Mortgage and Consumer Protection Notes

Lender's Power and Consumer Protection

On a mortgage, the lender is paid last in case of default. Other parties are prioritized. Consumer protection measures, like the National Credit Code (NCC), aim to balance the power between banks and consumers, especially in property purchasing.

Consumer Overlay and the NCC

The NCC, similar to the Australian Consumer Law (ACL), provides consumer protection in financial transactions. It was strengthened after the Royal Banking Commission to address the power imbalance between banks and consumers. Banks generate revenue through lending, making consumer protection crucial due to the prevalence of property purchasing in Australia.

Even with recent interest rate increases, banks are hesitant to sell houses and will often offer hardship provisions and rearrangement options. It can often take up to twelve months of dragging before a bank takes steps to sell a property.

Lender's Responsibilities and Options

As lawyers, understanding the powers banks possess is essential. Banks often don't immediately exercise their power to sell. Borrowers can also initiate the sale of their property with the bank's agreement. Lenders have the power to recover their funds, but there are many provisions in place to support borrowers.

One example was given of a client who hadn't paid on four properties for three and a half years, collectively valued at 12.5 million, and was offered to settle the loan for 8.5 million within thirty days, showcasing the bank's hesitancy to sell.

Engaging with the lender and communicating any difficulties usually leads to a resolution facilitated by the NCC. Ignoring the bank's notices can result in greater losses. Despite interest rate increases, Australia's mortgage default rate remains low compared to other countries.

Types of Mortgages and Statutory Regulation

The lecture covered types of mortgages under the Torrens system and the statutory regulation of mortgages. Three main pieces of legislation interact:

• Property Law Act.
• Transfer of Land Act.
• National Credit Code.

These laws ensure requirements are met for property purchases and mortgage creation. The Transfer of Land Act applies upon sale, facilitating title transfer through registry mechanisms.

Workflow in Property Transactions

Property transactions involve two workflows:

1. Main Titles and Registering: Transferring instruments under Torrens title provisions.
2. Financial Line: Dealing with finances and payments, where the lender is a party bound by the National Credit Code.

Under the NCC, credit contracts for domestic purposes are subject to regulations concerning mortgage creation and power of sale. Even though the title passes to the purchaser, the registered mortgage appears directly below it, indicating the lender's interest.

Priority of Mortgages

A registered mortgage holds power over any unregistered interest in the land. First and second mortgages determine the order of priority for repayment. Taking a second mortgage means understanding the first party's rights. It's crucial to understand existing mortgages and ensure they are discharged upon purchasing a property.

If a mortgage isn't discharged, the new owner could be burdened with it, as the bank's interest is tied to the property title, not the individual. Discharging the mortgage concurrently with a new mortgage or cash payment ensures full ownership. Most property contracts now include a special condition requiring e-conveyancing through PEXA to prevent construction.

PEXA and E-Conveyancing

PEXA is the primary system for e-conveyancing in Australia, owned by the banks. It integrates land registry, state revenue office, banks, purchasers, vendors, and their legal counsel into an online system. Settlements through PEXA are efficient, typically completing within twenty minutes.

Solicitors obtain client authorization to act on their behalf. The solicitor's name is often used to certify the certificate. Banks must be ready to avoid potential defaults in sale contracts. The NCC provides an extra layer of protection for borrowers.

Client Authorization and Verification of Identity (VOI)

A Client Authorization Form (CAF) is required and may be audited by the land registry. Verification of Identity (VOI) can be done electronically or face-to-face. Electronic VOI is often preferred due to enhanced security by cross-checking details. The solicitor must be satisfied with the identity of the client.

If VOI has been done within the last twelve months, it's not required again. Banks also outsource their VOI to third parties. The validity of the mortgage is not the solicitor's responsibility as long as conveyance requirements are met. Awareness of the NCC is important, but enforcement isn't required unless it's private lending.

Anti-Money Laundering (AML) Legislation

Solicitors have been included in AML legislation, requiring systems to track money laundering and terrorist financing. Failure to report suspicious activity within 24 hours can result in a 19,000 fine. This adds importance to verifying identity to ensure compliance. Preference is given to electronic VOI due to its robust and secure verification process.

Mortgagee's Power of Sale

The mortgagee's power of sale is not covered under the NCC but falls under section 77 of the Transfer of Land Act (TLA). The TLA always applies in any issue involving a transfer.

Default Notices and Timing

Banks now issue multiple notices before a formal default notice. Technically, missing three payments can result in a default. Credit scoring assigns a score each month based on payment timeliness. A score of zero indicates on-time payment. A notice in writing is required, and both the TLA and NCC apply to the timing of the notice.

Power of sale and registration of goods are outside the NCC, relating to the bank's ability to recover funds. The NCC doesn't apply to the contract between the vendor and the bank.

Key Cases and Good Faith

Cases like MBF and Nolan set precedents for understanding the broad interpretation of good faith. Good faith is essential to ensure the bank doesn't profit unfairly at the expense of the borrower. Legislation prevents actions that do not demonstrate good faith. Even if the debtor has failed to meet their obligations, they are entitled to some recovery of value.

The Royal Banking Commission highlighted instances of bad faith, leading to increased scrutiny. It's important to understand there is the power to sell, but there are steps and compliance that must be met prior to doing so.

Establishing Good Faith

To establish good faith, consider the interest price, property valuation, current reserve price, purchase price, and maximum bid. Banks can obtain independent valuations, advertise the property widely, and use market benchmark data to demonstrate fair value. Market value is based on what someone is willing to pay, not necessarily the price of comparable properties nearby. Factors such as land size, property type, and state of repair need to be assessed.

Solicitors need to be aware of the necessity to act in good faith and comply with the TLA when assisting clients in recovering funds.

Hypothetical Scenario: Commercial Office Default

• If a notice says you're in default and has 14 days to pay, what does the TLA say about that?
• Requirement that the notice is in writing met.
• Can the borrower object to statuatory power of sale? They can object to it because under section 77, that there is one month given.
• Issuing a notice can buy additional time.

A text message is not a default notice until it has been issued in writing.

Key Points for Mortgages

• National Credit Code does not apply because it's not a consumer contract.
• For the default to be valid, one month needs to be given per the terms of the transfer of land act.
• There must be section 74 compliance, as well as codes 14, 17, and 42 in the transfer of land act.