Senate

Revised Explanatory Memorandum

Circulated by the authority of the Minister for Financial Services and Superannuation, the Hon Bill Shorten MP

Chapter 3 - Reverse mortgages

Outline of chapter

3.1 Schedule 2 of the Consumer Credit Legislation Amendment (Enhancements) Bill 2012 (Enhancements Bill) introduces new obligations for persons who engage in credit activities in relation to reverse mortgage contracts. The key elements of these requirements are:

•

introducing a 'no negative equity guarantee' protection through a prohibition against credit providers requiring or accepting repayment of the loan for an amount which exceeds the market value of the mortgaged property (subject to certain exceptions);

•

mandating that holders of an Australian credit licence must undertake the following conduct before they make an assessment or a preliminary assessment under sections 123, 124 or 128 of the NCCP Act:

-

using a website approved by the Australia Securities and Investments Commission (ASIC), show a consumer projections of the potential effect a reverse mortgage may have on the value of the equity they have in their home;

-

provide the consumer with a printout of these projections;

-

notify the consumer of additional information that will assist them to decide whether to enter into a reverse mortgage, and, if so, on what terms; and

-

give the consumer a reverse mortgage information statement;

•

prohibiting credit providers from specifying that certain types of conduct can constitute a default under a reverse mortgage contract;

•

disclosure of the way in which non-title holding residents will be treated under a reverse mortgage contract;

•

prohibiting credit providers from entering into a reverse mortgage contract unless the consumer has received legal advice regarding the contract (with commencement of this obligation deferred to a date to be prescribed by regulation); and

•

introducing new requirements on credit providers where they have given a default notice to a debtor, including an obligation to take reasonable steps to contact the debtor in person, to make sure they understand they are in default and therefore provide them with an opportunity to rectify the default.

Context of amendments

3.2 At its meetings on 3 July and 2 October 2008, the Council of Australian Governments (COAG) agreed to implement a two-phase implementation plan to transfer responsibility for the regulation of credit to the Commonwealth.

3.3 The NCCP Act implemented Phase One of the Implementation Plan by introducing a Commonwealth statutory framework for the regulation of persons who engage in credit activities, including the requirement to hold an Australian credit licence.

3.4 Under Phase Two, COAG agreed the Commonwealth would consider reforms to the regulation of reverse mortgages.

3.5 In August 2010, the Government announced the Delivering for Seniors package which included enhancements to protections for seniors seeking to access the equity in their homes using reverse mortgages and home reversion schemes.

3.6 Reverse mortgage contracts require targeted regulation because they differ from other credit contracts. Some of the main differences are that:

•

they are marketed exclusively to seniors or persons approaching an age where they will retire from the workforce;

•

interest is capitalised as there is no obligation on the borrower to make regular repayments, meaning the amount owing increases over time;

•

at the time they are considering taking out the loan, consumers have no way of accurately determining the value of the equity in their home over time; and

•

debtors may be required to repay more than the value of the mortgaged property at a stage in their life when they may no longer have the financial resources to be able to do so.

3.7 The Enhancements Bill contains amendments to the NCCP Act to address these issues.

Summary of new law

3.8 The Enhancements Bill contains amendments to the NCCP Act (including the National Credit Code) which relate specifically to contracts for reverse mortgages.

3.9 In general terms a reverse mortgage contract is defined as a contract in which the balance of the credit contract will increase over time (as the borrower will ordinarily only repay the debt following sale of their residence).

3.10 The key elements of these amendments are:

•

creating a prohibition against credit providers requiring or accepting repayment of the loan for an amount which exceeds the market value of the mortgaged property;

•

requiring licensees to undertake the following conduct before they make an assessment or a preliminary assessment under sections 123, 124 or 128 of the NCCP Act:

-

using a website approved by the Australia Securities and Investments Commission (ASIC), show a consumer projections of the potential effect a reverse mortgage may have on the equity they have in their home;

-

provide the consumer with a printout of these projections;

-

notify the consumer of additional information that will assist them to decide whether to enter into a reverse mortgage, and, if so, on what terms; and

-

give the consumer a reverse mortgage information statement.

