BANKING COUNCIL SUBMISSION ON THE 2^ND DRAFT OF THE HOME LOAN AND MORTGAGE DISCLOSURE BILL

1. INTRODUCTION
The discriminatory practices that were systematically carried out under apartheid resulted in South Africa’s black population suffering from a lack of economic opportunities. In the light of this history Parliament has recently passed the Promotion of Equality and Prevention of Unfair Discrimination Act, 2000 ("the Equality Act") to make unfair discrimination a criminal offence.
While this is a significant step forward, clearly there has to be disclosure to identify acts of discrimination. It is therefore entirely legitimate that government would enact legislation to ensure the necessary disclosure.
On behalf of South Africa’s banking industry, The Banking Council wishes to place on record its support for the aim of disclosure as laid down in this Bill. At the same time we wish to place on record certain problems we see arising from the Bill in its current form. This submission is intended to address those problems.
The Banking Council is of the view that there should be no conflict between Government and the banks regarding disclosure and that we should work co-operatively to eradicate any problems.

2. THE AIM OF THE BILL
This legislation follows the model and structure of the laws that were passed in the United States of America during the 1960s and 1970s aimed at preventing discriminatory practices.
The US legislation is made up of:
· the Fair Housing Act which makes it a civil offence to discriminate on the grounds of race or gender,
· the Home Mortgage Disclosure Act (HMDA) which requires disclosure so that acts of discrimination can be identified, and
· the Community Re-investment Act which encourages banks (but does not compel them) to re-invest into low-income communities.
The Equality Act equates, with respect to housing, with the United States’ Fair Housing Act – however theirs is a civil offence, while ours is a criminal offence – in that they both address unfair discrimination. The United States’ Home Mortgage Disclosure Act (on which this Bill is modelled) has been used as an important and effective instrument for determining whether ‘race’ and ‘gender’ are being used as discriminatory factors in granting loans for housing purposes.
The Banking Council has publicly stated on behalf of the South African banking industry that CRA type legislation is necessary, but that it needs to be specifically designed to meet the South African needs and circumstances. This issue has been discussed with the Department of Housing, and we know that it is their intention to introduce legislation along the lines of the United States’ CRA in the future.
We are therefore of the view that the Department of Housing is correct in limiting the aim of The Home Loan and Mortgage Disclosure Bill to ensuring the provision of the information necessary to determine if unfair discrimination, as contemplated in the Equality Act, on the grounds of race or gender has occurred.
In summary, we are of the view that:
· the Equality Act is well placed to outlaw and eradicate unfair discriminatory practices;
· the Home Loan and Mortgage Disclosure Bill should focus on ensuring that the information is available to determine whether unfair discrimination has occurred;
· the forthcoming CRA-type legislation should focus on the issue of extending housing finance to un- and under-served communities, always within the bounds of proper banking norms.

3. THE SCOPE OF THE BILL
3.1 The scope of the Bill applies to all financial institutions (bank or mutual bank registered as such), or any other registered financial institution whose business is, in full or in part, either the acceptance of deposits from the general public, the advance of credit to persons or both such acceptance and advance with the security of a registered mortgage bond or any other form of accepted security, for the purpose of providing home loans.

3.2 While the Banking Council is relieved that the definition has been extended to include other forms of security besides a mortgage bond, it needs to be borne in mind that it is not necessary to be a registered financial institution to grant loans to the public for housing purposes. There are now many other types of bond originators that do not fall within government regulation, e.g. S.A. Home Loans. Nor do we think that a micro-lender (registered with the Micro-Finance Regulatory Council) would fall within the definition of "a registered financial institution".
The substantive legislation, namely the Equality Act, is not limited to discrimination by registered financial institutions only, and is reliant on the disclosure legislation to identify acts of discrimination. We are therefore of the view that the disclosure legislation itself should cover all institutions and businesses whose business includes the granting of housing finance.

3.3 We therefore propose:
· that the definition of financial institution (Section 1(v)) be changed to "housing financier" – and used throughout the Bill. This definition should be extended to include all originators of housing finance loans. It should also include any subsidiaries set up by both bank and non-bank finance providers that provide housing finance.

4. DISCLOSURE OBLIGATIONS of HOUSING FINANCIERS (Section 2)
4.1 Due to the enormous number of loan applications received in a year, it would be impossible to report each and every application in the Annual Financial Statements. In fact if this model were to be adopted the Annual Financial Statements of a large bank would be literally overwhelmed by the housing finance disclosure aspects.
4.2 We are therefore of the view that there should be a clear distinction between reporting:
· in the Annual Financial Statements (which should be aggregated data); and
· to the Office, which should be on a monthly basis, electronically or by paper schedule, and on an individual loan by loan basis and by category.
It is obviously imperative that the Office is appropriately resourced to accept and interpret the large amount of data that will be submitted, and also to accept the input in electronic format.
4.3 It is also imperative that whatever is required of the banks should be decided in the context of the cost to the banks of providing that data. Additional costs are very problematic for a bank, particularly where it is trying to remain internationally competitive, and any increase in costs acts as a disincentive to remaining in the market that occasions that cost. That could obviously have precisely the opposite effect to the one intended by the proposed legislation.

