Schedule 2 of the Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 contains amendments to the NCCP Act (including the National Credit Code) which relate specifically to contracts for reverse mortgages, commencing on 1 July 2012.
What do you need to do?
If you provide reverse mortgages (as defined) then your procedures and systems will change.
A reverse mortgage is defined for the purposes of the Code as an arrangement which involves a credit contract and a mortgage over a dwelling or land securing a debtor’s obligations under the contract and either:
• the arrangement is an arrangement of a type which ASIC has declared to be a reverse mortgage ; or
• the arrangement meets the following two conditions:
– the total amount the borrower owes under the contract or mortgage may exceed the maximum amount of credit they may be provided under the contract without them being required to reduce their liability to a figure less than that maximum amount; and
– the arrangement meets any prerequisites prescribed by the regulations (with it anticipated that this regulation-making power may be needed to exclude other classes of credit contracts where the protections applicable to reverse mortgages are not appropriate).
Bridging finance contracts are excluded from the definition of reverse mortgages as these are also credit contracts where the outstanding balance of the contract can increase until the final repayment, but where the protections applicable to reverse mortgages are not necessary.
The provisions in the Bill include new obligations for persons who engage in credit activities in relation to reverse mortgage contracts. The key elements of these requirements are:
• introducing a ‘no negative equity guarantee’ protection through a prohibition against credit providers requiring or accepting repayment of the loan for an amount which exceeds the market value of the mortgaged property (subject to certain exceptions);
• mandating that holders of an Australian credit licence must undertake the following conduct before they make an assessment or a preliminary assessment under
sections 123, 124 or 128 of the NCCP Act:
– using a website approved by the Australia Securities and Investments Commission (ASIC), show a consumer projections of the potential effect a reverse mortgage may have on the equity they have in their home;
– provide the consumer with a print out of these projections;
– notify the consumer of additional information that will assist them to decide whether to enter into a reverse mortgage, and, if so, on what terms; and
– give the consumer a reverse mortgage information statement;
• prohibiting credit providers from specifying that certain types of conduct can constitute a default under a reverse mortgage contract;
• disclosure of the way in which non-title holding residents will be treated under a reverse mortgage contract;
• prohibiting credit providers from entering into a reverse mortgage contract unless the consumer has received legal advice regarding the contract (with commencement of this obligation deferred to a date to be prescribed by regulation); and
• new requirements on credit providers where they have given a default notice to the debtor, including an obligation to take reasonable steps to contact the debtor in person, to make sure they understand they are in default and therefore provide them with an opportunity to rectify the default.
ASIC’s moneysmart website provides a visual demonstration of possible outcomes.
The draft Regulations provide that it will be presumed that a credit contract will be unsuitable for a borrower under the following circumstances:
• that the credit contract is not a reverse mortgage;
• the borrower is at least 55 year of age and is not in full-time employment when the credit contract will be entered into ;
• the amount owing under the contract can only be repaid by selling the borrower’s principal place of residence; and
• if reasonable inquiries about the consumer’s requirements and objectives establish that the consumer would use the credit provided under the contract predominantly to pay for regular or recurring household expenses, or to pay for expenses relating to the health of the consumer, or another resident of the property aged over 55 years old. This would not include the consumer’s use of the credit provided under the credit limit in the contract as part of discharging the consumer’s obligations under another credit contract that is secured by a mortgage over the consumer’s principal place of residence.
