Mortgage and Finance Brief article features Bransgroves White Paper

The Mortgage and Finance Brief, the official organ of the Mortgage and Finance Association of Australia, has done an article featuring Bransgroves White Paper on ‘External Dispute Resolution’.

Click here for a pdf of the article.

The following is a transcript of the article:


THE MORTGAGE FUND INDUSTRY recently produced a white paper to The Parliamentary Joint Committee on Corporations and Financial Services and The Senate Economics Legislation Committee entitled, ‘Why the External Dispute Resolution regime is hurting capital availability in Australia’.

The white paper represents the views of mortgage funds that have around $5.3 billion invested in Australian mortgages. The white paper, produced for the industry by Bransgroves Lawyers, specifically withholds the names of the mortgage funds because they fear ‘bureaucratic retaliation’.

The papers states: Indeed the gravamen of this paper is that a lender’s ability to enforce mortgages has been wrongly placed in the hands of bureaucrats with unfettered arbitrary power instead of being subject to the law, and lenders fear the arbitrary exercise of that power.

All lenders who raise money from the public, or who hold Australian Credit Licences, are required to be members of an EDR. In April 2011, ASIC required that the two EDR’s, the Financial Ombudsman Service (FOS) and the Credit Ombudsman Service Limited (COSL), require their members to cease all enforcement of mortgages as soon as a borrower files a complaint.

The EDRs hold the power to forgive interest and principal. Once a decision is made by an EDR there is no appeal to the courts. Approaching the court for redress can lead to expulsion from the EDR and consequent exclusion from
the industry.

The mortgage funds believe that the system moves the certainty associated with mortgages as a security and, with it, their ability to calculate risk. White Paper author Matthew Bransgrove points out that certain complaints have put many loans in limbo, with no certainty as to, if, or when, the principal can be recovered.

“Mortgage funds have begun warning their investors of the unknown risk and the investors have begun withdrawing their funds, resulting in the mortgage fund industry facing slow strangulation,” he says.

ASIC seeks comment
The Australian Securities and Investment Commission (ASIC) has sought public comment on the current EDR framework in Consultation Paper 172: Review of EDR jurisdiction over complaints when members commence debt recovery legal proceedings, December 2011.

The ASIC paper states that it aims to: strike an appropriate balance between:

  • promoting the participation of confident and informed consumers and investors through an efficient and effective dispute resolution system; and
  • the costs to industry and the schemes in complying with their obligations.

Although the paper is calling for comment to determine whether any refinements are necessary, it also offers unqualified support for the system:

“We are of the view that the current requirement in RG 139.77–RG 139.79 is appropriate and does not require change at this time. This is because we have no reason to believe that this scheme jurisdiction is not working as intended — that is, to assist Australian consumers who may need hardship assistance, often urgently.”

Matthew Bransgrove says that this statement from ASIC indicates the EDR process is being used to effectively grant borrowers a mortgage moratorium.

“They have indicated in letters to desperate lenders that they will only make a hardship determination as a last resort, leaving lenders in limbo, in some cases for up to 18 months,” he says.

“There is no appeal, there is nothing encouraging them (EDRs) to give decisions that are predictable and they decline to be bound by their earlier decisions. Where lenders and investors need legal certainty this system gives them arbitrariness.”

Bransgrove says it means lenders are not able to judge the risk involved in lending and increasingly cannot justify risking their own or investor’s capital.

“The delays of unknown length mean that lenders can no longer take an educated guess at what the property will be worth if they have to sell it. Instead of a safe investment, mortgages are now a game of Russian roulette,” he says.

“Unless there are changes in the EDR system, a crucial component of the small business finance sector will disappear. The mortgage fund sector plays a vital role in reassuring the banks that borrowers have an exit strategy if their circumstances become nonconforming. The disappearance of this sector will further tighten bank credit.”

White paper – legislative reform
The white paper calls for legislation to reform the EDR regime so that:

  • EDR schemes can only consider complaints on grounds of breaches of the law, or of codes of practice to which the Member has subscribed
  • EDR schemes can only suspend or expel a member by initiating proceedings in the Federal Court
  • EDR schemes must determine complaints within 60 days of receiving them (or the complaint will be deemed to be dismissed)
  • EDR schemes must publish reasons for their determinations, and follow their own reasoning in prior determinations unless they have been overruled on appeal by a court of law
  • EDR schemes are prohibited from preventing a lender from approaching the courts to enforce mortgages that are in default.

The determinations of EDR schemes can be appealed on their merits, in the Administrative Appeals Tribunal. Those making determinations on behalf of EDR schemes must be legally qualified.

The quantum of disputes that can be heard, and the relief that can be granted, by an EDR scheme is restricted to $5,000.

The maximum amount in EDR disputes is currently set at $500,000. However, as Matthew Bransgrove points out, EDRs can halt a $10 million project on the grounds that $500,000 is in dispute.

“The most important of our recommendations is to remove the
freezing of enforcement, and having complaints determined within 60 days – it would go a long way to solving the problem,” he says.

“Property rights have to be brought back to within the court system. If you start using what is essentially a complaints process to suspend property rights, it is very dangerous.”

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