4.4 We therefore propose:
· that similar to the U.S. legislation, this Bill states that ‘in prescribing regulations, every effort must be made to minimise the costs incurred by housing financiers in complying with them".
· the reporting requirements for the Annual Financial Statement must be limited to aggregated data by category.
· the reporting requirements to the Office should be regular monthly reporting on a case by case basis submitted in electronic or paper format.
· that all reporting should be on a 'group' consolidated basis (i.e. the 'group' should include the holding company and all its subsidiaries).

5. INFORMATION TO BE DISCLOSED BY HOUSING FINANCIERS (Section 3)
5.1 In this regard, there are three issues of great concern -
· How is the race and gender of the applicant to be determined, bearing in mind that the disclosure is meaningless unless the race and gender is disclosed in every application;
· In order to have uniformity across all lenders, it is essential that the categories of loan in respect of which disclosure has to made, and the nature of the disclosure that has to made is well-defined; and
· How, when and where disclosure is to be made is well-defined.
5.2 The race and gender of the applicant
In the case of reporting on ‘race’, the Bill opens up a range of thorny issues, not the least of which is the return to a ‘Group Areas approach’ to racial classification. We think that the following issues need to be addressed -
· How do you define the "race" of an individual, or is it the race that the applicant regards himself or herself to be?
· How do you define the race of a mixed race marriage where both partners own the home?
· How do you define the race or gender of a body corporate or partnership?
· What happens where the applicant refuses to define himself or herself by race?
· Where does the responsibility for determining race lie where housing financiers outsource the loan and/or bond origination (e.g. the estate agent)?
· Does the housing financier have any responsibility for checking whether the race and gender have been correctly given, bearing in mind that in many cases they do not even see the applicant, and even if they do how are they to judge whether the answer given is correct?
We think that it would be very useful to follow the USA model where they have experience in dealing with these problems and where they have found a satisfactory modus operandi with the banks. For example, in the US, if the applicant is not a natural person, then they would be coded "not applicable".
Once these issues have been decided, they will have to remain pretty stable since a change will immediately destroy the basis for historic comparisons and new systems will have to be developed (at further cost).
5.3 What loans and what disclosure
Again we think that there are a range of issues which need to be cleared up -
· All new residential loans including all loans over vacant single residential stands and all building loans (but not development loans for a number of stands or a block of dwellings) should be included;
· All re-advances and further loans over single residences or vacant land should be included;
· The granting or decline of every completed application for a housing loan should have to be reported, and to reconcile the numbers with the number of loans that are then paid out, the number of loans not taken up (NTU loans) will also have to be reported. The rejection of uncompleted applications should not be reported;
· The housing financier should be entitled to rely on the statement of the applicant as to the purpose of the loan in deciding whether it is a housing loan or not;
· On the one hand this section is very specific as to the information that will have to be disclosed. However, in (e), under regulations yet to be promulgated by the minister – and to be drawn up without any obligation to consult the housing finance sector – the disclosure requirement can be extended, on an entirely open-ended basis, to ‘such other information as is prescribed’.
· The accuracy of completed applications for the whole sector will be suspect due to the fact that applicants often apply to more than one financial institution and/or more than one branch. It is almost impossible to eliminate the duplications.
Again, we would like to suggest that we follow the USA model where:
· housing financiers submit in writing to the appropriate agency such additional data or explanations as the financier deems relevant to the decisions it makes; and
· housing financiers give reasons for denial using prescribed codes, e.g. debt-to-income ratio, employment history, credit history, insufficient down payment, unverifiable information, credit application incomplete, mortgage insurance denied, other.

5.4 How, when and where the disclosure is to be made
The disclosure requirements are going to require the institutions to change both their practices and their systems. By way of example, because they are not currently required to report the grant and denial of applications, it is their practice not to load onto their systems all applications that are patently defective or where there is clearly not the necessary capacity to afford the loan. Now they will have to load all those applications onto the system to be able to report them. They will also have to develop the systems. Those systems will be complex, because the applications are not granted and paid out in a day. From application to grant could be as long as a month in some circumstances, and payment on an ordinary loan could be delayed as long as 6 months (while clearance certificates are obtained from local authorities and transfer is registered) and on a building loan as long as 2 years. The system will have to be able to reconcile all this difference in timing.
In fact the consequence of trying to keep records on what has been paid out, NTUs, repaid, re-advanced and so on will quite rapidly turn into a nightmare for the reporting office.
Very careful thought must therefore be given to exactly what is reported and cognisance will have to be taken of the time and the costs involved in bringing practices and systems into line with the reporting requirements.
5.5 Concern regarding the breaching of confidentiality with respect to a financial institution's marketing and strategic information
Section 3(3), when read with section 5(1)(d) will result in confidential marketing and strategic business information privy to each financial institution being made public.

