The Senior Australians Equity Release Association of Lenders (SEQUAL) has revised its code of conduct to tighten conditions on no negative equity guarantees.
The changes to the code come after meetings with Uniform Consumer Credit Code (UCCC) regulators, ASIC and consumer watchdog Choice.
The no negative equity guarantee is a mandatory component of SEQUAL's code of conduct. It guarantees that borrowers can never owe more than the value of their home.
SEQUAL executive director Kieren Dell said SEQUAL's code of practice now contains minimum contract requirements to ensure that the no negative equity guarantee stands in all cases, except when a borrower has been fraudulent or wilfully damaged the property or has tried to sell the home without the approval of the lender.
Dell said the required contract changes must be made by all SEQUAL members by 1 January 2008.
"There has been continual reviewing of the code of conduct and this is part of the process. But it's also in response to consumer need, as expressed by Choice and by the advisers, brokers, and lawyers looking at the contracts saying we'd like this to be a bit tighter," Dell said.
"So its really just trying to make the industry standard at an acceptable level."
He said the improved code of conduct also outlines appropriate processes for lenders to implement should the borrower default on the loan.
"Again, these processes have been designed with the retiree in mind. Lenders must act in accordance with the Uniform Consumer Credit Code and make both written and personal contact before taking any action to call in a loan," says Dell.
SEQUAL worked with Choice after the consumer group conducted a reverse mortgage shadow shop in 2006 of 23 reverse mortgage loans.
Ten loans had a no negative equity guarantee, but others had conditions that easily allowed lenders to avoid the guarantee if you were in default at the time of the sale.
"The shadow shop showed that most lenders had procedures in place to avoid or resolve defaults, but Choice felt that these weren't enough protection. SEQUAL developed these procedures to become mandated practices for its members to better protect retirees," Dell said.
Further changes to the Code include default settings for loan calculators that illustrate the potential effects of future house values, interest rates and capitalisation of interest on a reverse mortgage. SEQUAL members will update calculators immediately.
Choice has welcomed the changes.
"Choice is particularly pleased with the improved no negative equity guarantee for reverse mortgages," CHOICE senior policy officer Elissa Freeman said.