•

prohibiting credit providers from specifying that certain types of conduct can constitute a default under a reverse mortgage contract;

•

disclosure of the way in which non-title holding residents will be treated under a reverse mortgage contract;

•

prohibiting credit providers from entering into a reverse mortgage contract unless the consumer has received legal advice regarding the contract (with commencement of this obligation deferred to a date to be prescribed by regulation); and

•

new requirements on credit providers where they have given a default notice to the debtor, including an obligation to take reasonable steps to contact the debtor in person, to make sure they understand they are in default and therefore provide them with an opportunity to rectify the default.

Comparison of key features of new law and current law

Detailed explanation of new law

Commencement

3.11 Part 2 and items 12, 13, 14, 16, 17, 18, 21, 22, 24, 25 and 26 of Schedule 2 commence on 1 March 2013. Part 1 and items 15, 19, 20 and 23 of Schedule 2 commence on the day the Enhancements Bill receives Royal Assent.

Schedule 2 - Reverse mortgages

Part 1 - Definitions

Division 1 - Definition of reverse mortgage

3.12 Part 1 inserts definitions of expressions relevant to these reforms into both section 5 of the NCCP Act and section 13A of the Code.

3.13 A reverse mortgage is defined for the purposes of the NCCP Act as having the same meaning as in section 13A of the Code. [Schedule 2, item 1, subsection 5(1)]

3.14 A reverse mortgage is defined for the purposes of the Code as an arrangement which involves a credit contract and a mortgage over a dwelling or land securing a debtor's obligations under the contract and either:

•

the arrangement is an arrangement of a type which ASIC has declared to be a reverse mortgage [Schedule 2, item 2, paragraph 13A(1)(b) and subsection 13A(4)]; or

•

the arrangement meets the following two conditions:

-

the total amount the borrower owes under the contract or mortgage may exceed the maximum amount of credit they may be provided under the contract without them being required to reduce their liability to a figure equal to or below that maximum amount [Schedule 2, item 2, paragraph 13A(1)(a) and subsection 13A(2)]; and

-

the arrangement meets any prerequisites prescribed by the regulations (with it anticipated that this regulation-making power may be needed to exclude other classes of credit contracts where the protections applicable to reverse mortgages are not appropriate) [Schedule 2, item 2, paragraph 13A(1)(a) and subsection13A(3)].

Example 3.1

A lender offers a credit product which provides the borrower with a $50,000 loan. The credit contract allows the borrower to not have to make regular repayments but that full repayment has to be made if the borrower sells or permanently vacates their home, or upon the death of the borrower. Until this time, interest on the loan is compounded with the total amount owing under the loan able to increase above the $50,000. Since the credit contract allows the borrower's total debt to exceed the initial $50,000 without any obligation to reduce that liability under that amount (and meets any of the additional prerequisites under the regulations) the contract would be a reverse mortgage for the purposes of the Code and the NCCP Act.

3.15 ASIC may, by a legislative instrument, declare a credit contract to be a reverse mortgage [Schedule 2, item 2, subsection 13A(4)]. This will allow ASIC, as the national regulator for consumer credit, to ensure that changes in product design do not have the result that those credit contracts which should be regulated under the NCCP Act as a reverse mortgage will not be subject to the protections introduced in Schedule 2. ASIC's power to make this type of declaration in respect to reverse mortgage contracts is analogous to its power under section 761AE of the Corporations Act 2001 in relation to margin lending facilities.

3.16 There is a cross-reference to the definition of a reverse mortgage in subsection 204(1) of the Code, with that subsection specifying that the term is defined in section 13A of the Code. [Schedule 2, item 3, subsection 204(1)]

Division 2 - Other definitions

3.17 For the purposes of the NCCP Act, a reverse mortgage information statement is defined as a document relating to reverse mortgages which complies with the regulations. [Schedule 2, item 4, subsection 5(1)]

3.18 It is anticipated that the form of the reverse mortgage information statement will be a document containing generic information regarding the key features and implications of reverse mortgages (in response to the characteristics of this market as discussed in paragraph 3.6).

3.19 The Enhancements Bill also introduces a definition of a bridging finance contract, as a contract where:

•

firstly, at the time the contract is made the debtor reasonably expects to receive a lump sum before the end of the contract and to use that sum as far as possible to meet their obligations under the contract;

•

secondly, that the contract must be for a term of two years or less; and

•

thirdly, if the regulation prescribe any conditions, those conditions are met. [Schedule 2, item 5, subsection 204(1)]

3.20 Bridging finance contracts are excluded from the definition of reverse mortgages as these are also credit contracts where the outstanding balance of the contract can increase until the final repayment, but where the protections applicable to reverse mortgages are not necessary.

