New rules in the NCCP Enhancement Act shouldn’t deter lenders from financing mature aged borrowers - but additional steps might be ‘prudent’, says Gadens Lawyers partner, Jon Denovan.
Denovan says some lenders have been cautious about financing borrowers aged 45 or more because of the risk that they might retire prior to repaying their loan in full.
“The fear is that this possible future hardship in making repayments makes a 25 or 30-year loan ‘unsuitable’.”
He says this fear is enhanced by s 131(3) of the NCCP Act, which says that if a borrower could only comply with the financial obligations under the contract by selling their principal place of residence, it’s presumed that the loan is ‘unsuitable’ unless alternatives are proven to be available.
“This concern was partly mitigated by RG209.71, which provides an example of a borrower who proposes to sell his home to fund repayment and states that the loan will not be unsuitable as the loan meets the borrower’s genuine requirements and objectives.”
The situation has been further complicated by s 179(7) of the NCCP Act, introduced by the NCCP Enhancement Act applying from 1 March 2013.
“This section provides that if:
a lender enters into a credit contract or increases a loan secured by the borrower’s principal place of residence; and
the loan or increase is ‘unsuitable’; and
a court is satisfied that at the time of the credit assessment there was a reverse mortgage which would have been suitable and available for that borrower (provided either by that lender or any other lender),
the borrower, or ASIC on behalf of the borrower, can apply for an order to let the borrower reside in the place of residence possibly until death to prevent or reduce loss or damage suffered or likely to be suffered by the borrower vacating the home.”
In this case, the court must consider an order appropriate to prevent or reduce the loss or damage.
Accordingly, Denovan say, besides breaching the responsible lending provisions, the lender may find itself stuck with a long-term occupant.
“To address this risk, we recommend that lenders and brokers obtain a reasonably detailed written statement from each borrower aged 45 or more stating in some detail their intention to sell the security property if and when they can no longer make the repayments and that this sale fits with their requirements and objectives.”
In the absence of some appropriate evidence, he says it may be difficult for lenders and brokers to establish what the borrower’s requirements and objectives were - particularly many years after the event.
“These kinds of applications are most likely to occur when borrowers have retired, find they are defaulting under their loan, and seek solutions - often possibly attacking the easiest target, namely, the lender or the broker.”