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Karen Cox

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... one month behind in mortgage repayments with 15,000 more than 3 months overdue ... Many long-awaited reforms are now in the final stages of consultation and ... – PowerPoint PPT presentation

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Title: Karen Cox


1
Credit Crisis
  • Karen Cox
  • Coordinator Consumer Credit Legal Centre

2
Consumer Credit Legal Centre (NSW)
  • Consumer Credit Legal Centre (CCLC) is a
    community legal centre specialising in credit,
    debt and banking for NSW consumers, particularly
    disadvantaged consumers.
  • CCLC operates the Credit and Debt Hotline, the
    first port of call for NSW individuals
    experiencing financial difficulties and the key
    referral point for financial counsellors across
    NSW.

3
The debt problem
  • Credit Crisis

4
Are we having a US Style sub-prime crisis?
  • There are clear differences between the situation
    in the US and Australia including
  • The size of the official sub-prime market is
    smaller in Australia
  • The lack of teaser rates in the sub-prime market
    in Australia, which result in large scale sudden
    readjustments of mortgage commitments after a set
    number of years.

5
Are we having a US Style sub-prime crisis?
  • However
  • Consumer debt as a percentage of GDP has grown
    faster in Australia than in the US and is now one
    of the highest in the world
  • The unofficial subprime market in Australia is
    hard to quantify
  • Australian consumers have had unprecedented
    opportunities in the last 5 years to repay debt
    with debt, hiding true levels of financial stress
  • Debtors are now facing the additional pressure of
    interest-rate rises resulting from the sub-prime
    crisis in the US, escalating any latent problems
    in the local market.

6
And Deeper in Debt.... Dr Steve Keen September
2007
7
CCLC Statistics Home Repossessions
  • Number of calls to the Credit and Debt Hotline
    regarding the imminent repossession of the
    callers home by calendar years to March.

8
CCLC Statistics Legal Advice re Home loans
  • Calls to the CCLC legal advice line regarding
    home loans and home equity products by calendar
    years with 2008 projected from the first three
    months.

9
Home Repossessions
  • Reserve Bank estimates 40,000 people are one
    month behind in mortgage repayments with 15,000
    more than 3 months overdue
  • Arrears in Western Sydney are 2.5 times greater
    than those in other parts of NSW (15
    repossessions per week in Blacktown for example)
  • 3,948 writs of possession issued in NSW in 2007
    75 homes being repossessed each week
  • 30 increase in increase in 2007 in people
    accessing their superannuation to prevent the
    repossession of their homes

10
NSW Supreme Court Applications for Possession
of Land
  • 1990 - 2481
  • 1991 - 3287
  • 1992 - 2288
  • 1993 - 2005
  • 1994 - 1300 (estimated)
  • 1995 - 1522
  • 1996 - 1806
  • 1997 - 1568
  • 1998 - 2162
  • 1999 - 2095
  • 2000 - 2151
  • 2001 - 2671
  • 2002 - 2189
  • 2003 - 2361
  • 2004 - 3061
  • 2005 - 4873
  • 2006 - 5368

11
Other Debt
  • Repossessions only part of the story

12
CCLC analysis callers with credit card debt
Sept 2004 Jun 2006
13
  • CCLC call data
  • 7,548 calls in the 04/05 financial year
  • 9,204 calls in the 05/06 financial year
  • 11,297 in the 06/07 financial year
  • Looking at over 12,000 calls for this financial
    year although it could be more based on the 1st
    quarter of 2008.
  • Veda Advantage reported in February 2008 that
    there had been a 35 increase on credit
    agreements generally in the past year.

14
Current Law and Codes of Practice
  • Responsible Lending

15
Who says lenders have to assess borrowers
capacity to repay debts?
  • UCCC Unjust Contracts
  • S70(2)(l)
  • Whether at the time the contract, mortgage or
    guarantee was entered into or changed, the credit
    provider knew, or could have ascertained by
    reasonable enquiry of the debtor at the time,
    that the debtor could not pay in accordance with
    its terms or not without substantial hardship.