5.6 We therefore propose:
· that the development of the reporting requirements takes the United States’ experience into account with respect to format. Banks must be consulted on cost and time implications in changing their practices and their systems. Moreover, certain requirements for information that are practically impossible to track should be revisited, and possibly scrapped altogether.
· only 'completed' applications will be loaded onto the system – i.e. if an applicant refuses to fill in a field, e.g. race, it will not be loaded but reported under a special category.
· housing financiers will not be responsible for cross-checking information.
· that the first line of 3(1)(b) read "the total number and Rand amount of applications for home loans declined and that a housing financier must be given the opportunity to provide an explanation for its decision, either through written explanation or the use of prescribed codes".
· that the first line of 3(1)(c) read "the total number and Rand amount of home loans cancelled, i.e. fully repaid."
· that the first line of 3(1)(d) read "the total number and Rand amount of all home loans granted by a financial institution during the financial period in respect of which financial statements have been prepared."
Disbursed loans to include: all housing finance re-advances, including second or subsequent loans.
· that the disclosure of lending information around discrimination 3(1)(d)(i) be limited to race and gender and that this is written into the statute to ensure that the appropriate data is captured by lending institutions (and to overcome customer resistance to the data capture process).
Noteworthy is the fact that lenders do not keep records on race due to the historical significance of the issue. Banks that recently tried to introduce a race classification have had to remove it due to customer objections. They will therefore require a period of time to develop reporting systems to capture such data. They will never be able to provide historical comparisons in respect of periods prior to the development of the new system.
Moreover, government will have to embark on an education programme to assure potential borrowers that the request for information on race is to eliminate discrimination rather than promote it.
· that "such other information as prescribed by regulation" be deleted (e).
· that a financial institution’s marketing and strategic business information be treated as confidential.

6. ESTABLISHMENT OF THE OFFICE OF DISCLOSURE (Section 4) and Secretariat (Section 11)
6.1 Since the purpose of the Bill is the provision of information necessary to determine whether discrimination has occurred, the Office of Disclosure should be established on a basis necessary to perform that function. In the United States, federal and state oversight agencies gather information from their reporting institutions. They then submit this information to the Federal Financial Institutions Examination Council, located in the Federal Reserve Bank. This body prepares a disclosure statement, which the financial institutions must make public. To the best of our knowledge, the Council is staffed by public servants.
6.2 In the latest draft of the Bill, the work of the Secretariat is seen as being incidental to the performance and functions of the Office. We are of the view that this is an inappropriate approach to the handling of the very intensive work responsibilities.

6.3 We therefore propose:
· that the concept of the Office of Disclosure be established in the Department of Housing to carry out the functions of collecting the information and reporting on it. Government employees, located in the Department of Housing, should therefore be appointed to handle these functions without the creation of unnecessary costly infrastructure.

7. FUNCTIONS OF OFFICE OF DISCLOSURE (Section 5)
7.1 While The Banking Council has noted its support for the need to collect and report lending statistics, it is nevertheless concerned that the functions and powers (section 5 (1)) proposed in the Bill for the Office of Disclosure are too broad.
We view the collection and reporting of data, and identification of possible acts of discrimination as an objective function. Either there has been an act of unfair discrimination, measured against the standard set out in the Equality Act, or there has not. If there has been unfair discrimination the institution should be prosecuted. It is not a case of "rating" the performance of one institution against another.

7.2 We therefore propose:
· that the functions of the Office should be to:
· receive the required information (a);
· analyse and interpret such required information (b);
· assist in identifying possible discriminatory lending patterns (d);
· report to the Minister annually in respect of its work, including an analysis of each financial institution’s performance in complying with the Act (f); and
· make recommendations on matters falling within the purview of the Act (g).
7.3 In addition we propose that the following functions be dropped from the Bill:
· receiving and investigating public comment (c);
· making available to the public information that indicates whether a housing financier is serving the housing credit needs of its community (d); and
· assisting any regulatory body in enforcing compliance with anti-discriminatory legislation (e).
We are firmly of the view that in the case of functions (c) and (d) they would be more appropriately catered for in CRA-type legislation, rather than mixing them up in a Bill aimed at disclosure. Functions, such as rating of banks, must therefore be left for the forthcoming CRA legislation.
In addition, we believe enforcement of the provisions of the Equality Act should be done in terms of that Act.
7.4 The Office of Disclosure has been given a number of powers (Section 5(2)) to carry out its work. Again, we think that the powers should be focused onto giving effect to the disclosure objectives of the Bill.

