Specialist Showcasing

A suitable loan?

Credit Law Compliance Summit Karen Cox – Consumer Credit

Legal Centre (NSW) IncApril 2010

Consumer Credit Legal Centre (NSW)

Credit and Debt Hotline1800 808 488

Financial Counsellors line

Insurance Law Service (National) 1300 663 464

Mortgage Hardship Service – casework, intake via Credit and Debt

Hotline

Over 15,000 calls last financial year

About 4900 referrals to financial counsellors in the last financial year

Lets start somewhere obvious &

comfortable........A couple with large and growing family, sole source of income Centrelink payments, in serious default on their home loan.They answer an advertisement placed by a broker. Explained whole situation honestly. Put in loan with higher repayments than the loan they were in default on. Set up costs almost $30,000, including $15,000 in brokerage.

 

 

Calls by Debt TypeNov 09-April 10

Credit cards Home loan Personal loans MV loan0

200

400

600

800

1000

1200

1,116887

528291

Credit Card Lending Problems

• Limit increases on the basis of behavioural scoring without touching base with the customer about their financial situation

• Limits are too big! Likely reason – assessment of capacity to pay based on ability to meet the minimum repayment

• Limit increases to borrowers carrying debt month to month

Credit limit available by minimum repayment percentage at repayments

of $100 per monthMinimum

Repaymentpercentage

Credit limit

2% $5,0002.5% $4,0003% $3,330

3.5% $2,8504% $2,500

Time taken to repay debt at $100 per month and interest paid

Interest

Rate10.8% 14.3% 20.7% 24.5% 29.5%

Credit Limit

TimeTo pay

Int. paid

TimeTo pay

Int. paid

TimeTo pay

Int. paid

TimeTo pay

Int. paid

TimeTo pay

Int. paid

2,500 2y5m 345 2y7m 486 2y10m 800 3y1m 1034 3y5m 1425

2,850 2y10m 458 3y0m 653 3y5m 1,107 3y8m 1465 4y3m 2119

3,330 3y5m 646 3y8m 938 4y3m 1665 4y10m 2308 5y11m 3690

4,000 4y3m 980 4y8m 1466 5y10m 2849 7y1m 4400 14y1m 12813

5,000 5y8m 1,673 6y6m 2,650 9y9m 6,606 Indef. Infin. Indef. Infin.

Repayment will exceed 4yrs at $100 per monthRepayment will exceed 5yrs at $100 per monthInterest paid will exceed credit limit (amount borrowed)Debt will never be repaid at $100 per month

ASIC - RG 209Example 5: Capacity to repay in relation to credit cards For credit cards, there may be some risks associated with assessing a consumer as having the capacity to repay the contract based solely on being able to meet the minimum monthly repayments. If, by paying only the minimum monthly repayments, the consumer is likely to take a long period of time to repay the maximum limit on the card, credit licensees should consider whether this would meet the consumer’s requirements and objectives (i.e. taking a number of years to repay a relatively small debt, and paying high amounts of interest on this debt).

2 Years

Evidence of Substantial Hardship

Jan 08

Apr 08

Jul 08

Oct 08

Jan 09

Apr 09

Jul 09

Oct 09

Jan 10

Apr 10

Jul 10

Oct 10

Jan 11

$-

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

Credit LimitAccount Balance

Housing Market• Problems now overwhelmingly hardship• A few years ago it was all predatory and

irresponsible lending, with ample complaints about the role of brokers– Predatory, intentional exploitation of

desperation (equity stripping)– Building/development scams targeting

emerging migrant communities– Low doc/no doc lending, often facilitated by

brokers/introducers– Relaxation of standards re income stability,

repayment to income ratios and valuations– Risk based pricing– Frequent refinancing of consumption debt

What doc?

What doc?

No no-doc, low-doc, mini-doc!

Disguising inability to pay

• Credit card where the consumer can meet the minimum repayments but cannot repay the debt

• Home loan where there are interest only payments for a specified period followed by principal and interest payments that the consumer cannot afford,

• Home loan where there are interest only payments for a period, or a repayment holiday (and interest is essentially capitalised) and, the entire loan is repayable as a lump sum at the end of the term (the term may be as short as 1-5 years),

• Large balloon payment at the end of a car loan or lease. Remember the presumption against the sale of the home being required to pay the loan.

Substantial HardshipEmphasis on requirements and objectives – you must ask.However, in our experience some consumers are very poor at estimating their own expenses.Use both recognised benchmarks and reasonable enquiries.

For Sale

I can afford it, but.........• Interest free promotion to buy $1,000 fridge,

credit limit granted $7,000• Borrowers goal is to pay off home loan faster

– sold a line of credit with a linked credit card when a principal and interest loan with a redraw facility would have served purpose more effectively

• Ordinary home purchase structured as an on demand facility

• A consumer lease when the consumer intends to own the goods

Proceed with caution• Debt consolidation• Lines of credit secured over the home

(associated with misleading mortgage reduction advice, used to disguise affordability problems which don’t emerge until credit limit reached, should not be used as reverse mortgages, in general may not meet consumers requirements and objectives if their intention is to pay off their home and they don’t!)

• Reverse mortgages• Guarantors and co-borrowers – perennial

issue, new defences

Back to predatory lending

Possible challenges in using law to respond:• Lenders who claim they do not do regulated

lending will not be licensed or in EDR• The changes to the business/investment

purpose declaration provisions are not yet tested

• No capacity to challenge broker fees as excessive (as in current legislation in some States and planned in States’ uniform National Finance Broking Bill)

• More elaborate fraud and documentation of creative requirements and objectives likely

• No interest rate cap

High cost lendingPayday lending• Cost of loans may be justified by higher

comparative cost of lending and higher risk• Problem is that impact on consumers is to

exacerbate disadvantage and create a debt trap

• Other measures such as capping fees separately and preventing repeated rollovers are almost impossible to enforce

• Without any cap, there is no effective competition and prices will not stop at what can be justified

High cost lendingGenerally• High cost loans are not confined to the small,

personal loan market – also prevalent in equity stripping scenarios (e.g. 10% per month and 15% on default secured against home).

• As cost increases, so does the likelihood of unjust/unconscionable conduct and fraud. Enforcement completely inefficient if done on a case-by-case basis.

• Price is the one thing that it is hard to fabricate – if you want to charge it, it needs to be written in the contract.

Attainable goals!