TO: Director General – Department of Housing

FROM: D.R. Myrick – Public Finance Specialist – 021 659 9312
Applied Fiscal Research Centre (AFReC)

SUBJ: Government Gazette No. 29418 – Comment

DATE: December 18, 2006

The Home Loan and Mortgage Disclosure Act No, 63 (2000) and the subsequent gazette 29418 have the objective of requiring disclosure by financial institutions relative to originating home loans. Disclosure can be viewed from two perspectives. The first perspective is that of disclosure of data relating to loan origination – i.e., property type, loan type, loan amount, loan to value ratio, etc. Such data is required to be reported in annual financial statements. The second perspective (not addressed in the legislation) is that of disclosure to borrowers, where vital information about the terms of the home loan agreement is provided.

As an example, lenders are not required to provide borrowers with an amortisation schedule that shows interest payments against the capitalised [borrowed amount] over the life of the loan. The importance of such information is that the borrower can see the financial effect of each loan payment and, should they decide to pay off the loan before the end of the loan term, they can determine the principal amount owed at any point in time. A borrower may then decide to make additional payments against the principal amount owed, thereby retiring the debt before the end of the loan term.

There are many issues relating to taking out a mortgage bond that, I fear, borrowers are blind to because financial institutions are not compelled to give full disclosure to borrowers. For example, financial institutions are not compelled to provide plain language user-friendly documents that disclose the terms and conditions of the mortgage bond. Consider, the implications of an un-fixed (adjustable rate) mortgage loan in the face of rising interest rates. Importantly, the implication is that a homeowner’s mortgage payment will be increased with rising interest rates. Notably, financial institutions do not inform the borrower that a fixed rate loan might be more advantageous. Some financial institutions will not even offer a fixed rate home loan because of the affect on the financial institution in times of fluctuating interest rates.

The question then is: Who is looking out for the welfare of borrowers? This, therefore, is motivation for including in gazette 29418 or a subsequent gazette added disclosure requirements for financial institutions, with such disclosure meant to facilitate an informed home loan borrower.

Allow me then to offer this recommendation: I would welcome the opportunity to chair a panel of stakeholders from financial institutions and representatives of consumer groups with the objective of studying “fair lending and disclosure” legislation to amend either the existing Home Loan and Mortgage Disclosure Act or the gazette. Essentially, the goal is to make real the second perspective indicated above of disclosure by financial institutions to borrowers of home loans.