16
Who says lenders have to assess borrowers
capacity to repay debts?
  • Code of Banking Practice
  • 25.1
  • Before we offer or give you a credit facility (or
    increase an existing facility), we will exercise
    the care and skill of a diligent and prudent
    banker in selecting and applying our credit
    assessment methods and in forming our opinion
    about your ability to repay it.

17
Who says lenders have to assess borrowers
capacity to repay debts?
  • Mortgage Finance Association of Australia Code of
    Practice
  • 21A
  • A Member must suggest or recommend to an
    applicant only those arrangements for finance
    that the Member genuinely and reasonably believes
    are appropriate to the needs of that applicant
    after undertaking an assessment of the
    applicants capacity to repay the loan.
  • 24
  • A Residential Loan Member must always make such
    enquiries as are reasonably necessary in all the
    circumstances to determine an applicants
    capacity to repay the proposed loan.

18
Is anyone listening?
  • Apparently not!
  • Repeated examples of mismatches between credit
    card limits and ability to repay presenting at
    all relevant services over many years spreading
    to other portfolios such as personal loans
  • Growth in low-doc and no-doc lending for loans
    secured over residential property
  • Evidence of predatory lending in the home loan
    market both for standard home loans and small
    (caveat) loans for mortgage arrears and
    repayment of other personal debts

19
Predatory Lending
20
Why is regulatory framework so ineffective?
  • Credit has is regulated by states and largely not
    included in federal financial services
    regulation. Some benefits but some large
    drawbacks
  • No licensing of credit providers or brokers (at
    least to date) industry association can expel
    but offender still operates in market
  • No compulsory membership of external dispute
    resolutions (such as Banking and Financial
    Services Ombudsman or Credit Ombudsman Ltd)
  • Limited to personal household credit (FSR
    includes small business and most individual
    investors)

21
Why is regulatory framework so ineffective?
  • Weaknesses in UCCC provision
  • Only applies to loans for predominantly personal
    or domestic household purposes
  • Does not address responsible lending on a
    systemic scale (credit card debt and
    Low-doc/no-doc loans) part of shopping list of
    unjust factors, not a clear obligation with a
    penalty for failure to comply, limited to
    individual negotiations on behalf of clients
    already in trouble rather than prevention,
    remedies inadequate to either restore clients
    position or deter lenders (eg Cook Case)
  • Widespread avoidance Bills of exchange and
    Promissory Notes, Business/Investment Purpose
    Declarations, no interest loans, cheque cashing
    fees, split entities brokerage

22
Why is regulatory framework so ineffective?
  • Code of Banking Practice provision is
    non-specific, and can lead to a lowest common
    denominator approach.
  • There is considerable profit in the large grey
    area between clearly cant pay and can repay
    entire debt comfortably.

23
Why is regulatory framework so ineffective?
  • The role of brokers
  • Enormous growth in the past 10 years now
    involved in about 40 of new home loans
  • Little or no regulation in most states
  • A significant number are prepared to manipulate
    loan applications from relatively minor omissions
    and extrapolations to serious fraud
  • Have created complications in holding credit
    providers to account at law for their lending
    decisions
  • All seriously dodgy or predatory loans involve
    at least on broker, and often a solicitor and
    possibly an accountant

24
Reforms that are on the table
  • Credit Debt

25
Uniform Consumer Credit Code
  • Promissory Notes and Bills of Exchange are now
    covered as of November 2007
  • Consumer Credit Code Amendment Bill 2007
    currently coming to the end of the consultation
    phase
  • Amendment to prevent abuse of business purposes
    declarations
  • Prohibition on taking security over household
    items that would be protected in bankruptcy
  • Improved ability to challenge fees

