NCCP Act 2009: Lenders not permitted to 'call in' loans unless borrower is in default

[Shadow]

This is a brief summary of a discussion I have been having on another forum, and I thought some members here might be interested or have additional insight on this topic (especially the brokers here, and other people from the banking industry).

Some people (normally property bears) like to suggest that banks can 'call in' or 'margin call' or repossess the homes of borrowers who end up in negative equity simply because (through no fault of the borrower) house prices happen to fall/crash. They claim the banks can do this even if the borrower is keeping up with his repayments. One person has pointed to a statement in this CBA document to back up his claim. His document says...

What we require from you for the loan to operate
3.5 Value of the Security
The value of and title to the Security Property must be to out reasonable satisfaction at all times during the term of the Contract. We may obtain a new valuation of any Security Property.

Default
9.1 When you could be in default
You are under default under the Contract if any of the following conditions apply:
(a) Overdue amount: You do not pay on time any amount payable under the contract
(b) Breach of contract: You do not keep to the other terms of the Contract or the terms of any Security
(c) Value or title unsatisfactory: We are not reasonably satisfied with the value of or the title to the Security Property or the Security over it will be inadequate security for the Loan in accordance with our usual prudent credit standards

It should be noted that the CBA document quoted above is not a contract - it is just an information booklet about home loans, and therefore non-binding, and not a legal document. Clause (c) is actually there to cover circumstances where a revaluation is triggered, for example due to the borrower knocking down the house. A general fall in house prices would not trigger a revaluation, and the CBA booklet doesn't even claim that it would.

In fact, the NCCP Act 2009 actually makes it quite clear that banks can't 'margin call', or repossess, or force the sale of a residential property unless the borrower has defaulted on repayments and subsequently failed to comply with a request to remedy that default.

National Consumer Credit Protection Act 2009

Division 2—Enforcement of credit contracts, mortgages and guarantees

88 Requirements to be met before credit provider can enforce credit contract or mortgage against defaulting debtor or mortgagor

Enforcement of credit contract
(1) A credit provider must not begin enforcement proceedings against a debtor in relation to a credit contract unless the debtor is in default under the credit contract and:
(a) the credit provider has given the debtor, and any guarantor, a default notice, complying with this section, allowing the debtor a period of at least 30 days from the date of the notice to remedy the default; and
(b) the default has not been remedied within that period.
Criminal penalty: 50 penalty units.

Enforcement of mortgage

(2) A credit provider must not begin enforcement proceedings against a mortgagor to recover payment of money due or take possession of, sell, appoint a receiver for or foreclose in relation to property subject to a mortgage, unless the mortgagor is in default under the mortgage and:
(a) the credit provider has given the mortgagor a default notice, complying with this section, allowing the mortgagor a period of at least 30 days from the date of the notice to remedy the default; and
(b) the default has not been remedied within that period.

92 Acceleration clauses

(1) For the purposes of this Part, an acceleration clause is a term of a credit contract or mortgage providing that:
(a) on the occurrence or non-occurrence of a particular event, the credit provider becomes entitled to immediate payment of all, or a part, of an amount under the contract that would not otherwise have been immediately payable; or
(b) whether or not on the occurrence or non-occurrence of a particular event, the credit provider has a discretion to require repayment of the amount of credit otherwise than by repayments fixed, or determined on a basis stated, in the contract;
but does not include any such term in a credit contract or mortgage that is an on demand facility.

(2) An on demand facility is a credit contract or mortgage under which:
(a) the total amount outstanding under the contract or mortgage is repayable at any time on demand by the credit provider; and
(b) there is no agreement, arrangement or understanding between the credit provider and the debtor or mortgagor that repayment will only be demanded on the occurrence or non-occurrence of a particular event.

93 Requirements to be met before credit provider can enforce an acceleration clause

(1) An acceleration clause is to operate only if the debtor or mortgagor is in default under the credit contract or mortgage and:
(a) the credit provider has given to the debtor and any guarantor, or to the mortgagor, a default notice under section 88; and
(b) the default notice contains an additional statement of the manner in which the liabilities of the debtor or mortgagor under the contract or mortgage would be affected by the operation of the acceleration clause and also of the amount required to pay out the contract (as accelerated); and
(c) the default has not been remedied within the period specified in the default notice (unless the credit provider believes on reasonable grounds that the default is not capable of being remedied).

