MAKING FINANCIAL MARKETS WORK FOR THE POOR COMMENTS ON THE DRAFT
REGULATIONS FOR THE HOME LOAN AND MORTGAGE DISCLOSURE ACT, 2000 PUBLISHED FOR
COMMENT IN GOVERNMENT GAZETTE NO 1734,
DATED 24 NOVEMBER 2006 SUBMITTED TO: MR G PHOKUDATE: 5 JANUARY 2007 SUBMITTED
BY: FINMARK TRUST PREPARED BY ILLANA MELZER AND KECIA RUST FINMARK TRUST
INTRODUCTION
The Department of Housing published the draft Regulations in terms of Section
12 of the Home Loan and Mortgage Disclosure Act, 2000 for public comment, in
Government Notice No. 1734 on 24 November 2006. This document sets out comments
from the FinMark Trust.
The FinMark Trust is an independent trust based in Johannesburg, South Africa.
Established in 2002, its mission is “to make financial markets work for the
poor” in the Southern African Customs Union (SACU) countries. In practice, this
means extending access to appropriate financial services to individuals and
households lacking them. FinMark Trust realises its mission through two core
strategies: (1) removing barriers to the better workings of financial markets,
which involves substantial work with, and for, financial regulators and policy
makers on the legislative, regulatory and information environment; and (2)
promoting innovation in product design and delivery, through the provision of
concessional resources.
One of the FinMark Trust’s theme areas focuses on housing finance. Our
objective is to support the development of frameworks for the sustainable
leverage of private capital into affordable housing. Over the past four years
we have engaged extensively with both government and the private sector in the
pursuit of research initiatives and the development of product innovation to
meet our objective. Most directly relevant is our analysis of access to housing
finance as illustrated in the annual FinScope Survey. It is this focus and
experience which prompts our interest in commenting on the draft regulations
for the HLMDA.
This comment addresses four broad areas of interest:
1. Definitions
2. Disclosure and reporting
3. Penalties for non-compliance
4. Data reporting
DEFINITIONS
Application
The definition of “application” is a “duly completed and signed home loan
application form that is accompanied by all the supporting documents that are
required by a financial institution”. Different application processes may exist
(or may be developed) at different institutions. Specifically, some
institutions may have pre-approval processes that exclude potential borrowers
from ever submitting a completed application form. Mostly the criteria used for
pre-approval are designed to streamline the loan application process. However,
pre-approval processes could potentially enable an institution to circumvent
the legislation. For example an institution that prefers not to lend in some
areas could ask customers to provide details on the location of the proposed
property before the application form is completed. If the location of the
property is an undesirable area the potential borrower would be turned away and
no final application form would be submitted. In this case, no record of the
application or its rejection would be required by the legislation.
Suggestion: While it would be useful to require banks to submit
information on all applications at all stages, this could prove exceedingly
complex and expensive. To establish whether pre-approval processes should be
monitored, the Regulations should enable the Office of Disclosure to
periodically review application processes. Subsequent amendments to the
regulations could then consider whether additional detail is required.
Financial Institution
According to the current draft, the definition of a financial institution is
restricted to banks. Lending activity of non-bank housing lenders such as SA
Home Loans (mortgages), Alexander Forbes (pension-backed loans) and others
would therefore not be monitored by this legislation. [It is not known what
share of business in each product category is currently generated by non-bank
housing lenders, but it is likely to be significant and is almost certainly
increasing]
Suggestion: the Regulations should cover the lending activity of all
lenders (banks and non banks) who exceed a minimum Rand value of applicable
(i.e. housing finance) assets defined in absolute terms or relative to their
total assets. This asset threshold should be reviewed and adjusted periodically
by the Minister of Housing.
Housing Loan
It is not clear that lenders and borrowers share a common view of what a
‘housing’ loan is (for example, would an unsecured loan to purchase a geyser be
regarded as a housing loan? Would a loan to purchase a DSTV dish be regarded as
a housing loan?
Suggestion: the Regulations should include a definition of “housing
loan” and link this to the variety of uses for which such a loan might be relevant
(linking to Annexure A, item 6).
2. DISCLOSURE AND REPORTING
1 (b) Reporting frequency
The current draft states that: “(b) a financial institution must, within 60
days of each financial year end, submit to the Office the information required
…”. In other words, information is submitted once a year in line with financial
year end. However, particularly in the early years of the legislation when
reporting standards are being tested and refined, more frequent submissions may
be optimal. This would enable the Office and lenders to confront any
definitional shortcomings and practical difficulties associated with
implementing the Act sooner rather than later.