3.21 It is anticipated that additional conditions that must be met in order for the definition of bridging finance contract to be met will be prescribed by regulations.

3.22 The Enhancements Bill also introduces the following definitions:

•

engage in conduct is defined as meaning the doing of an act or omitting to perform an act [Schedule 2, item 6, subsection 204(1)];

•

practising lawyer is defined as a person admitted to the legal profession by a federal court or State or Territory Supreme Court who holds a practising certificate entitling them to practice law [Schedule 2, item 7, subsection 204(1)]; and

•

reverse mortgaged property in relation to a credit contract is defined as a dwelling or land that is mortgaged to secure a borrower's obligation under a reverse mortgage contract. [Schedule 2, item 8, subsection 204(1)]

Part 2 - Provisions applying to licensees

3.23 A note is inserted into section 133 of the NCCP Act to illustrate the consequences of a breach of the prohibition in that section. The example in the note states that if a person has suffered loss or damage from entering into a credit contract which is unsuitable, when a reverse mortgage would have been not unsuitable, that person may apply to a court under sections 178 or 179 for appropriate orders. These orders may either compensate them for the loss or damage or reduce the loss or damage suffered, by putting the consumer in the position they would have been in had they been placed into a not unsuitable reverse mortgage. [Schedule 2, item 9, section 133]

3.24 This note will assist licensees and debtors to appreciate the importance of complying with section 133, by a cross-reference to the power of the court to make flexible orders to provide a remedy under section 179 where a licensee arranged a credit contract which was unsuitable.

Part 3-2D - Licensees and reverse mortgages

3.25 Part 3-2D of Schedule 2 of the Enhancements Bill imposes obligations on licensees that are intended to enhance a consumer's understanding of the potential outcomes of entering into a reverse mortgage, before they decide whether or not to enter into a particular reverse mortgage contract. These obligations will be in addition to those currently required under Chapter 3 of the NCCP Act.

3.26 The introduction of a new Part 3-2D results in the need to include a Guide to this Part. [Schedule 2, item 10, section 133DA]

3.27 The first obligation will be that licensees use an ASIC-approved website to generate projections made in accordance with the regulations, and to show them to a consumer in person or give them to the consumer in a way prescribed by the regulations. It is expected these projections will illustrate the effect a reverse mortgage contract may have on the value of the equity the consumer has in their home over time, and the potential impact of interest rates and house price movements. They may also show the effect on their equity of different types of loan payments (for example, the difference in the rate at which the consumer's liability increases where they borrow a lump sum or drawdown regular monthly payments). [Schedule 2, item 10, subsection 133DB(1)]

3.28 The licensee must also give the consumer a printed copy of the projections. [Schedule 2, item 10, paragraph 133DB(1)(b)]

3.29 The requirement to show the projections in person is intended to assist the consumer by enabling them to seek explanations directly from the licensee, or ask them questions prompted by the projections.

3.30 It is a defence to these requirements if the licensee reasonably believes the consumer has been shown the projections and received a copy of them from another person [Schedule 2, item 10, subsection 133DB(3)(a)]. The projections would need to have been the same or substantially the same as those the licensee would otherwise be required to show the consumer [Schedule 2, item 10, subsection 133DB(3)].

3.31 Licensees will also have a defence to these requirements in any circumstances that may be prescribed in the regulation. This will enable the obligations to be applied flexibly and respond to changes in licensee procedures. [Schedule 2, item 10, subsection 133DB(4)]

3.32 These defences will avoid duplication if, for example, the credit provider knows that a consumer has already received a copy of the projections from an intermediary such as a mortgage broker.

3.33 The second obligation will be that licensees tell the consumer in person certain matters that relate to reverse mortgages and are prescribed in the regulations [Schedule 2, item 10, paragraph 133DB(1)(c)]. It is anticipated these matters will include notifying the consumer that:

•

there are alternatives to a reverse mortgage which they could consider (such as downsizing to a smaller house); and

•

taking out a reverse mortgage may affect their entitlements to any government benefits they receive (if any). For example, if the proceeds of a reverse mortgage are placed into a financial investment, such as a term deposit, then income from that investment would be assessed under the Commonwealth's deeming rules that apply to all financial investments.

