a good place to be for those borrowers that can really benefit from the work of a good broker, but someone has to pay for yet another absolution of personal responseability.

Im sure at some point clarification will prevail, alas, its not impossible that by this time the broker market share will be so weeny that our big 4 will once again be very very happy.


ta
rolf

 

[Rolf Latham]

There is little doubt that the political imperative to "do something" about what was going on in the periphery of the broker industry had the potential to lead to a fairly draconian response.

I have no data on the quantum of the "issues" of the periphery.

In truth and fact, how much of an issue is/was the "periphery", and how much of that was not already covered in existing legislation of some sort, and just poorly administerd and policed ?

I have said it before, Im not against national regsm

My concern is and remains this little story


Monday to Thursday I run a broking business and I have to endure things like if a client has a 500 a week savings plan, and its regular, one interpretation of the new act is that this is a FIXED expenditure and this can not be used for servicing. So I need to send them away to a bank branch, where there is no current requirement to comply with the new act til 2010, and hopefully that time someone will have woken up.


On Fridays, I work as a loans guy for a big 4 bank, and I can get people a loan even though they dont have the funds to complete, they dont have any real income, and they have a pretty sad CRAA. They act on that approval and make a purchase they can not settle and lose their deposit. This will be cleaned up a little Jan 2011.

On Saturday, I have a job at a Store, I can sell someone a doo dad finance package at 20 % plus pa that they can ill afford.........and I can do that for another 3 years............. while my employer gets time to train me

On Sunday I work at a used car lot, and we represent Sharky Loans. I am quite ok to sell you a car with a 28 % plus loan that you have no HOPE of repaying, but your 30 % deposit from your trade in will make sure we dont lose on this one...........again, this will go on for a long time while my employer gets time to train me .

Come Monday..............now how much do u spend on Foxtel sir ? See John, now I notice on your statements that you make 3 ATM withdrawals from an ATM at the Commercial Hotel..........do u have a gambling or alcohol problem? And Sue, what form of contraception do you use please, so we can properly ascertain what the risk of another financial dependent may be ?

Sarcastic and Far fetched ?? a little yes...............but until we have some actual cases in court, who knows what will be considered "reasonable"

Its those issues that have many brokers not happy, not the regulation itself.

ta
rolf
.

 

[bcoombs]

To be fair, absent the lobbying of the industry you would be facing a good more grief than is the case now. There is little doubt that the political imperative to "do something" about what was going on in the periphery of the broker industry had the potential to lead to a fairly draconian response.

That said, I'm not convinced many brokers are fully aware of the implications to them of the new Act. Those industry participants who continue to think their job is to "assist" a borrower in presenting a particular view of the deal rather than forming their own, well-researched understanding of the borrowers capacity to meet their obligations over the medium term are in for a (potentially expensive) shock.

And having spent some time with ASIC over last few months, there's little doubt they will be looking for some "proof" they are making a difference sooner rather than later.....

As you may have gathered "brokers" are fully aware of the implications on them. They are also fully aware of the lack of implications on anybody else!!

When most of the future problems are sourced back to the bank, I am sure it will cost the poor broker a tidy some to prove they did the right thing.

 

[Rolf Latham]

Hi Brett

You dont have to be in trouble with any client. In fact you can have 10 000 very happy clients and still be very much in breach of your obligations, be liable for significant fines, and be at risk of not being able to trade

The annual compliance certificate to be provided to ASIC (content and form yet unknown.........) will likely have some in depth requirements such as an external audit opinion of your financials showing you are a solvent business, to any breaches, or suspected breaches of your externally monitored and regularly tested compliance programme.

One thing for our business, that we are having issues with an that still has to be properly nutted out is the issue of conflict of interest. The current interpretations are such that it is not possible to properly discharge your duty of care to a client AND be fully compliant with this bit. In other words, one may be ok if the conflict of interest serves the client and you can properly explain it.

An example is you encourage a borrower to take more on their LOC than they need today. This could be construed to be a conflict because you MAY get more comm, but you increase the clients debt exposure The logic says you should be fine because of the buffer benefit gained blah blah, but then you need to make sure there is history of responsible use of such buffer in the past.

But with others its not so easy, example, you encourage a client to take a loan with one of your panel lenders, when in fact that client would be better served to go to a branch of Credit Union X which is NOT on your panel, because the monthly fee on a "comparative" product is lower than any of your panel's products.

There will be an ongoing conflict of interest. Just because you cant identify it doesnt mean there isnt one.

AS part of your compliance program, youd better have an acceptable way of managing that risk to your business.

Again, Im sure in the middle term there will a specific definition what is regarded as a tangible conflict of interest.

ta
rolf

 

[Dazz]

I appreciate the lucid discussion thus far in this thread from all contributors.

I have certainly gained some knowledge.

Thank you all.

 

[Dazz]

And they wonder some of us mortgage brokers are looking at walking away from the industry and going back to managing our own rental properties and collecting rents.

Richard,


Having just read your API article, I now know this is not a valid threat. You sounded like you were absolutely bored stupid being a retired Landlord, and so the prospect of returning to that position surely wouldn't be attractive.

 

[LisaP]

if a client has a 500 a week savings plan, and its regular, one interpretation of the new act is that this is a FIXED expenditure and this can not be used for servicing.

Surely not?? In what possible way could regular savings be seen as an expenditure?!!

 

[Qlds007]

Dazz

I totally agree but fighting ASIC and the ongoing legislation isn't that attractive when you see what lenders get away with.

Have had to put up with this in the Fin Planning arena for enoughs years and really dont need it again.

Thankfully my kids are 6 years older now and almost old enough to look after themselves.

