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Issues with the global economy (primarily as a result of the Sub Prime crisis in the US) has seen a considerable tightening of Monetary
Policy across the Globe over the last 18 months.
This has particularly impacted on Non Bank Home Loan Lenders who have relied on a Securitisation model as their sole source of funding.
Additionally, mainstream Banks have tightened
their Lending Policies to minimise perceived Risk Levels given the uncertain times that lie ahead.
This has resulted in the following recent changes to Home Loan Lending Policy (amongst others):
- COMPLETE withdrawal of MANY Low Doc Lenders from the marketplace.
- LIMITATION of LVR's by many existing Low Doc Lenders to a maximum of 60% (some 80% Low Doc loans are still available).
- REDUCTION in LVR's for Full Doc Borrowers (a maximum of 90% is now "the norm").
Additionally, the Federal Government is about to pass Legislation that will take the regulation of Credit away from the States and incorporate it
into a new Code called the National Consumer Credit Protection Act. This piece of Legislation will encompass ALL FORMS of Consumer Lending (Home Loans,
Car Loans, Credit Cards, Interest Free Store Loans and Equipment Rental, to name but a few). The Bill was released on the 27th April 2009 with
submissions due by 22nd May 2009. It is expected to be operable from the 1st November 2009 (with Business Finance to follow at a later date).
In a nutshell, the new Code has the following major provisions:
- The regulation and Licensing of credit providers, finance brokers and intermediaries or any person who provides credit assistance to loan applicants.
- Inclusion of "Investment Loans" ("unregulated loans") under the Code for individuals.
- Mortgages cannot be placed over Goods essential to the earning of personal income.
- Before making a Loan to a Borrower, a Credit Provider MUST enquire about the Borrowers ability to repay the loan without hardship.
Failure to do so may result in 5 years jail, a $220,000 to $1,100,000 fine or both. Because of this, we believe that Low Doc Loans
(by definition) may not comply with the new Code. As a consequence, Banks and other Lenders may have no choice but to phase out this very
important avenue of Home Loan Lending. This is beginning to happen already ... in early May 2009 Macquarie announced the withdrawal of their
Low Doc Car Loan range of Products from the marketplace due to the impending legislation. The exact wording:
"Unfortunately, pending national credit legislation is likely to soon place additional obligations on introducers and lenders with regard to
assessing the credit-worthiness of applicants. With this in mind, Macquarie Leasing has decided to withdraw the Express Car Loan from the market
as of 1st June 2009. From this date, all applications must be submitted with the standard required financial information."
Additionally, St George, Westpac and RAMS announced in September 2009 that they now require 12 months BAS Returns to be lodged in order to
qualify for a Low Doc Loan.
Click HERE for the Australian Governments summary of the proposed Code.
Click HERE for the FULL Draft Code.
The effect on the economy may be profound. While we support a National approach to the provision of Credit, we believe that the implications of
the Act have not been properly considered from a practical perspective. For example:
- Low Doc Home Loans allow self employed people to purchase property without providing extensive paperwork. The rationale is that
many Borrowers use legal Tax minimisation tactics to reduce their taxable income or simply employ complex Corporate and Trust structures that make it impractical
for them to produce the paperwork required to apply for a conventional Home Loan. This avenue of finance appears to be in jeopardy. This will
effect Borrowers, Lenders, Finance Brokers and the property market in general, as an entire class of Buyers may now be excluded from the Marketplace.
- Because of the severe penalties that are scheduled to be introduced, Lenders will need to be far more diligent when granting Credit to a
prospective Borrower. This means that the Application process may be much longer and "border line" cases may simply be excluded from obtaining a
loan (the "when in doubt" approach). Once again the effect on the Real Estate Market (and associated industries) may be devastating.
- Major Retail outlets may have difficulty in providing Interest Free / Store Credit as the requirements to determine an Applicants credit
worthiness appear to be prohibitive. As a result, Retailers of major ticket items may be adversely effected to the extent where it may no longer be
viable for them to continue operations. The loss of jobs could be substantial.
- Motor Vehicle Retailers may be in a similar situation. In the past, Credit has been reasonably easy to obtain as an extensive forensic examination
of an Applicant's ability to repay has not normally been undertaken. Additionally, it could be argued that a Tradesman's Motor Vehicle is an essential
means to earn personal income ... how will this be treated under the new Code? ... will they even be able to get a loan if the Security offered
(ie: the "Work Vehicle") is essential to earning their income?
- Many businesses also rely on Rental plans for IT equipment and Furniture. At the moment, it is a simple matter to walk into a Retail Store and
walk out with $5,000 worth of Computer Equipment under a rental plan (eg: Flexirent) without going through an extensive Credit Application process.
Will this sort of financing now be shut off?
Keith Jenkins - Managing Director
Webloan Pty Ltd t/as lowdocloans.com.au
May 2009
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