Home Loan and Mortgage Disclosure Act, 2000 (Act 63 of 2000) (HLAMDA) - invitation to submit comments on gazetted HLAMDA Regulations, No. 29418, Volume No. 497 dated 24 November 2006
Further to our letter dated 25 October 2006, attached for ease of reference, we wish to advise that the views remain unchanged. This letter serves to officially respond to the gazetted invitation for interested parties to submit comments on the draft HLAMDA Regulations.

Non-alignment between the National Credit Act, 34 of 2005 (NCA) and HLAMDA:
There are at least eight areas where these two Acts are not aligned, which in turn will require lenders to provide both separate data extracts and to effect system changes in order to meet the requirements for each Act. The format of, and the lack of definitional information within the HLAMDA draft regulations are also open to interpretation, which in turn could lead to misinformation and negate the value of this legislation. This is not in the interest of consumers, which will ultimately bear these costs. The non-aligned areas include:

Contracting Entities:
NCA defines contracting parties into two categories, namely juristics (companies, close corporations, trusts) and naturals (individuals, sole proprietors, or trust of two or less trustees). On the other hand HLAMDA is not consistent in referring to contracting parties and uses concepts such as naturals, juristic persons and legal entities. South African law does not recognise the concept of a ‘juristic person’ and if used in legislation, this must be defined. No formal definition of what is included in each of these categories is stipulated within HLAMDA or the HLAMDA Regulations. There is therefore a need for HLAMDA to align these categories to that of NCA and to define these within the Act.

Principal Debt/Loan to Value Ratio definitions:
There is no definition within HLAMDA for what is meant by ‘principle debt’. It requires a definition to be derived from the NCA. NCA does however not provide a definition of ‘principle debt’ and so at least four interpretations of ‘principle debt’ can be made, namely:
the amount of the loan relative to the purchase price only
the amount of the loan plus accrued interest
the amount of the loan plus origination costs (legal costs/bank fees)
the amount of the loan plus accrued interest plus origination cost

HLAMDA will therefore need to define the term ‘principle debt’ within the HLAMDA Regulations. As regards the definition of Loan to value as contained within the HLAMDA regulations, we recommend that the words “… the property” is replaced by the words “… security for the home loan…” as not all security provided is required to be in the form of property.

Household income:
Within NCA there is a clear definition of what ‘income’ is. Within HLAMDA there is however no definition of what is meant by this and so it will be necessary for legislators to clearly define what income means both at an applicant and household income level. We recommend that NCA’s definition of income be adopted. HLAMDA will also require a definition as to what ‘household income’ is, as this is not contained within NCA.

Record keeping:
NCA requires documentation to be held for 3 years from date of termination of the agreement or creation of applications, whilst HLAMDA requires documentation to be held for 5 years from date of report to the Office of Disclosure. Clearly both Acts need to be aligned. We recommend that these should be aligned to the Financial Intelligence Centre Act, 38 of 2001 (FICA).

Applications:
Although ‘application’ is defined in the HLAMDA, the definition is problematic, as it requires the formal application form to be completed by the applicant together with all the required documentation to be provided. Given the current predominant electronic origination of loans primarily through intermediaries, current loan application processes in most cases do not include the provision of supporting documentation. This is only obtained prior to either the payout of loans or when an applicant completes legalities with Conveyancers. Accordingly, as Financial Institutions do not receive the required supporting documentation up front, in most instances loans will be declined prior to this being made available. This will result in very few applications being reported correctly.

Notifying clients and the reasons for the decline of loans:
HLAMDA requires customers to be advised in writing of all the reasons for declining an application. On the other hand the NCA stipulates that, although consumers have the right to receive the reasons for the decline of loans, reasons are only required to be provided upon request from the consumer. Further, the reasonable time period for the disclosure of decline reasons is unclear within HLAMDA.

NCA only requires the predominant reason for the decline of a loan to be provided as opposed HLAMDA, which requires lenders to provide all reasons for the decline of a loan. Given that lender application scoring systems use a multitude of applicant and property/security criteria in assessing loan applications, but only display the predominant reason for loan application declines, it is not possible for lenders to provide more than the predominant reason for why loans have been declined. We mention that NCA states that if a loan is declined due to adverse information reported by credit bureaus, the credit provider should disclose details of such information to the consumer.

We accordingly recommend that HLAMDA be aligned to NCA for both these items under discussion within this sub topic.

