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APRA PROPOSES CHANGES TO HOME LOAN RISK WEIGHTING
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In a discussion paper released on 27 November, the Australian Prudential Regulation Authority (APRA) proposes the introduction of more detailed criteria for authorised deposit‑taking institutions (ADIs) to qualify for the concessional risk‑weighting of residential mortgage lending for capital adequacy purposes.

APRA’s proposal follows its earlier survey of the experience of ADIs with “low doc” loans, which are written with considerably less documentation and verification of income and serviceability than “conventional” mortgage lending. APRA has also noted that, in some cases, ADIs are offering loans originated via mortgage brokers and other third‑party channels, without independently verifying relevant information about the borrowers.

Most loans made by ADIs have a 100 per cent risk‑weight for capital adequacy purposes. However, a concessional risk‑weight of 50 per cent applies to loans that are fully secured by registered mortgage over a residential property, provided certain criteria are satisfied. This concession reflects the very low loss rates historically associated with mortgage lending in Australia. It also reflects the fact that conventional mortgage lending by ADIs has involved them undertaking a comprehensive assessment of the ability of the borrower to service the loan, as well as ensuring that the property is appropriately valued.

APRA’s proposed new criteria are:

an ADI must have documented procedures in place to assess the ability of potential borrowers to meet repayment obligations;
an ADI must have established verification procedures to substantiate critical data provided by potential borrowers;
where an ADI does not use a formal valuation, its lending procedures must detail the criteria used to justify the purchase price, or other means of valuation, as an indication of the value of the residential property;
where an ADI requires a formal valuation for a home loan, all residential properties securing the loan must be subjected to an independent valuation;
loans will only be eligible for the concessional risk‑weighting if they are secured against properties zoned residential or where the ADI can demonstrate the marketability of the property would be of a similar nature to properties with such zoning;
a 100 per cent risk‑weight will be assigned to loans that do not fulfil the criteria set out above unless (1) the loan‑to‑valuation ratio (LVR) at origination is 60 per cent or less or (2) the loan is fully mortgage insured with a mortgage insurer rated at least A, in which case the risk‑weight will be 50 per cent; and
where an ADI outsources any part of the credit process to a third party, the arrangement must comply with APRA’s prudential standard APS 231 Outsourcing, and the ADI’s lending criteria must be met at all times.

A full copy of the discussion paper is available on APRA’s website.

ADIs and other interested parties have the opportunity to comment on the proposed changes before they are finalised. The consultation period will end on 30 January 2004. The intended date for implementing the proposed changes is 1 July 2004.

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Harassment by debt collectors
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Esanda Finance Corporation Ltd will pay a customer and his wife $20,000 compensation after the Federal Court declared it acted unconscionably and used undue harassment when its debt collectors and tow truck operators entered the customer's home and pinned him to the ground while they re-possessed a car.

The ACCC instituted proceedings against Esanda, Capalaba Pty Ltd trading as Nationwide Mercantile Services (NMS), and six individuals (three debt collectors and three tow truck operators). It was alleged that the customer was subjected to physical force, undue harassment, and unconscionable conduct in breach of the Trade Practices Act 1974*. The ACCC also alleged a number of individuals breached the Western Australian Fair Trading Act 1987.

Esanda consented to Federal Court declarations that:

- Esanda acted unconscionably by serving a demand notice in a way that conveyed or was capable of conveying that Esanda would not, or could not lawfully, re-possess the car without a court order and then had the car re-possessed without an order; and also by failing to stop or suspend orders to its agents to re-possess the car when it had reasonable cause to believe that a physical confrontation may occur if the re-possession was attempted or carried out.

- Esanda acted unconscionably by its agents entering the customer's home by jumping a gate for the purpose of opening the garage from the inside; and by not stopping the re-possession when they had reasonable cause to believe a physical confrontation may occur.

- Esanda used undue harassment by its agents' and/or sub-agents' repeated attendances at the customer's home, including surveillance, and its agent approaching the customer's wife at work, claiming the vehicle had been sold, hidden and/or stolen and demanding its location.

NMS consented to a declaration that it used physical force when its tow truck operators physically restrained the customer while the car was being removed. The debt collectors consented to declarations that they aided and abetted and were knowingly concerned in NMS's use of physical force.

NMS and the three debt collectors consented to declarations that they aided and abetted and were knowingly concerned in Esanda's unconscionable conduct and undue harassment.

After a trial, the tow truck operators were found to have aided and abetted and to have been knowingly concerned in Esanda's unconscionable conduct by not stopping their attempts to re-possess the car when they had reasonable cause to believe a physical confrontation may occur if they continued.

Two tow truck operators were found to have contravened section 23 of the WA Fair Trading Act by physically restraining the customer while the vehicle was being removed.

The court made orders:

- restraining Esanda from engaging in similar conduct in the future;

- requiring Esanda to change some of its procedures and instructions to its agents;

- requiring Esanda to pay $20,000 compensation to the customer and his wife;

- reducing the amount of the loan by $1892.73; and

- pay the ACCC's costs.

The court restrained the collection agents from engaging in similar conduct in the future, ordered them to attend compliance seminars and pay costs.

Justice Malcolm Lee said the conduct was "clearly unfair or unreasonable".

This is the first time that the prohibition on the use of physical force in section 60 has been considered by the courts.

Justice Lee said that section 60 of the Act is "intended to govern relations between trading corporations and consumers by providing that a corporation is not to resort to harassment, or the use of physical force, in support of a demand for the payment by a consumer for goods or services supplied to the consumer".

He considered the Act to set "a norm of corporate conduct in which the use of physical force, or undue harassment, by a corporation in such circumstances is deemed to be unacceptable".