3.34 The third obligation will be to give the consumer a reverse mortgage information statement (as discussed at paragraph 3.18). [Schedule 2, item 10, paragraph 133DB(1)(d)]

3.35 It is a defence to this requirement if the licensee reasonably believes the consumer has already received a statement from another person within the previous 90 days. [Schedule 2, item 10, subsection 133DB(5)]

3.36 A defendant will bear the onus of proving the defences under subsections 133DB(3) and (4). This is appropriate since it would be relatively easier for the defendant to prove that they believed a consumer has been provided with either the projections or information statement by reference to internal procedures.

3.37 A breach of these requirements will attract a civil penalty of 2000 penalty units and also be an offence attracting a criminal penalty of 50 penalty units. [Schedule 2, item 10, subsections 133DB(1) and (2)]

3.38 In addition to the obligation to provide a reverse mortgage information statement under subsection 133DB(3), the following classes of persons must also make available a reverse mortgage information statement:

•

credit providers under one or more reverse mortgages; and

•

licensees who provide, or hold themselves out as providing, credit assistance in relation to reverse mortgages.

3.39 The circumstances in which they must provide an information statement are:

•

through their website (where the person has a website which provides information about reverse mortgages) [Schedule 2, item 10, subsections 133DC(1) and (2)];

•

when the consumer asks the licensee for an information statement, and the consumer has given the licensee their contact details as required by the regulations [Schedule 2, item 10, subsections 133DD(1) and (2)]; and

•

the regulations require a consumer to be given an information statement (and the consumer has given the licensee their contact details as required by the regulations) [Schedule 2, item 10, subparagraph 133DD(1)(b)(ii)]. This regulation making power will allow for flexibility in the circumstances under which a consumer will be able to access an information statement as industry practices change over time.

3.40 Failure to provide an information statement in the above circumstances will attract a civil penalty of 2000 penalty units and is an offence attracting a criminal penalty of 50 penalty units. [Schedule 2, item 10, subsections 133DC(2) and (3) and subsections 133DD(2) and (3)]

3.41 There are two defences provided for a contravention of the requirement to provide a reverse mortgage information statement in response to a consumer's request. These are:

•

that the licensee has already given the consumer, or reasonably believes the consumer has already been given, an information statement [Schedule 2, item 10, subparagraph 133DD(4)(a)]; and

•

if they are a credit provider who offers reverse mortgages, the licensee reasonably believes the consumer would not be eligible for a reverse mortgage from them. [Schedule 2, item 10, subparagraph 133DD(4)(b]

3.42 A defendant will bear the evidentiary burden in relation to these defences. This is considered appropriate since it would be relatively easier for the defendant to prove that they believed a consumer need not be provided with an information statement (either because they establish facts or circumstances as to why they reasonably believe another person has done so or because the consumer would not be eligible for their products, by reference to internal procedures).

3.43 The regulations may also prescribe circumstances in which licensees are not required to give a consumer a reverse mortgage information statement. This will allow reasonable relief from the requirement to provide an information statement as industry practices change over time. [Schedule 2, item 10, paragraph 133DD(4)(c)]

3.44 The Enhancements Bill will prohibit licensees, when providing or offering to provide a credit service to a consumer, from using the phrase 'reverse mortgage' or another term of similar import to it. [Schedule 2, item 10, subsections 133DE(1)and (2)]

3.45 This provision ensures that consumers can have confidence that the term 'reverse mortgage' will be used to describe only those contracts where they will have the benefit of the statutory protections introduced by the Enhancements Bill. Licensees should not be able to use this term where the effect or result may be to encourage a consumer to enter into a credit contract with none of these protections (for example, where they are required to repay the contract after five years).

3.46 A breach of the prohibition on the use of the term 'reverse mortgage' will attract a civil penalty of 2000 penalty units. [Schedule 2, item 10, subsection 133DE(2)]

3.47 It is a defence to this requirement if the use of the phrase reverse mortgage (or phrase of similar import) accurately represents that the credit contract or mortgage being referred to:

•

is or will be a reverse mortgage: or

•

is not or will not be a reverse mortgage.

