Lenders Mortgage Insurance - Which Credit Code?

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Who does this affect?

Lenders mortgage insurers and their insureds.

What do you need to do?

Lenders mortgage insurers should review their LMI policies in light of the New Code, where appropriate prepare to register with ASIC and consider making submissions to the Senate Economics Legislation Committee by 17July 2009. We can help.

Authors
Philip Ward
Partner

Ann Newbrun
Special Counsel

Mandy Tsang
Solicitor

Philip Ward

Partner
T +61 2 9296 2213

Ann Newbrun

Special Counsel
T +61 2 9296 2195

Sydney
Peter Stockdale

Perth
Sarah Harrison

Brisbane
Justin McDonnell

Canberra
John Topfer

Lenders Mortgage Insurance - Which Credit Code? - 6 July 2009

The National Consumer Credit Protection Bill 2009 (Credit Bill) and the National Consumer Credit Protection (Transitional and Consequential Provisions) Bill 2009 (Transitional Bill) were released on 25 June 2009. In our previous alert , we raised certain insurance implications that arise from the exposure draft of the Credit Bill. The release of the Transitional Bill has clarified some of the issues identified in the previous alert.

Effect of the New Code on LMI policies which are in place pre and post commencement of the Credit Bill

As discussed in the previous alert, the Credit Bill extends the application of the new National Credit Code (New Code) so that regulated credit will include loans to individuals for the purchase of a residential property for investment purposes or their renovation or improvement (Investment Mortgages). Further, the threshold under which a debtor can request changes to the terms of their credit contract on grounds of hardship and postponement of enforcement proceedings is increased to $500,000 (Increased Threshold).

The Transitional Bill sets out how these changes will apply to existing mortgages. Whether the New Code applies to mortgages which are in place prior to the commencement of the Credit Bill may have a flow on effect for lenders mortgage insurance (LMI) policies which insure those mortgages and claims on those policies (depending on policy terms). Complex transitional provisions deal with treatment of proceedings in courts under the Uniform Consumer Credit Code (UCCC).

Changes	Existing mortgages (insured mortgages entered into pre commencement)	Impact for LMI policies insuring existing mortgages	New mortgages (insured mortgages entered into post commencement)	Impact for LMI policies insuring new mortgages
Application of the New Code to Investment Mortgages and LMI cover	New Code will not apply to existing Investment Mortgages. (Schedule 1, Part 2, Division 2, sub items 3(1) & 3(2) of Transitional Bill)	No change.	New Code will apply to new Investment Mortgages.	Lenders mortgage insurers should consider whether to amend their manuscript LMI policy wording, pricing and underwriting criteria.
Increased Threshold	Threshold remains unchanged for existing mortgages. (Schedule 1, Part 2, Division 2, sub items 3(2), 3(3)(e) & 3(5) of Transitional Bill and ss 72(5) & 95(4) of Credit Bill.)	No change.	The Increased Threshold will apply to new mortgages which are within the ambit of the New Code.	As above.
Application of New Code to insured mortgages and LMI cover	If UCCC applies to an existing insured mortgage then corresponding provisions in the New Code will apply to that mortgage (except for some provisions). If there is no corresponding provision in the New Code then existing provision/s in the UCCC are taken to be incorporated into the New Code and to apply to the mortgage. If UCCC does not apply to an existing insured mortgage (e.g. Investment Mortgage) then the New Code will not apply to that mortgage. (Schedule 1, Part 2, Division 2, sub items 3(1) & 3(2) of the Transitional Bill)	Review implications of New Code applying to insured mortgage in relation to coverage and rights and obligations of parties to the insurance contract.	New Code applies if mortgages to be insured are within its ambit.	As above.
New default notice requirements before a credit provider can enforce a credit contract or a mortgage against a defaulting debtor or mortgagor	If the UCCC applies to existing mortgages then new notice requirements will apply. If the UCCC does not apply to existing mortgages (e.g. Investment Mortgages) then new notice requirements will not apply. (Schedule 1, Part 2, Division 2, sub items 3(1) & 3(2) of Transitional Bill, s 88 of Credit Bill.)	Lenders mortgage insurers should be aware of these notice requirements when exercising the enforcement rights of a mortgagee.	New default notice requirements will apply for new mortgages if within ambit of the New Code.	Lenders mortgage insurers should be aware of these notice requirements when exercising the enforcement rights of a mortgagee.

Master Policies

As set out above, mortgages insured under LMI policies may be governed by the UCCC, the New Code or not at all. Requirements under master policies which regulate the relationship between the insurer and insured should be reviewed in light of the proposed changes and because amendments may be required or desirable going forward.

Registration and licensing

The requirements and obligations for lenders mortgage insurers to register and apply for an Australian Credit Licence (ACL) as outlined in the last alert continue to apply. Registration starts on 1 November 2009 and ends on 31 December 2009 and special registration procedures are in place for APRA regulated bodies. In relation to mortgages to which the Credit Bill applies, a lenders mortgage insurer will require an ACL where it is assigned or exercises the rights of a credit provider (because it then engages in a “credit activity”). An insurer risks contravention of the Credit Bill or Transitional Bill if a claim arises and it engages in a “credit activity” without being registered or licensed.

Both the Transitional Bill and Credit Bill allow ASIC to grant an exemption to a class of person from the requirements to be registered or apply for an ACL. Given that lenders mortgage insurers (in relation to their LMI business) should only be engaging in a “credit activity” when they stand in the shoes of an insured credit provider in a LMI claim (for example pursuant to rights of subrogation or as an assignee), lenders mortgage insurers should consider the merits of applying for an exemption from the registration and licensing obligations. Lenders mortgage insurers may also consider making submissions to the Senate Economics Legislation Committee (see below) for an explicit exemption for lenders mortgage insurers under the Credit Bill or regulations.

For more information on the registration and licensing regime and other aspects of the new Credit Bill, please see our alert from 25 June 2009.

Professional Indemnity Insurance

The requirement to hold professional indemnity insurance for a licensee under the ACL regime appears to be replicated. However, the release of the draft regulations under the Credit Bill will provide further details.

Strict liability offences

The Credit Bill now makes it a strict liability offence for contravention of certain provisions dealing with related insurance contracts.

What next?

The Government has announced its intention that the Credit Bill and associated legislation will commence on 1 November 2009 (if passed).

The Credit Bill and Transitional Bill (together with related legislation) have been referred to the Senate Economics Legislation Committee with its report due by 7 August 2009. The closing date for submissions is 17 July 2009.

We can assist you in considering the impact of the Bills on your business and in preparing any submissions in response to the draft legislation. We have extensive experience in this area.