EXPLANATORY STATEMENT

 Select Legislative Instrument 2012 No. 313

Issued by authority of the Minister for Financial Services and Superannuation

National Consumer Credit Protection Act 2009

National Consumer Credit Protection Amendment Regulation 2012 (No. 3)

Section 329 of the National Consumer Credit Protection Act 2009 (the Act) provides that the Governor-General may make regulations prescribing matters required or permitted by the Act to be prescribed, or necessary or convenient to be prescribed for carrying out or giving effect to the Act.

The Consumer Credit Legislation Amendment (Enhancements) Act 2012 (Credit Enhancements Act) amended the Credit Act (including the National Credit Code) to introduce a number of reforms to the regulation of reverse mortgages and consumer leases.  The Regulation amends the National Consumer Credit Protection Regulations 2010 (Principal Credit Regulations) to support the reforms introduced by the Credit Enhancements Act.

A reverse mortgage is a credit product offered to seniors allowing them to access the equity in their home.  The debt does not usually need to be repaid until the home is sold (usually when the borrower dies or voluntarily vacates the home), with interest compounded until this time. 

Section 86A of the Credit Enhancements Act amends the National Credit Code to provide a protection against negative equity for reverse mortgage borrowers.  This protection provides that a borrower will not have to pay more than the market value of their home as repayment for a reverse mortgage (even if the amount of interest that has accrued would result in the balance of the debt exceeding that value). 

The amendment to the Principal Regulations prescribes the method for calculating the market value of a reverse mortgaged property, when a property either has or has not been sold.

The amendment provides that if the property has been sold, the market value is its sale price.  However, if the property has not been sold, or has been sold and circumstances exist which have reduced its market value (as specified in the regulation), the market value must be determined by an authorised valuer.  The purpose of the amendment is to:

•                provide certainty for borrowers regarding the maximum amount they will need to repay; and

•                provide that lenders will not bear the risk of negative equity in situations in which the borrower’s conduct has reduced the value of the property.

The reforms introduced by the Credit Enhancements Act include additional disclosure requirements of lessors and requirements on lessors to obtain consent before taking possession of rental goods.

A consumer lease is defined as a contract for the hire of goods by a natural person or strata corporation under which that person or corporation does not have a right or obligation to purchase the goods but where they would pay an amount in excess of the cash value of the goods.  An example is a lease for a refrigerator over several years where the total repayments exceed the cash value of the goods.

The amendment to the Principal Credit Regulations specifies the content of disclosure requirements for lessors in the Credit Act, as follows: 

•               Periodic statements of account – setting out that the lessee will not own the goods at the end of the consumer lease, the lessee will not have an obligation or a right to purchase the goods at the end of the lease, of amounts owing and particulars of any payments;

•               End of lease statements – setting out the date the lease ends, the total amount paid by the consumer under the lease, when and how the goods may be returned or collected by the lessor, the amounts the lessee is liable to pay if the goods are not returned and whether the lessor is prepared to sell the rental goods, and if so, an estimate of the sale price and contact details for the person whom the sale of goods can be negotiated;

•               Written notices about a change by agreement to the consumer lease – setting out the date and particulars of any changes, repayment details, amount(s) payable to third parties, the period of time the lease is increased by and the proposed new expiry date of the lease;

•               Statements of amount payable on termination of the lease – setting out the total amount to be paid to terminate the lease, the amount to be paid of the rental goods are not returned, whether the lessor is prepared to sell the rental goods, and if so, an estimate of the sale price and contact details for the person whom the sale of goods can be negotiated;

•               Notices about direct debit defaults; and

•               The consent to enter residential property to take possession of rental goods.

The intention behind the disclosure requirements is, in general terms, to improve consumer awareness of costs associated with leases of consumer items and assist them with making well informed decisions.

Details of the Regulation are set out in the Attachment.

The Regulation is a legislative instrument for the purposes of the Legislative Instruments Act 2003.

The Credit Act does not specify any conditions that need to be satisfied before the power to make the Regulation may be exercised.

The regulation on reverse mortgages, given its narrow scope, was subject to targeted consultation in August 2012 through the Equity Release Consultation Working Group, convened by the Department of the Treasury.  The members of the group include nearly all reverse mortgage lenders, representatives from groups representing reverse mortgage lenders, senior citizens and consumer advocate groups. Submissions were received from lenders and consumer groups.

The regulations on consumer leases were publicly released for comment in August 2012.  The regulations were also subject to targeted consultation with stakeholder groups. Submissions were received from industry bodies, ASIC and consumer groups.

The Regulations commenced on the day after it was registered for sections 1 to 4 and Schedule 1 and on 1 March 2013 for Schedule 2.  This staggered start reflects different start dates for the obligations in the Credit Enhancements Act in respect of reverse mortgages and those in respect of consumer leases.