(2) However, a credit provider is not required to give a default notice under section 88 or to wait until the period specified in the default notice has elapsed before bringing an acceleration clause into operation, if:
(a) the credit provider believes on reasonable grounds that it was induced by fraud on the part of the debtor or mortgagor to enter into the contract or mortgage; or
(b) the credit provider has made reasonable attempts to locate the debtor or mortgagor but without success; or
(c) the court authorises the credit provider not to do so; or
(d) the credit provider believes on reasonable grounds that the debtor or mortgagor has removed or disposed of mortgaged goods under a mortgage related to the credit contract or the mortgage concerned, or intends to remove or dispose of mortgaged goods, without the credit provider's permission or that urgent action is necessary to protect the goods.

Furthermore, ASIC stipulates the following conditions...

http://www.asic.gov.au/asic/pdflib....o-if-my-goods-are-about-to-be-repossessed.pdf

And regardless of the fact that banks have no legal right to take such action (repossession, forced sale etc) against homeowners who are not in default, it wouldn't be in the bank's interest to do so anyway. A loan is an asset to a bank. It would make no sense for a bank to repossess the home of a non-defaulting borrower and then force the sale of that home for less than the value of the loan. It wouldn't help the bank's balance sheet or financial position in any way.

 

[Marty McDonald]

I have seen them do it in commercial but I would think it highly unlikely but not impossible in resi. A real melt down and an urge to shrink the balance sheet could cause it IMO. in such a melt down they could possibly shoot first and ask questions later.

Another reason to not x coll.

 

[Terryw]

I haven't considered this before, nor looked into it, but...

What about if there was a clause in there which stated something along the lines of:
"your loan must remain 90% of less then the value of the property at all times otherwise you are in default of this agreement."

The loan is $90,000 on a value of $100,000 initially, but the property drops to $80,000.

How would a bank enforce a margin loans against shares?

 

[Rolf Latham]

Def of default is whenever the lender deems u are in default under your agreement ........case closed

t
arolf

 

[Shadow]

Just to follow up on the original post, and to note that the NCCP Act 2009 regulates all PPOR mortgages, and also all IP loans taken out since July 2010.

http://www.lawhandbook.sa.gov.au/ch08s04s01s01.php

To the people who say the bank can just go ahead and do whatever they have written in the contract - please note that the NCCP Act 2009 and ASIC would over-rule any clause in a commercial contract. A bank would be unable to enforce a clause in a manner that breaches the laws set out by the NCCP Act.

 

[Rolf Latham]

Just to follow up on the original post, and to note that the NCCP Act 2009 regulates all PPOR mortgages, and all IP loans taken out since July 2010.

http://www.lawhandbook.sa.gov.au/ch08s04s01s01.php

To the people who say the bank can just go ahead and do whatever they say in the contract - please note that the NCCP Act 2009 and ASIC would over-rule any clause in a commercial contract. A bank would be unable to enforce a clause in such as way that it breaches the laws set out by the NCCP Act.

until I see some actual cases in front of a magistrate Id suggest we are somewhat premature.


ta
rolf

 

[Shadow]

until I see some actual cases in front of a magistrate Id suggest we are somewhat premature.

ta
rolf

Can you think of a situation where a bank would be tempted to take this to a magistrate - i.e. to claim that a clause in their loan contract actually overrides the laws set out by the NCCP Act and ASIC? Actually, do you know of any bank who even include a clause in their regulated loan contact stating that they can take such action against a borrower just because median house prices fall?

 

[Aaron_C]

Usually the bank can call in the loan whenever they want, as long as they give you 90 days notice. This wouldn't be tested by a magistrate - it would go straight to the federal court.

 

[Shadow]

Usually the bank can call in the loan whenever they want, as long as they give you 90 days notice. This wouldn't be tested by a magistrate - it would go straight to the federal court.

Can you link to any regulated loan contract from any lender with a clause that stipulates this?

 

[Terryw]

Shadow,

I have just checked the NCCP Act and cannot find the sections you quoted above. They do not appear to come from this act.

eg.

