Alert

Who does this affect?

Lenders mortgage insurers and their insureds.

What do you need to do?

Consider the impact of the increased hardship threshold applying to existing insured mortgages if the Committee’s recommendation is adopted.

Authors
Philip Ward  
Partner

Ann Newbrun  
Special Counsel

Mandy Tsang  
Solicitor

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Philip Ward  
Partner
T +61 2 9296 2213

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Ann Newbrun  
Special Counsel
T +61 2 9296 2195

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The National Consumer Credit Protection Bill 2009 (Credit Bill) and related bills were referred to the Senate Economics Legislation Committee (Committee) for inquiry. The Committee released its Report on 7 September 2009.

Increased hardship threshold recommended to apply regardless of when the credit contract commenced

As discussed in our previous alert, the Credit Bill proposes to increase to $500,000 the threshold under which a debtor can request, on grounds of hardship, changes to the terms of their credit contract and postponement of enforcement proceedings. The transitional provisions for the Credit Bill mean that the increased hardship threshold would not apply to existing mortgages but would apply to new mortgages which are within the ambit of the new National Credit Code.

As part of the inquiry, certain interested bodies submitted in effect that a dual approach was inappropriate and confusing, particularly considering that a standard home loan may run for 25 to 30 years. Following these submissions, the Committee in its Report recommends that the increased hardship threshold “should apply to all applications for a variation of the terms of a credit contract on the grounds of hardship (made under section 72 of the National Credit Code) regardless of when the credit contract commenced.” (However the increased hardship threshold would not apply to hardship variation applications made before the National Credit Code commences.)

Lenders mortgage insurance (LMI) policies commonly provide cover for loss as a result of changes to the terms of the insured mortgage and postponement of enforcement proceedings on grounds of hardship. If the hardship threshold increases, the scope of cover and potential claim payouts may increase, depending on the exact policy terms. The effect of the increased hardship threshold applying to existing insured mortgages is that a lenders mortgage insurer may not have been adequately compensated for the additional risk associated with the increased threshold because it was not anticipated at the time of entering into the policy.

For new LMI contracts, lenders mortgage insurers should consider whether to amend their manuscript LMI policy wording, pricing and underwriting criteria.

Other issues

The Report did not provide further clarification on other issues raised in our previous alert.

What’s next?

The Government intends to pass the Credit Bill and related legislation on 1 November 2009. We will continue to monitor the progress of these bills to see if the Committee’s recommendations are adopted.