26
National Finance Broking Bill 2007
  • Proposed National uniform legislation - Bill out
    for comment that includes
  • Compulsory licensing
  • Compulsory membership of EDR
  • Obligations to borrower including obligation to
    assess capacity to repay, additional advice
    obligations when recommending reverse mortgages
  • Penalties and remedies

27
Compulsory External Dispute Resolution
  • All deposit taking institutions are already
    required by FSR to be members of an ASIC approved
    EDR which captures banks, credit unions and
    building societies.
  • Many large, well-known credit providers are in
    EDR voluntarily but can withdraw at any times
    (RAMS, issue with unpaid determinations)
  • The Ministerial Council for Consumer Affairs has
    agreed in principle that this should be extended
    to all credit providers but no proposed
    legislation at present (Victoria is going alone
    additional registration requirement)

28
Productivity Commission Recommendations
  • A brave new world?

29
Productivity Commission Recommendations
  • In relation to credit generally
  • The federal government should take over the
    regulation of credit including credit providers
    and brokers/advisors
  • ASIC should have responsibility for credit within
    the overarching FSR regime
  • The UCCC should be retained (appropriately
    modified)
  • Finance brokers should be licensed and required
    to belong to EDR
  • Credit providers that are not already licensed
    under FSR should be required to be registered
    with EDR as a compulsory condition of
    registration

30
Productivity Commission Recommendations
  • In relation to responsible lending in particular
  • Overall debt levels manageable (we can afford it)
  • Some pockets of difficulty
  • No US style sub-prime crisis in Australia
  • Undecided on the issue of whether the current law
    is inadequate to engender systemic change in
    relation to poor lending practices
  • Specifically notes that other recommendations
    such as expanding enforcement tools available to
    regulators and unfair contract terms legislation
    might help without any other changes

31
Pros and Cons
  • Pros
  • Procedures for reforming State-based uniform law
    have been completely unwieldy resulting in
    glacial pace for even non-controversial reforms
  • ASIC has proven a pro-active regulator with a
    good understanding of consumer protection issues

32
Pros and Cons
  • Cons
  • Many long-awaited reforms are now in the final
    stages of consultation and further delays would
    be unacceptable
  • Risk of a lowest common denominator approach to
    State innovations at the expense of consumer
    protection (48 cap, unfair terms)
  • Extremely disappointing response to crucial issue
    of the credit crisis denying it exists leaves
    us without an adequate discussion about how to
    deal with the situation we are in (Hardship
    responses) and how to prevent its further
    exacerbation or repetition in the future
    (responsible lending)

33
Response of the New Federal Government
  • Where to from here?

34
Recent COAG announcement
  • COAG recently announced that the Federal
    Government will assume responsibility for
    mortgage brokers, mortgage lending and advice
    with the details to be reported on in October
    2008.
  • Appears they could be planning a partial
    take-over of credit as in the UK where first
    mortgages are regulated by the Financial Services
    Authority and other credit by the Office of Fair
    Trading.

35
What do we want?
  • We are planning to write to the Federal and State
    government Ministers immediately asking for
  • No delays to current reform processes in
    particular the broking legislation and the
    changes to the UCCC contained in the 2007 Bill
  • An immediate co-ordinated government response to
    the current credit crisis including improved
    hardship and enforcement rights, compulsory EDR
    for all credit providers, improved resources for
    financial counsellors and free legal advice
    services (Legal Aid and CLCs) and other ancillary
    matters.
  • Urgent reform in relation to responsible lending
    provisions.

36
Consumer Credit Legal Centre
  • Credit and Debt Hotline main source of CCLC
    client intake 1800 808 488 referral to
    financial counsellors in NSW
  • Financial Counsellors at CCLC strategies,
    contact details, serial advice, some negotiations
  • Solicitors - legal advice and representation
  • Pilot Insurance Service 1300 663 464
  • Education
  • Policy
  • Media
  • Website and other publications
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