KAREN COX

COORDINATOR CONSUMER CREDIT LEGAL CENTRE

Credit Crisis

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.

The debt problem

Credit Crisis

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.

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.

And Deeper in Debt....Dr Steve Keen September 2007

1960 1980 20000

50

100

150 Private DebtExponential FitGovernment Debt

Australia's Debt to GDP Ratios

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CCLC StatisticsHome Repossessions

Number of calls to the Credit and Debt Hotline regarding the imminent repossession of the caller’s home by calendar years to March.

CCLC StatisticsLegal 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.

•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

Home Repossessions

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

Repossessions only part of the story

Other Debt

CCLC analysis – callers with credit card debt Sept 2004 – Jun 2006

Debt Range – Total amount owed across all credit card accounts

Amount Owed Number of callers within range

Under $3,000 500

$3,000 - $5,000 460

$5,000 – $9,999 501

$10,000 - $19,999 528

$20,000 - 39,999 372

$40,000 - $79,999 144

Greater than $80,000 48

Insufficient information given 0

CCLC call data7,548 calls in the 04/05 financial year9,204 calls in the 05/06 financial year11,297 in the 06/07 financial yearLooking 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.

Current Law and Codes of Practice

RESPONSIBLE LENDING

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.

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.

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 applicant’s 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 applicant’s capacity to repay the proposed loan.

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

Predatory Lending

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)

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 client’s 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

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 can’t pay and can repay entire debt comfortably.

Why is regulatory framework so ineffective?

The role of brokersEnormous 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

CREDIT & DEBT

Reforms that are on the table

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

National Finance Broking Bill 2007

Proposed National uniform legislation - Bill out for comment that includes:

Compulsory licensingCompulsory membership of EDRObligations to borrower including obligation to

assess capacity to repay, additional advice obligations when recommending reverse mortgages

Penalties and remedies

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)

A brave new world?

Productivity Commission Recommendations

Productivity Commission Recommendations

In relation to credit generallyThe 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

Productivity Commission Recommendations

In relation to responsible lending in particular:Overall debt levels manageable (we can afford it)Some pockets of difficultyNo US style sub-prime crisis in AustraliaUndecided 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

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

Pros and Cons

ConsMany 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)

Where to from here?

Response of the New Federal Government

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.

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.

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