'No negative equity' guarantee to be law
Draft legislation covering reverse mortgage lending would codify the "no negative equity" commitment that has been a feature of industry self-regulation. The draft proposes that if a debtor pays out a contract and the loan amount exceeds the market value of the property the borrower will be able to terminate the contract if the amount being repaid is at least equal to the property's market value.
This provision is included in the exposure draft legislation covering phase two of national consumer credit reform released by the Assistant Treasurer, Bill Shorten, on Friday.
Credit licensees and their representatives will have to give reverse mortgage borrowers projections (using models approved by the Australian Securities and Investments Commission) showing the impact of the loan on their home equity over time.
They would also have to inform borrowers about any potential effects on pension entitlements and tax when they take out a reverse mortgage.
The requirements would be in addition to the responsible-lending rules contained in the National Consumer Credit Protection Act, which say that a lender must be satisfied that a loan is not "unsuitable" (that is, it meets the borrower's needs, and the borrower has the capacity to repay the debt).
Lenders would have to provide a reverse mortgage information statement.
After a property is sold, the credit provider would not be able to recover any amount from the borrower that is above the proceeds of the sale
And, if a reverse mortgage contract provides protections for non-title holding residents, the draft says the contract must allow the borrower to nominate a person who will be allowed to occupy the property under the same rights as the debtor.
The borrower would have to be informed if a reverse mortgage contract did not provide protections for non-title holding residents.
The draft makes provision for regulation that would stop a lender completing a reverse mortgage contract before the borrower has received independent legal advice.