Division 2—Enforcement of credit contracts, mortgages and guarantees

88 Requirements to be met before credit provider can enforce credit contract or mortgage against defaulting debtor or mortgagor

Enforcement of credit contract
(1) A credit provider must not begin enforcement proceedings against a debtor in relation to a credit contract unless the debtor is in default under the credit contract and:
(a) the credit provider has given the debtor, and any guarantor, a default notice, complying with this section, allowing the debtor a period of at least 30 days from the date of the notice to remedy the default; and
(b) the default has not been remedied within that period.
Criminal penalty: 50 penalty units.

 

[Terryw]

Usually the bank can call in the loan whenever they want, as long as they give you 90 days notice. This wouldn't be tested by a magistrate - it would go straight to the federal court.

I doubt the Federal Court would have jurisdictions. Most appropriate would be the Supreme Court - Possessions list.

 

[Rolf Latham]

just because median house prices fall?

so where is this in any lenders provision of mortgage contract ?

I dont necc disagree with you overall, but lets stay in the realms of the real world and not some nebulous galaxy far far away


ta

rolf

 

[Terryw]

I guess what Shadow is wanting to ask is

"Can a condition of a mortgage agreement be that the LVR cannot fall below a certain limit and if it does can this be considered a default?"

I have no idea of the answer, but suspect it can, similar to that of a margin loan on shares.

 

[hobo-jo]

Thanks for posting where I can respond.

It should be noted that the CBA document quoted above is not a contract - it is just an information booklet about home loans, and therefore non-binding, and not a legal document.

Actually as the booklet says, it contains the terms which govern those products. Shadow, I have never signed a loan with the CBA, but have with other lenders and usually the contract is accompanied by 1 or several booklets. Usually in the contract you will sign to say you agree with the contract as well as that you have read and agree with XXX T&C booklets. This would likely be one of those booklets, not simply an "informational booklet" as you have suggested.

In fact, the NCCP Act 2009 actually makes it quite clear that banks can't 'margin call', or repossess, or force the sale of a residential property unless the borrower has defaulted on repayments and subsequently failed to comply with a request to remedy that default.

Can you not even read what you quoted? It doesn't say "defaulted on repayments" it says "default under the credit contract" (Big difference!), which is exactly what the borrower has done in the case of the CBA clause in question if their property doesn't meet their valuation requirements.

Furthermore, ASIC stipulates the following conditions...

This is an information sheet, not an in depth paper that covers everything.

 

[Shadow]

Shadow,

I have just checked the NCCP Act and cannot find the sections you quoted above. They do not appear to come from this act.

eg.

The link to the NCCP Act is in my OP... http://www.comlaw.gov.au/Details/C2012C00083

The quoted text is all there.

 

[hobo-jo]

Actually, do you know of any bank who even include a clause in their regulated loan contact stating that they can take such action against a borrower just because median house prices fall?

It's got nothing to do with medians, it's to do with the specific value of the property acting as security for the loan. As rolf said, come back to reality...

 

[Shadow]

I have never signed a loan with the CBA, but have with other lenders and usually the contract is accompanied by 1 or several booklet

Can you link to any regulated loan contract with a clause stipulating that the lender can take action against the borrower simply because house prices have fallen?

 

[hobo-jo]

Can you link to any regulated loan contract with a clause stipulating that the lender can take action against the borrower simply because house prices have fallen?

I will follow up with CBA tomorrow in regards to the T&C I've been using.

 

[Shadow]

It's got nothing to do with medians, it's to do with the specific value of the property acting as security for the loan. As rolf said, come back to reality...

Right, so something would have to happen to trigger a revaluation (for example, borrower knocks down the house etc). That's fine - I have no problem with that.

As mentioned in the OP, I'm actually talking about a situation where a lender just decides that a person's home is worth less because house prices in general have fallen, and then tries to take action against the borrower by claiming the borrower is in default because house prices in general have fallen.

The NCCP Act 2009 and ASIC prevent the lenders from doing that, and I don't actually believe any lenders would have an enforceable clause in their regulated mortgage contracts stating that they can do this anyway.

 

[hobo-jo]

Sorry Shadow but going to have to side with the experienced brokers who have said otherwise in this thread than agree with a random who has a few IPs.