On 17 September 2012, the Consumer Credit Legislation Amendment (Enhancements) Act 2012 ("the Enhancements Act") passed into law. The Act came into full operation on 1 July 2013.
Mature aged borrowers
My focus in this post is the effect of the Act on lending to mature aged borrowers, because among other things it brings into play new rules for dealing with hardship applications.
There does not yet appear to have been any Supreme Court case law based upon this aspect of the amended legislation.
I understand that some lenders have taken a cautious approach to lending to borrowers aged 45 or more because of the risk that those borrowers might retire prior to repaying their loan in full. For example, a standard 30 year mortgage will see 45 year old borrowers owing money until they are 75.
Due to the introduction of the new hardship provisions, lenders are concerned about borrowers approaching retirement (even if retirement age is deferred until 70!) with substantial outstanding principal sums and then making a 'hardship' application on the basis that they now have to sell their family home to repay the balance due to the lender.
Section 131(3) of the National Consumer Credit Protection Act originally provided that if a borrower could only comply with the borrower’s financial obligations under the contract by selling the borrower’s principal place of residence, it is presumed that the loan is ‘unsuitable’ unless the contrary is proved.
The situation has been further complicated by subsections 179(6) and (7) of the National Consumer Credit Protection Act applying from 1 March 2013 due to their introduction in the Enhancements Act.
The effect of the combination of these sections is that if a lender enters into a credit contract with security over the borrower’s principal place of residence and (to use the words of the section) the loan is ‘unsuitable’, a court is empowered to reconsider the loan.
Alternative reverse mortgage loan available
If the court finds (in an application by the borrower, or ASIC) that at the time of the credit assessment for the loan there was a reverse mortgage which would have been suitable and available for that borrower (provided either by that or any other lender), then in effect the court can order the lender to make such a reverse mortgage loan to the borrower, allowing the borrower to reside in the place of residence possibly until death to prevent or reduce loss or damage suffered or likely to be suffered by the borrower vacating the home.
Problems for lenders
Lenders face two problems in this scenario: First they may be breaching the responsible lending provisions, and secondly, they may be subject to a court ordered long term occupant to whom they did not agree.
Lenders must therefore now carefully consider the type of loan that they are prepared to make to borrowers aged 45 or older.
The regulations (in particular 209.71, which provides an example of a borrower who proposes to sell his home to fund repayment and states that the loan will not be unsuitable as the loan meets the borrower’s genuine requirements and objectives) may provide a basis for lenders avoiding this risk down the track.
Detailed evidence needed
Lenders and finance brokers will now need to obtain a written statement from each older borrower stating in some detail their intention to sell the security property when they can no longer make the repayments, and that this sale fits with their requirements and objectives. Perhaps caution requires a statement of an intention to 'down size' from the current family home on retirement to a smaller (and cheaper) retirement residence.
It seems that the legislation is another potential, furtile ground for litigation against lenders in circumstances where any difficulty that a borrower faces in several (possibly many) years cannot have been foreseen at the time that the loan was made.