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Reverse mortgage lenders overhaul loan contracts

29 August 2018 4:42PM
ASIC has forced reverse mortgage providers to withdraw unfair terms and conditions in loan contracts, after it completed a granular review of lending practices in the controversial market segment.Australia's two remaining equity release lenders - CBA and Auckland-based Heartland Bank - have removed controversial clauses from their respective reverse mortgage contracts after the regulator found they could disadvantage borrowers.ASIC conducted an audit of the reverse mortgage sector last year before Macquarie Bank and Westpac exited the market.The regulator found that all lenders had included unilateral variation clauses and so-called "entire agreement clauses"  in contracts that eroded the rights of borrowers.Unilateral variation clauses allow lenders to vary any term or condition without the consent of the contracting borrower.Entire agreement clauses absolve lenders from statements and representations made outside of written contracts.ASIC also found that most lenders included broad non-monetary default clauses that will be banned under the banking industry's new code of conduct.The regulator reviewed data on 17,000 reverse mortgages that were written in the last five years and conducted in-depth interviews with 30 borrowers.While it found that equity release loans were allowing older Australians to achieve their immediate financial goals, the regulator also concluded that all lenders had failed to document the long-term needs of borrowers."Reverse mortgage products can help many Australians achieve a better quality of life in retirement," said ASIC deputy chair Peter Kell."But our review shows that lenders and brokers need to make inquiries that would lead to a genuine conversation with customers about their possible future needs, not just a set of tick boxes on a form."Loan files inspected by the regulator indicate that all lenders tended to focus on the short-term financial objectives of loan applicants, without regard to their future needs.In its report, ASIC said lenders had an important role to play in ensuring that a reverse mortgage was not unsuitable, given that cost of obtaining independent financial advice was prohibitive for many prospective borrowers.The regulator has instructed lenders to document their inquiries about a consumers' future needs and objectives, including their potential requirements for aged care.ASIC noted that lenders had already taken action to address matters of concern raised in the report, but that staff also needed to be re-trained to understand their responsible lending obligations when deciding to approve reverse mortgages. The regulator has formed a special working group involving lenders and other industry participants to improve lending practices in the reverse mortgage sector.The report also included an admission from ASIC that the reverse mortgage calculator on its MoneySmart website may be giving users limited insights into the risks and benefits of equity release loans."To help ensure that potential borrowers are adequately equipped to make fully informed choices about benefits, cost, risks and alternatives, we will…review the design of ASIC's MoneySmart reverse mortgage calculator within the next six months, to help prompt potential borrowers to consider the features and risks of a reverse mortgage."

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