Assessment of Existing Lending

Hi All,

I have been having a discussion/debate with some people about banks assessing both servicing and LVRs of existing lending.

They believe that they have had a loan called in with perfect repayment history simply because the banks changed policy. Another said because they no longer met servicing.

Another person believes banks are required to assess ongoing servicing for reporting under RG209??

Regardless I believe that whilst banks do have a loan call-in within their contracts it would only ever be actioned in the event of a contract breach (ongoing defaulting).

I argue that:
A) A reassessment of existing lending is simply not feasible and that 90% of Australians would likely fail, especially if anyone has started a family since application.

B) Banks would never call in a high LVR loan that is not in breach of contract. It makes zero sense for the banks to realize the loss.

I know commercial loans can have ongoing reporting requirements but I have never heard of a random reassessment of an existing residential home loan mortgage. I have also never heard of the banks randomly calling in a high LVR loan when repayments are being met.

I have however not been around long enough so am very interested to see what others have seen/heard?

 

I believe your friends are wrong if they are talking residential.

 

What does the standard residential lending contract say? If it asks you to pay off over 30years, they cannot come to you at year 5 (say) and ask you to pay it off completely. Unless there has been a (major) breach.

Or is there a clause in the standard residential real estate credit contract that gives the bank this discretion?

 

The lenders are also bound by the code of banking practice, the NCCP Act and unfair contract legislation.

 

This is an interesting & relevant thread especially given the current lending climate.

I've asked the same question to my broker and his comment was that lenders do not have the
resource or capacity to do that even if they want to. I hope he is right about it.

However, I am more interested in the historical facts if any such resi loans call in has ever occured
say during GFC and the high interest rate period in the the Australian loans history.

Also, my broker commented that during GFC, many commercial loans couldn't roll over by
lenders and causing some fire sales. But it will be good if some of you experienced experts may
share some insights as it's never easy to get this kind of info.

Thanks,
FXD

 

As long as people continue making their repayments, I've never heard of a bank calling a residential loan, even during the GFC.

During the GFC, quite a few lenders did get into serious trouble themselves and found themselves in default of their own loans. The lenders themselves had loans called and found themselves in receivership or being bought out. In those cases the loans essentially became managed by other parties. Again nobody's loan was called if they kept up with repayments, but those did see significant increases in rates.

It makes a very good argument for staying away from certain lenders, regardless of how cheap their interest rates are.

 

For commercial and construction loans, many of these are for much shorter terms. And if the loan term is for say 5 years, there is often no obligation on the bank to rollover funding at that 5 year point (under most contracts it would seem). I suppose this is no different to residential, in that you must have the loan paid off at the 30 year point. Some of the testimony at the Banking Royal Commission has been around this very issue ie. commercial or construction loans which the bank have refused to rollover at the expiry of the loan. Many of these loans are for much higher amounts, and to parties often with significant commercial experience, so much of the consumer law that requires banks to play nice does not apply.

 

My limited understanding is around ‘the golden rule’
He who has the Gold makes the rules.
They can change the interest rate, the way it’s calculated, fees and charges etc with a notice period.
They can call residential loans in, but they only do this when you default. There hasn’t been a case of LVR or policy change being interpreted as a breech if contract and being called in. Not during the GFC, not during the Great Depression.
There were cases of lenders, such as rams and Macquarie selling their book, their customers, to other managers who increased rates, and fees and charges, which had a detrimental effect on lots of borrowers, ‘mortgage prisioners’, but that’s not the issue at hand.

 

Banks have ability and capacity when there is a reason i.e. LVR is an easy trigger, change in circumstances is another etc. But need to consider reputational risk with something like that... they won’t do it.

Commercial is different.

 

Can you cite any authority for this? My understanding is that a bank could not call in a residential loan early due to change of circumstances.

 

Out of curiosity what would a bank do with an investor with multiple properties with the same bank that got into financial difficulties, was unable to refinance and was seeing loans go from IO to P&I.
Would they deal with it on whatever property was falling behind in payments or the best outcome for the bank.
Lets say the owner wants to sell in an area that is very slow moving area with little interest from buyers , could the bank step in and force a sale in a prime city location.
Could they force the owner to make a quick sale as opposed to a long drawn out one ????.

 

in this situation they would do nothing until there was a default. They would give the borrower ample time to try to rectify and then start taking possession of one or more properties, selling them and applying the proceeds to the remaining loans.

The terms of the mortgage agreements would give them the right to take any of the properties, even it was not mortgaged in direct connection to the loan in question, but they would probably start selling the ones connected to the defaulting loans first.

 

E.g. Extract from NAB General Terms for Home Loans (other banks would have the same/similar):

Review

20 We may conduct a review of the operation of your facility account and your financial position. The review may be conducted at any time, and, in relation to a credit account, it will generally be conducted at least annually. As a result of a review and subject to the section ‘How we may exercise our rights and discretions’, we may vary this contract, including by:
(a) changing your principal and interest repayments under this contract to ensure that the total owing is repaid within the loan term; or
(b) reducing or cancelling your credit limit.

And then, see defaults clause 21.1(a) - (c):

Defaults
21.1 When are you in default?

You’re in default if:

(a) you do not pay on time any amount due under this contract;
(b) the credit limit under this contract is cancelled by you or by us and you do not immediately repay the total owing;
c) you breach any material provision of this contract or any security or other agreement you have with us and that breach can’t be remedied or is not remedied within 30 days of notice requiring you to do so;....

Also take a look at clause 22.1 (g)

Changes we can make:
22.1 In addition to other changes we may make (as set out in this contract), we may, subject to any representations we have made:

(g) change any of the other provisions of this
contract.

 

this doesn't support your argument that the bank can call in the loan though.

An unused credit limit could be reduced, but this would not mean they could reduce the limit to less than you owed.

You also have to consider enforceability of any contract terms.

 

Clause 20 says they can do a review of your financial position. They can, as a result of that review, cancel or reduce a credit limit. It doesn’t say they’ll only cancel unused credit limit.

If they cancel limit or reduce it to an amount lower than the outstanding amount (say to a level that you can meet the serviceability assessment at), any amount above the credit limit would become payable. If they cancel the limit, entire amount is payable. If you don’t pay the required amount, it’s a default, then they could call the loan.

Agree re: enforceability, but bank has deeper pockets than most consumers for legals.

All that aside, reputational risk would be too great for the bank to exercise based on that alone... however it is in the contract terms...