Definitions within the Acts:
The definition of ‘home loans’ within the HLAMDA is at variance to the HLAMDA Regulations as the Act only refers to mortgages and other loans supported by formalised security, whereas the Regulations include micro loans, which are unsecured loans. Further as the Usury Act, 73 of 1968, has been repealed, the concept of “micro loans” no longer exists. Accordingly the HLAMDA as well as the HLAMDA Regulations require amendment.

Applicant versus Product specific reporting:
Perhaps one of the most marked differences between HLAMDA and NCA is that HLAMDA requires applicant specific reporting whilst that of NCA is predominantly product specific, with resultant marked differences in the nature and the quantum of reporting information required. Clearly, as lenders are already required to provide reports based on NCA criteria, we would obviously welcome HLAMDA aligning itself to this legislation, but are at the same time mindful that NCA has a broader product focus than HLAMDA does. Accordingly we would like to recommend that Banking Association provides the Department of Housing (DoH) with a ‘mock’ NCA report for evaluation purposes and that the DoH adds to this where necessary.

HLAMDA Annexures:
The Annexures are in our opinion poorly written as we are of the opinion that they merely provide lenders with a ‘concept’ framework as opposed being detailed Regulations. No definitions for each of the line items are provided and so reports are open to interpretation, an example being ‘property description’ where the property description fields vary from bank to bank.

Some of the line areas are also vague and need further clarification, examples being that banks are unsure where to record ‘single credit facilities’ as this facility does not appear to be catered for within the Regulations. Further, the relationship between item areas 6 (justification) and 17 (reasons for decline) are nor clear. Given the limited timeframe open to interested parties for commentary, the extent of commentary and debate required around each line item suggests that a small technical working group from Banking Association member banks meets with government representatives as soon as possible to detail the lack of definitional concerns at each line item level.

At present, based on the nature of the information required, none of the major banks are able to provide the Office of Disclosure with the reports required in respect of the draft HLAMDA Regulations. There will be a need for lenders to amend their home loan application forms to meet the information required in terms of HLAMDA and at the same time for them to make amendments to their computer systems. Given that lenders are already in the process of changing both their documentation and computer systems to comply with Basel 2 as well as NCA, it is unfortunate that HLAMDA now seeks to burden lenders with new and additional changes, in an already hard-pressed industry, which is struggling to meet current regulatory and legislative demands.

There is some confusion on the part of lenders as to the reasoning behind some of the informational demands, as we are of the opinion that some of this is superfluous information which will not be used by government, but which will at the same time add information provision complexity to lenders, an example being the need to attempt to determine the gender and race composition of each member within a legal entity.

On an annual basis, lenders receive in excess of 1 million mortgage home loan applications alone, many of which are on a multiple lender application basis, as the role of an intermediary is to obtain the best deal possible for clients and so applies for a loan with multiple lenders, choosing only one of them to actually take up the loan with. For lenders to provide the extent of the information required in terms of HLAMDA will therefore be extremely expensive and time consuming, as:
much of the paper at application stage is superfluous, as these applications are only taken up by customers with one lender, rendering the other institutions irrelevant to the process. There is therefore a need to separate the extent of the information required at application versus approval/decline versus loan payout stages and to include two additional information categories within the Regulations, namely ‘Loans Disbursed’ and ‘Loans Not Taken Up’.

We fail to understand why submissions to the Office of Disclosure need to be in both hard copy (paper based) as well as electronic format. Most of the Financial Institutions would obviously prefer an electronic submission, (the content of The Electronic, Communication and Transactions Act No.25, 2002 pertains). Further, given the extent of the information required at applicant level, there is a client confidentiality/competitive issue for which lenders would want to enjoy some protection from the Office of Disclosure.

We are concerned that the usage of the term “regulated Financial Institutions” within the Act will exclude some lenders from having to report in terms of HLAMDA, examples being personal loan lenders (previously known as micro loan lenders) as well as niche players such as the Rural Housing Loan Fund as they do not fall within the definition of “regulated Financial Institutions”.

Conclusion
As previously advised, as Banking Association we believe that it is essential that we be given the opportunity to engage with government representatives on a proactive and constructive basis so to resolve aspects of the proposed Regulations, which we believe will hamper both lenders and government.

Yours faithfully

pp Cas Coovadia
Managing Director
Banking Association South Africa