1 JULY 2010 UPDATE

Important Notes regarding Low Doc Loans and the National Consumer Credit Protection Act

From a Low Doc perspective, Brokers and Lenders are now required to make "fair and reasonable" enquiries regarding the Borrowers objectives and ongoing capacity to repay a Loan. As a result, Income Declarations where an Applicant signed a Form self declaring earnings of $x pa will no longer be considered as sufficient proof of the capacity to repay. Having said this, the Act does not specify what sort of additional enquiries need to made ... it simply says that it is not permissible for a Broker/Lender to make no enquiries.

Because of this, we are now required to ask for some evidence that Borrowers are in a position to service the requested loan on an ongoing basis. What we may ask for will depend on your particular situation. Some examples include: Very little (for sophisticated Investors/high nett worth individuals), 6 months of current mortgage statements, 6 months of current rental statements, 3-6 months of Bank Statements showing income flow, BAS statements for 6 months, Accountants Letters and so forth. Our objective is simply to satisfy ourselves that you will not be placed in a position of hardship should your Loan Application be successful. It is also important to note that we will work with you to satisfy this requirement. To this end, we will be open to any documentary proof that you can provide us that will satisfy the spirit of the legislation.

Please read the article below for more background relating to this issue (predictavely accurate).

MAY 2009

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 heavy penalties to the Broker/Lender. 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 or refinance 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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