•

[Schedule 2, item 10, subsection 133DE(3)]

3.48 A defendant will bear the onus of proving the defences under subsections 133DE(3). This is appropriate since it would be relatively easier for the defendant to prove that using the term 'reverse mortgage' is appropriate by reference to internal procedures or the contracts used.

3.49 Section 179 of the NCCP Act is amended to provide for specific consequences where a plaintiff, or ASIC on behalf of a plaintiff, applies to a court for orders to let the plaintiff reside in a reverse mortgaged property to prevent or reduce any loss or damage they have suffered, or are likely to suffer if they were otherwise required to vacate the property. [Schedule 2, item 11, paragraph 179(6)(d)]

3.50 Under section 179 the court is given power to make orders to compensate a consumer or to reduce the loss or damage suffered by a consumer. The power to reduce the loss or damage suffered by a consumer can be exercised through specifying that an unsuitable contract should operate in accordance with orders of the court. This existing power is supplemented by specific provisions in respect of reverse mortgages that are intended to deter this type of conduct from occurring, given the potential vulnerabilities of borrowers who enter into unsuitable reverse mortgages.

3.51 In the case of a consumer who is placed into a contract that is unsuitable, where a reverse mortgage would have been not unsuitable, this power would allow the court to make orders so that the unsuitable credit contract is rewritten to apply in the way that the suitable reverse mortgage would have (for example, by allowing the consumer to remain in their residence until they permanently vacate it).

3.52 The effect of the amendment to section 179 is to specify circumstances in which a consumer may apply for such orders, and where the court would be able to make such orders.

3.53 The circumstances under which a plaintiff may apply for such an order are:

•

the defendant is a credit provider who has contravened section 133 of the NCCP Act in relation to a credit contract that is not a reverse mortgage;

•

the debtor's obligations under that contract are secured by a mortgage over their principal place of residence; and

•

the court is satisfied that, at any time when the assessment needed to be made in relation to the contract under section 128 of the NCCP Act:

-

a credit provider was offering reverse mortgages;

-

the debtor would have been eligible to enter into a reverse mortgage; and

-

the reverse mortgage would not have been unsuitable under section 133 of the NCCP Act.

[Schedule 2, item 11, subsection 179(6)]

3.54 If these circumstances are met and a plaintiff, or ASIC on behalf of a plaintiff, applies to a court for the orders, the court must consider the order appropriate and make the order, unless it would adversely affect a person other than the debtor and the defendant. [Schedule 2, item 11, subsection 179(7)]

3.55 This approach reflects the importance of protecting elderly consumers who may be placed in unsuitable credit contracts, and the desirability, where this is the case, of allowing these consumers to be able to remain in their residence (rather than, for example, being provided with compensation through a lump sum). It is considered appropriate to protect these consumers by minimising the circumstances in which this class of borrowers would have to vacate their residence (with consequent impacts such as social dislocation and potential isolation).

Example 3.2

The credit provider advertises to seniors in need of cash. It arranges a loan for a pensioner on the following terms: the loan is interest only for a five year term, with the funds necessary to meet the repayments included in the amount borrowed. The loan also discharges the borrower's existing home loan. The pensioner was eligible for a reverse mortgage at this time. At the end of the five year term the borrower cannot repay the loan without selling their property, as the amount of the debt relative to the value of the equity means that they cannot obtain a reverse mortgage. Assuming the loan is unsuitable; section 179 requires the court to consider whether it is appropriate to allow the pensioner to remain in their home in order to reduce the loss or damage they would otherwise suffer.

Part 3 - Provisions applying to credit providers generally

3.56 Some potential debtors will be concerned about the rights of a fellow resident to remain in the property after they have vacated it; for example, a debtor may want their spouse (who does not share title to the residence) to be able to remain in the residence after they themselves move into aged care accommodation.

3.57 If a reverse mortgage contract gives residency protections for non-title holding residents, the Enhancements Bill regulates the way in which those protections are to be provided. The contract document must provide that the debtor may at any time nominate to the credit provider a person who will be allowed to occupy the property under the same rights as the debtor. The debtor must also be able to revoke any such nomination. [Schedule 2, item 12, subsection 17(15A)]

3.58 This provides a consistent and minimum level of protections for non-title holding residents across all credit providers who elect to who offer such protections.

