Transcript Credit Crisis - Community Legal Centres NSW

Credit Crisis
KAREN COX
COORDINATOR CONSUMER
CREDIT LEGAL CENTRE
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
Aus tralia's Debt to GDP Ratios
Percent of GDP
150
Private Debt
Exponential Fit
Government Debt
100
50
0
1960
1980
2000
CCLC Statistics
Home
Repossessions
Number of calls to the
Credit and Debt Hotline
regarding the
imminent repossession
of the caller’s home by
calendar years to
March.
300
284
250
200
191
150
126
100
50
0
30/3/05 to 29/3/06
30/3/06 to 29/3/07
Credit & Debt Hotline - Yearly
30/3/07 to 29/3/08
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.
700
600
600
500
400
321
300
236
200
100
55
0
2005
2006
2007
2008 (projected)
Home Repossessions
•R e s e r v e B a n k e s t i m a t e s 4 0 , 0 0 0 p e o p l e a r e o n e m o n t h
behind in mortgage repayments with 15,000 more than 3
months overdue
•A r r e a r s i n W e s t e r n S y d n e y a r e 2 . 5 t i m e s g r e a t e r t h a n
those in other parts of NSW (15 repossessions per week
in Blacktown for example)
•3 , 9 4 8 w r i t s o f p o s s e s s i o n i s s u e d i n N S W i n 2 0 0 7 = 7 5
homes being repossessed each week
•3 0 % i n c r e a s e i n
increase in 2007 in people accessing
their superannuation to prevent the repossession of their
homes
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
Other Debt
Repossessions only part of
the story
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 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.
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 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
Reforms that are on the
table
CREDIT & DEBT
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
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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 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
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)
Productivity Commission
Recommendations
A brave new world?
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
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
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
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)
Response of the New Federal
Government
Where to from here?
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
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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