7.5 We therefore propose:
· that the powers of the Office of Disclosure should exclude:
investigating and instituting proceedings to verify the validity of information disclosed by a financial institution in accordance with the requirements of this Act, and for that purpose, such financial institution must afford the Office all reasonable assistance and access to premises and information to analyse and interpret the information (d).
· that if it appears that discrimination has occurred, investigation into the act of discrimination should be carried out by an officer operating under the Equality Act.
The reason for this view is that we believe these powers would generate very onerous ‘discovery’ requirements, with a given housing financier being obliged to make available records of all kinds, as a means of establishing a ‘pattern’ of lending.

8. REGULATIONS (Section 12)
8.1 Despite the fact that the disclosure requirements can have an enormous and negative impact on the costs of the housing financiers, Section 12 of the Bill gives the Minister open-ended powers to make regulations, without obliging him/her to consult the housing finance industry. Not only does this delegation of the writing of regulations by-pass the industry being affected, it also ignores the people by not coming before Parliament.
The Minister is required to make the regulations in consultation with the Minister of Finance, and the Governor of the Reserve Bank.

8.2 We therefore propose:
· that the Minister must consult with the housing finance industry, before making regulations.
· that Parliament is also consulted on the regulations.

9. AMENDMENT TO THE USURY ACT, 1968 (Section 13)
9.1 We do not understand why it is proposed to amend the definition of ‘housing loan’ in the Usury Act, 1968 to inter-relate the 2 pieces of legislation. It is also likely that the linkage between the 2 pieces of legislation will introduce ‘unintended consequences’, e.g. relating to exemptions in the Usury Act.
9.2 We therefore propose:
· that Section 13 of the Bill relating to the amendment of the Usury Act be deleted.

10. OFFENCES AND PENALTIES (Section 15)
10.1 As mentioned in our discussion on the aim of the Bill, the United States’ Home Mortgage Disclosure Act is subject to administrative sanctions, including the imposition of civil monetary penalties.
We are of the view that a similar approach should be used in the South African Bill. We do not believe that this Bill warrants a criminal offence. The criminal penalty is correctly contained in the Equality Act.

10.2 We therefore propose:
· that the functions of this Bill be viewed as being administrative in nature, and that breaches of the Act, inadvertent or otherwise, be viewed as civil offences.

ADDENDUM – SPECIFIC COMMENTS ON THE BILL
1. Home Loan and Mortgage Disclosure Bill, 2000 to be renamed the Housing Finance Disclosure Bill.

2. Introduction to the Bill to read – "To promote fair lending practices, which require disclosure by financial institutions of information regarding the provision of home loans; to establish an Office of Disclosure; and to provide for matters connected therewith."

In the United States’ Home Mortgage Disclosure Bill, it is expressly stated that "neither the Act, nor the regulations are intended to encourage unsound lending practices or the allocation of credit." We propose that a similar statement be included in the Bill.

3. Preamble – to delete the section in the Preamble that reads "AND WHEREAS in terms of section 26 of the said Constitution … progressive realisation of this right" as its inclusion in the preamble of a statute relating to disclosure of lending by private housing financiers could promote the view that section 26 should be properly construed as having horizontal (as well as vertical) application and therefore every person has a right to a housing loan.

4. Preamble – to delete the section in the Preamble which reads "AND WHEREAS in terms of section 32(1) of the Constitution … … or protection of any rights", as this requirement is catered for in the Promotion of Access to Information Act, 2000 and is therefore not necessary in this Disclosure Bill.

5. Preamble – to delete the section in the Preamble that reads "AND WHEREAS in terms of section 2(1)(e)(v) and (vi) of the Housing Act, 1997 … by all actors in the housing development process", as this is unrelated to disclosure of lending practices by housing financiers.

6. Preamble – to delete the section in the Preamble that reads "AND WHEREAS in the past there has been discrimination … when considering or granting home loans", as this is an arbitrary and unproven observation, and adds nothing to the Bill.

7. Definitions – to replace the existing definition of ‘financial institution’ (including consequentially throughout the Bill) with:
"housing financier" means any institution whose business includes advancing credit to persons for housing or housing improvement purposes, with the security of a mortgage bond or a pledge of that person’s pension or provident fund rights.

8. Definitions – to delete the definition of ‘home’.

9. Definitions – to amend the definition of ‘home loan’ to read
"housing loan" means a loan advanced by a [financial institution] housing financier to a person for the purpose of purchasing a residence or single vacant residential stand or for building, renovating or improving a residence, with the security of a registered mortgage bond or a pledge of the person’s pension or provident fund rights (amend section 2 accordingly).