3.59 This requirement only applies if a reverse mortgage contract provides for non-title holding resident protections. This provision:

•

does not require all credit providers to offer protections to non-title holding residents; and

•

does not regulate or prescribe who can be a non-title holding resident (so that credit providers can adopt different eligibility criteria).

Example 3.3

A credit provider offers reverse mortgages that do not provide residency protections to persons living the home over which the reverse mortgage is secured, apart from the title holder. Therefore, subsection 17(15A) would not apply to the credit provider in relation to its reverse mortgages.

Example 3.4

A credit provider offers a reverse mortgage under which non-title holding residents nominated by the borrower are allowed to remain in the property after the borrower has died. This credit provider will need to comply with subsection 17(15A).

This credit provider could also have their own criteria regarding who can be nominated by the borrower to have these residency protections (for example, they must be over a certain age).

3.60 Subsection 17(15A) will be inserted into Part 2, Division 1 of the Code. A consequence of this is that it becomes subject to the operation of existing section 22 of the Code. This section prohibits a credit provider from entering into a contract that contravenes a requirement of Part 2, Division 1 or otherwise contravenes a requirement of the Division.

3.61 A breach of this requirement will attract a criminal penalty of 100 penalty units and is an offence of strict liability.

3.62 The imposition of a strict liability offence is considered appropriate since:

•

a credit provider can easily determine or control whether those matters are to be included in their contract documents; and

•

it enhances ASIC's ability to enforce this requirement.

3.63 A credit provider is prohibited from both entering into a reverse mortgage, or subsequently changing the terms of a reverse mortgage contract, to allow them to commence enforcement proceedings against the debtor for any of the following categories of default:

•

the debtor:

-

failing to inform the credit provider that someone else lives in the property, or failing, when the debtor occupies the reverse mortgaged property, to provide evidence they or a nominated person occupies the property;

-

leaving the property unoccupied (but only whilst it is still their principal place of residence); or

-

failing to pay a cost they are required to pay apart from the contract (for example, council rates or insurances) within three years after the payment became due;

•

a provision which does not make clear what the debtor must do to comply with the obligation;

•

a cross default (for example, the debtor defaulting on another credit contract with the same credit provider); or

•

any act or omission by the debtor prescribed by regulations.

[Schedule 2, item 13, section 18A]

3.64 The intention in excluding these terms from reverse mortgage contracts is that these borrowers will not be in default (and at risk of enforcement action) because of minor oversights or for reasons which bear no relationship to the risk to the credit provider from the default.

3.65 Section 18A will be inserted into Part 2, Division 1 of the Code and will therefore also attract the operation of section 22 of the Code which provides that a credit provider must not enter into a contract that contravenes a requirement of Part 2, Division 1 or otherwise contravenes a requirement of the Division. Therefore, a breach of this item will attract a criminal penalty of 100 penalty units and is an offence of strict liability.

3.66 The imposition of a strict liability offence is considered appropriate since:

•

a credit provider can easily take steps to ensure those matters are not included in their contract documents; and

•

it enhances ASIC's ability to enforce this requirement.

3.67 If a proposed reverse mortgage contract does not provide residency protection provisions for person other than the debtor, a person must inform the proposed debtor of this before providing credit services to them in relation to the contract. [Schedule 2, item 13, subsections 18B(1) and (2)]

3.68 This disclosure will enable the consumer to make a fully informed decision about whether a particular reverse mortgage contract is suitable for their requirements in respect of the consequences for non-title holding residents (such as a partner whose name is not on the title of the property). If the borrower wants to protect this person, they would then be on notice and could choose to find a credit provider who offers reverse mortgages with the appropriate protections.

3.69 Credit providers must also meet this requirement before entering into a contract for a reverse mortgage. [Schedule 2, item 13, subsection 18B(4)]

3.70 This disclosure must occur in writing in the form prescribed by the regulations (if any). [Schedule 2, item 13, subsections 18B(2) and (4)]

3.71 A breach of this requirement will attract a criminal penalty of 50 penalty units and is an offence of strict liability. The imposition of a strict liability offence is considered appropriate since it will significantly enhance ASIC's ability to enforce this requirement.