BACKGROUND

In July 1998 Esanda loaned $15,092.02 to a consumer to buy a car, secured by a chattel mortgage over the car. By April 2000, the arrears exceeded $1,800 and, by service of a notice, Esanda demanded that the consumer fix his default under the mortgage. On 20 June 2000 the car was repossessed with $2,180 outstanding.

The allegations made against Esanda and other respondents by arise from the manner in which the re-possession occurred. Esanda instructed agents and sub-agents to recover the car, on terms that no remuneration would be paid unless the agents succeeded re-possessing the vehicle or obtaining payment in full of the arrears due. The agents and sub-agents of Esanda contacted the consumer, or made it known that the consumer's movements were being monitored. Additionally, an Esanda agent went to the consumer's wife's work in circumstances which caused her embarrassment and humiliation. On 20 June 2000 three debt collectors and three tow truck drivers went to the customer's home to seize the car. One agent jumped a gate and opened the garage door from inside. A tow-truck was reversed into the garage. As the operator's were connecting the customer's car to the tow-truck, the customer ran into the garage in an agitated state. In the scuffle that ensued two operators pinned the customer to the ground and kept him there. After the customer's car was towed away the operators 'got up off' the customer and ran out of the garage.

More about debt harassment

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Financial Sector Bill
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On 4 November 2003, the House of Representatives agreed to the 3 amendments made by the Senate to the Financial Sector Legislation Amendment Bill (No 2) 2002. The amendments clarify the implementation of the "fit and proper" test to be applied by APRA for directors and officers of Approved Deposit-taking Institutions. The Bill is waiting for Royal Assent.

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Misleading advertising
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In ACCC v Commonwealth Bank of Australia [2003] FCA 1129, an advertisement with bold headlines that "no establishment fee" was payable for a home loan, when in fact customers had to either already hold or obtain two or three additional bank products to take up the offer of “no establishment fee”, was held to be misleading. The Federal Court said that the addition of the words "terms and conditions apply" did not override a false representation that is bold in its initial assertion.

Read the full judgment

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Importance of protecting product names
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In a competitive industry, where considerable amounts are spent on marketing, organisations are growing more protective of their investments.

In a recent Trade Mark case, Credit Union Services Corporation (Australia) Limited failed in its opposition to an application by St George Bank to register "Freedom" as a trade mark.

If you are promoting a product or service name that gives you a competitive edge then protect it. See our article (PDF).

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Another ASIC mortgage broker investigation
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The Australian Securities and Investments Commission (ASIC) has accepted an enforceable undertaking from Express Loans and Finance Pty Ltd, operators of the Express Loans mortgage broking business (Express Loans). The undertaking provides for the payment of compensation to past clients who lost money due to its advertising and broking practices.

ASIC accepted the enforceable undertaking following an investigation which found that some of Express Loans' advertising and broking practices misled borrowers and deposit bond issuers.

Express Loans, based in western Sydney, placed advertisements containing statements including '100% Home Loans Available', 'No deposits' and '100% Loans Available' in the Yellow Pages, Real Estate Magazines, the Daily Telegraph and a number of local newspapers.

ASIC was concerned that this advertising had misled, or would be likely to mislead consumers into believing that 100 per cent home loans were available without any deposit or other security.

ASIC was also concerned by Express Loans' broking practices.

Express Loans obtained deposit bonds on behalf of clients, so that they could exchange sale contracts without having to pay a deposit. ASIC received complaints from clients who used a deposit bond on the understanding that Express Loans had arranged a 100 per cent loan. However, the clients found that, at the completion of the sale, less than 100 per cent finance was available. A number of these clients were unable to source other funds, were unable to purchase the property, and were sued by the insurance company that provided the deposit bond.

ASIC's investigations also found that on a number of occasions Express Loans had prepared deposit bond applications, and provided letters of loan approval on Express Loans letterhead, that incorrectly stated that the client had loan approval for 100 per cent of the purchase price of the property. In fact, there was either no loan approval, or loan approval for a lesser amount.

As part of the enforceable undertaking accepted by ASIC, Express Loans has agreed to:
write to all past clients who may be affected by Express Loans advertising or broking practices;
appoint an independent reviewer to consider claims by past clients;
advertise 'no deposit' or '100 per cent' home loans only if any special conditions are clearly explained;
state that a client has loan approval only if the loan approval has been received from the relevant mortgage originator or lender.

Express Loans will also cease charging an up front fee for its services prior to the arrangement of credit.

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Who can be a Director or Senior Manager of an ADI?
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The Financial Sector Legislation Amendment Bill (No 2) 2002 was passed by the Senate on 30 October 2003 with 3 amendments and now goes back to the House of Representatives. The amendments clarify the implementation of the "fit and proper" test to be applied by APRA in when making an assessment as to whether an affected person is fit and proper to act as a director or senior manager of an ADI.

Read the Bill

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First Home Owners Grant
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The Queensland Government has introduced the First Home Owner Grant Amendment Bill 2003 to tighten the eligibility criteria for the Commonwealth's First Home Owner Grants.

The Bill will restrict the circumstances in which the grant may be paid to applicants under the age of 18 by way of giving a discretion to the Commissioner of State Revenue to deal with applications on a case-by-case basis. The Bill also contains an anti-avoidance provision to enable the Commissioner to ensure that the grant scheme is not otherwise exploited.

In addition, the Bill will include a 6-month residency period that will require applicants to live in the home as their principal place of residence for at least 6 months (subject to the Commissioner's discretion to reduce the residency requirement in appropriate circumstances). If applicants do not fulfil the residency requirement within the existing 12-month period of the eligible transaction, they would be required to repay the grant. These residency requirements will begin on 1 January 2004.

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