 

[grossreal]

thanks all interesting reading
these acts are going to bring alot of broker and vendor finance people into line
good or bad I have no idea
but I do know that there are alot that have no idea about it as yet
the people that it will hit is the cash funder
the people with cash in the back that role that into deals like container stock etc
these new rules span more then just these credit rules and yes alot are walking away
I only found out last week when I rang a few people
Hope you are doing well L.
I have moved on to another chapter and don't have any use to venture into anymore investments.
this was cut from an email today
he was a 5 mil cash investor and has told me he did not wish to go into these regulation here
so for me this will dry up the little cash funding still floating in the market.
I think they maybe good but you are going to see a big problem as containers are funded by this form of credit and if they are not funded
big problem
they were totally unregulated now these funder are not legal per the act
we see who and what they effect further the ripple moves outwards

 

[Token Funder]

As you may have gathered "brokers" are fully aware of the implications on them. They are also fully aware of the lack of implications on anybody else!!

When most of the future problems are sourced back to the bank, I am sure it will cost the poor broker a tidy some to prove they did the right thing.

Based on my travels the last few months, many are. Equally, there's a disturbingly high number that see it as licensing plus some additional paperwork as distinct from a significant shift in thinking. The biggest issue based on what I am seeing is the fact that there are still a number who are struggling with the notion of a shift from credit "enabler" to a credit advisor.

They can't see the difference between using their knowledge of the world to get a client what they want in contrast to forming a reasoned view as to what they can afford.

Clearly, experienced professionals capable of looking beyond the immediacy of the deal in front of them were already most of the way there. Others, not so much.

And I take Rolf's point and also point out that there are a bunch of bank lenders who are in for a shock when their legislative and compliance guys release what they're working on.

As I've said for some time.....old school lending is back and all participants who have only experienced the post 2000 period and consider it the norm will need to re-set their expectations.

 

[LisaP]

So from what I can gather, these new credit laws have been put into place to protect the "mum and dad" investors out there.

However, has there been any thought given to, or any provisions set aside to cater for the more sophisticated investor - i.e. those people who treat their property investing as a business? For example, an investor who can demonstrate they have a sophisticated understanding of their property investment strategy, can manage the risks involved, and can show the lender or broker that while on paper their debt levels may be high, they have a thorough understanding of their cash flow situation, and would be able to manage this debt.

 

[Bigtone]

they have been prepared to protect people who wont take responsibility for their own decisions and give them any easy out to blame the big bad bank or broker.

said it many times before

" these rules have been written to solve a problem that does not exist by people who don't understand the impact of their decisions all just to be seen to be doing something, it is absolutely ridiculous"

The old rules worked, fraud is fraud, self interest etc they just were not policed enough. This is way over the top and will hurt many of the people it is meant to protect and there is already many victims and will be many more whose path to wealth will be greatly slowed down by massive speed humps

 

[Rolf Latham]

Awwwwwwwwww Come on BT

Instead of investing in property, One can always go and buy some managed funds through a financial planner, or buy a Fed Bond

ta
rolf

 

[Rolf Latham]

However, has there been any thought given to, or any provisions set aside to cater for the more sophisticated investor - i.e. those people who treat their property investing as a business?

No not specifically.

There are some THEORETICAL exclusions such as corporate trustees etc, but the axe has already fallen.

AS an acid test as to how well the exlusions may work, note well the changes to Lo doc product across the board that demands various verifications, this LENDER requirement isnt any different for loans not currrently falling under the regime.

I am less vigilant with verifying which foxtel package my full doc No lmi investment clients with > 2-3 ips are on, than I have to be with a FHOG buyer with 10 to 15 % deposit

ta
rolf

 

[LisaP]

From an investor's perspective...

OK, so after taking a look at the National Consumer Credit Protection Act, the take away message for me (as an investor) is that lenders and brokers are now responsible for ensuring that a credit contract or credit limit increase is "not unsuitable" for the consumer.

It is deemed "unsuitable" if:

(a) it is likely that the consumer will be unable to comply with the consumer’s financial obligations under the contract, or could only comply with substantial hardship;

On this point, the legislation does not define "substantial hardship", and states that licensees are to develop their own benchmarks depending on the nature of the business. - such as the Henderson Poverty Index. However, ASIC also states that the law regarding "substantial hardship" will become clearer as cases come up before the courts and judgements are handed down. So from what I can gather, I would assume lenders would already have these benchmarks in place and it's business as usual, but ASIC is also saying to them watch this space, as things might change??

(b) the contract does not meet the consumer’s requirements or objectives;

Point (b) seems quite self explanatory.

(c) if the regulations prescribe circumstances in which a credit contract is unsuitable.

Regarding point (c), it wasn't clear to me within the Act what these regulations were. However, ASIC states on it's website that in Phase 2, Part 2 they will look at "regulation of credit for investment loans." So either they haven't as yet formulated this regulation, or I just haven't been successful in locating it.

So in my mind, to sum up, it is business as usual for investors, as long as an investor can show the broker/lender that:

- they will not be under "substantial hardship" as a result of taking on the loan (I assume they would have to do this now anyway); and
- the loan meets their objectives and requirements.

The big unknown relates to meeting "the additional regulations prescribed" by the government, which from what I've gathered have not been defined as yet, and once implemented may (or may not) change things significantly for the investor.

Ralf> I couldn't find within the legislation any mention of consistent savings being classified as a fixed expenditure? Given the Act was 516 pages long, I may have just missed it?

Anyway, I would be interested to get feedback from all you brokers out there as to whether I have interpreted the new Act right, or if I have missed anything. Also note, I've came at this from an investor's perspective, rather than from a broker's perspective, so have not mentioned the onerous burden on brokers to now prove that they have conducted "responsible lending".