3.72 The Enhancements Bill will enable regulations to be made that may regulate or prohibit a credit provider from entering into a reverse mortgage without the debtor having received legal advice. [Schedule 2, item 13, section 18C]

3.73 Section 18C will be included in Part 2, Division 1 of the Code, and therefore attract the operation of section 22 of the Code which provides that a credit provider must not enter into a contract that contravenes a requirement of Part 2, Division 1 or otherwise contravenes a requirement of the Division. Therefore, a breach of this section will attract a criminal penalty of 100 penalty units and is an offence of strict liability.

3.74 The deferral of this obligation until a commencement date has been prescribed by regulation is to enable the provision to come into force when the Government can have certainty that there are appropriately accredited solicitors available to provide legal advice.

3.75 The imposition of a strict liability offence is considered appropriate since it significantly enhances ASIC's ability to enforce this requirement.

3.76 Items 14, 15, 16 and 17 amend subsection 22 and 26 and paragraph 33 to make consequential amendments to the Code as follows:

•

item 14 amends subsection 22 to provide that a contravention of section 18B attracts the penalties under subsections 18B(4) and (5) rather than section 22 [Schedule 2, item 14, subsection 22];

•

item 15 amends subsection 26 to provide that section 26, which relates to debtors making payments before they are due, does not apply to payments made in accordance with section 86A (which specifically addresses the ability of a borrower to make payments which terminate their reverse mortgage) [Schedule 2, item 15, section 26]; and

•

items 16 and 17 amend subsection 33 to provide that in the case of a reverse mortgage (whether it be a continuing credit contract or not) the maximum period for a statement of account period is 12 months. [Schedule 2, items 16 and 17, subsection 32(2)]

3.77 A purported change to a reverse mortgage contract is void to the extent that it:

•

removes a provision required to be in the contract by subsection 17(15A) [Schedule 2, item 18, paragraph 67A(a)]; or

•

varies the contract so as to limit the ability of a debtor to nominate to the credit provider a person who is to be allowed to occupy the property or varies the rights they are provided under the contract (so that if a debtor entered into the contract because they had the right to later be able to nominate a non-title-holding resident, that right cannot be taken away). [Schedule 2, item 18, paragraph 67A(b)]

Subdivision B - Ending of reverse mortgage by credit provider receiving value of reverse mortgaged property

3.78 The Enhancements Bill inserts Subdivision B which regulates the debtor's accrued liability upon the conclusion of the reverse mortgage credit contract, whether by the sale of the reverse mortgaged property or other payment by the debtor.

3.79 As a result of the introduction of this Subdivision, there is a need to amend the heading to Division 1, and to introduce an additional heading, specifying that sections 82 to 86 of the Code are included in Subdivision A. [Schedule 2, item 19 , Division 1 of Part 5 (heading)]

3.80 The Subdivision introduces a statutory 'no negative equity' guarantee, so that the debtor cannot be required, subject to specific exceptions, to pay more than the market value of any property that is mortgaged to the credit provider.

3.81 In summary, the Subdivision introduces requirements so that where the credit provider receives an amount equal to the adjusted market value of the property that is secured under the reverse mortgage:

•

the effect of such a payment will be to discharge the debtor's liability to the credit provider;

•

the credit provider must not demand or accept payments in excess of the adjusted market value, and must refund any such payments; and

•

exceptions to these restrictions are introduced (for example, where the debtor deliberately damaged the secured property).

3.82 Where a credit provider receives an amount at least equal to the adjusted market value of the reverse mortgage property, the debtor's obligations and the mortgage securing those obligations is discharged. [Schedule 2, item 20, sections 86A and 86B]

3.83 A credit provider may receive those amounts either as a payment from the debtor or the proceeds of the sale of the reverse mortgaged property. [Schedule 2, item 20, subparagraphs 86A(b)(i) and (ii)]

3.84 This allows a debtor to voluntarily pay out a reverse mortgage contract if they repay an amount at least equal to the property's market value.

3.85 The effect of a payment of the adjusted market value is to discharge all the debtor's liabilities and the mortgage over their property. [Schedule 2, item 20, subsection 86B(2)]

3.86 Regulations may be made to determine how the adjusted market value of a property is to be worked out or adjusted. This will enable a mechanism to be specified to address situations where there may be a dispute about how this figure should be calculated or determined. [Schedule 2, item 20, subsection 86A(2)]

3.87 Where a reverse mortgage credit contract has been terminated under section 86A, a credit provider must refund any payments received in excess of the adjusted market value, and must not demand or accept further payments under the credit contract. [Schedule 2, item 20, sections 86C and 86D]

3.88 There are specific circumstances where the payment of an amount equal to the adjusted market value will not terminate the credit contract and that the credit provider may seek further payment from the debtor. These circumstances are:

•

where the debtor engaged in fraud, or made a misrepresentation relating to the reverse mortgage; or

•

any other circumstance prescribed in the regulations.

[Schedule 2, item 20, section 86E]

3.89 The regulation-making power will allow flexibility in accommodating other situations that may be identified where it would be appropriate for the credit provider to be able to demand and receive an amount in excess of the adjusted market value.

3.90 Before commencing enforcement proceedings against a debtor or mortgagor under a reverse mortgage, a credit provider must either contact or make reasonable attempts to contact the debtor or mortgagor (or their lawyer, or a person who has a power of attorney over their financial affairs). [Schedule 2, item 21, subsections 88(1) and (2)]

3.91 This contact must occur in the 30 day period commencing on the date of the notice. The contact must be in person or by telephone, with the credit provider required to confirm whether the debtor or mortgagor received the default notice and to also inform them of the consequences of failing to remedy the default.

3.92 These additional requirements in relation to contacting debtors and mortgagor about defaults recognises the impact age and declining health may have on this class of borrowers, their reliance on third parties to assist or advise them, and the consequent need for greater requirements on credit providers in respect of potentially senile delinquents. For example:

•

many reverse mortgage borrowers may better understand that they are in default and how to remedy it when this is disclosed to them verbally, rather than in writing; and

•

a default occurring during a period that a debtor is temporarily absent from the reverse mortgaged property due to circumstances such as illness or hospitalisation, is more likely to be resolved should the credit provider become aware of this absence when they attempt to contact the debtor.

3.93 A breach of this requirement will attract a criminal penalty of 50 penalty units. [Schedule 2, item 21, subsections 88(1) and (2)]

3.94 Under section 18A a credit provider is prohibited from specifying in a reverse mortgage contract that certain types of conduct will constitute a default. If a credit provider issues a notice relating to a reverse mortgage for an alleged default of the contract because the debtor or mortgagor has not complied with a contract term prohibited under section 18A, the notice is not a default notice for the purposes of subsections 88(1) and (2) or section 93 of the Code. [Schedule 2, item 22, subsection 88(7A)]

3.95 However, the notice will still be effective as a default notice for the purposes of sections 89, 94 or 95 of the Code. [Schedule 2, item 22, subsection 88(7B)]

3.96 Section 93A applies to reverse mortgages where the liability of the debtor or mortgagor to the credit provider can exceed the adjusted market value because one of the exemptions in section 86D applies.

3.97 If a credit provider is required under Section 88 of the NCCP Act to give a debtor or mortgagor a default notice before beginning enforcement proceedings, the default notice sent by the credit provider must include the following additional matters:

•

the amount received by the credit provider;

•

the debtor's liability under the reverse mortgage contract just before that amount was received; and

•

the ground or grounds under section 86D under which they are seeking payments in excess of the adjusted market value (such as deliberate damage or fraud or misrepresentation by the debtor).

[Schedule 2, item 23, subsection 93A(2)]

3.98 The Code currently provides that contravention of particular provisions of the Code will be a breach of a key requirement under section 111, with the credit provider liable for additional penalties in accordance with Part 6 of the Code.

3.99 Section 111 is amended to provide that a breach of section 17(15A) will be a breach of a key requirement under section 111. [Schedule 2, items 24 and 25, subsections 111(1) and (2)]

3.100 Credit providers that allow a debtor to nominate a person who may occupy the reverse mortgaged property on the same terms of the debtor (as discussed in paragraphs 3.57 to 3.58 above), must keep records of any nomination or revocation of a nomination by a debtor. [Schedule 2, item 26, subsection 185A(1)]

3.101 A breach of this requirement will attract a criminal penalty of 50 penalty units. [Schedule 2, item 26, subsection 185A(2)]