Suggestion: Submission of data to the Office of Disclosure should be
quarterly.
1 (c) Dissemination
The Act does not indicate whether additional information other than that
specified in Annexure “B” will be placed in the public domain, and if so how.
Ideally, all information should be made publicly available as soon as possible
to enable researchers to identify trends and to provide incumbent and potential
lenders with critical industry information. While such information may
currently be regarded as proprietary and confidential, greater disclosure can
materially improve competition in the industry and enhance market functioning
particularly in under-served market segments.
Suggestion: The Regulations should incorporate a requirement on the part
of the Office of Disclosure to publish the reported information (reports and
summaries) within 90 days of submission. Underlying loan specific data by
institution should be made available to those who request it from the Office on
a cost recovery basis (only costs associated with providing the data in a
usable format).
3. PENALTIES FOR NON COMPLIANCE
The act does not stipulate any penalty for non compliance or provide any
indication of the nature of censure that a financial institution may suffer
should it fail to comply with the act.
Suggestion:
Include a clause on penalties outlining the nature of the penalty an
organisation might incur.
4. DATA REQUIREMENTS – ANNEXURE A
1 and 2
The current Regulations do not require codes to enable easy sorting by branch
and province.
Suggestion: include branch code and province.
3 and 4 Property description and Type of home loan
The current draft incorporates every application for any housing-related loan
including pension-backed loans (secured by pension assets rather than the
property) and unsecured micro loans. Lenders are required to submit
property-specific information for each of these loan types. However, lenders
may not capture property-specific information where another form of collateral
is used or where there is no collateral (the information has no bearing on
risk). While a client’s place of residence is usually known to the lender, it
is not always the case that the property for which the loan is required is the
client’s primary residence. Thus, in order to comply with this act, lenders
would have to request and presumably verify additional (and from their
perspective, irrelevant) information on the location of the property for which
the loan is intended. [That said, the requirement to submit such information
may develop a consciousness among lenders about how their loans are used, and
to this end could support product development towards better targeted housing
finance.]
Further, particularly in the case of micro loans it is not possible to assess
whether the loan is in fact to be used for housing purposes (this applies to
some extent for pension-backed loans as well, although measures to address this
are being developed).
Finally, the vast majority of housing loans (by number not by value) are likely
to be micro loans. This will be a high number: in the quarter ending May 2006,
the number total micro loans disbursed was 4.4 million. It is estimated that
10% of these are for housing purposes – thus an estimated 440 000 housing loans
disbursed quarterly. The inclusion of this category of loan increases the
administrative burden on housing lenders significantly.
Suggestion: The Regulations should allow for reporting (as defined in
all the following sections) to be differently defined, specifically in terms of
two categories: (1) Mortgage, pension backed and instalment sale loans for
housing should all follow the data requirements on the basis of the Regulations
as defined (accommodating recommendations in this comment). (2) Housing micro
loans, on the other hand, should only be reported on with summary data (i.e.
not individual applications). This data should provide an indication of the
number of micro loans disbursed per lender per period, geographic distribution
of those loans, use, etc – based on data already collected by micro lenders in
terms of their NCA requirements. Lenders may require some time to implement the
necessary information collection mechanisms into their systems to record the
required information. It is likely that the Officer of Disclosure will need to
engage with lenders individually to ensure that common definitions are used.
6 Use for which home loan is required
The current Regulations do not require lenders to identify refinanced or
switched mortgages. Further, the use of mortgage loans for non-housing purposes
is also not considered. The loan may be for business purposes, and the purchase
of the property may be for reasons other than the purchasers’ residential
accommodation.
Suggestion: Include an additional requirement for lenders to specify
whether the loan is a refinanced loan or an initial loan. In addition, include
the following categories: business finance, education finance, purchase or
building of residential accommodation as an investment (not own dwelling),
purchase of second dwelling (i.e. holiday home).
7 Home loan data
The Regulations contain a requirement that the lender submit data on the size
of the loan. However, no data is required on the term of the loan or the
interest rate. As noted above, greater availability of information is thought
to materially improve market functioning. This is particularly the case for
data on price. In addition, greater disclosure on price provides consumers with
critical information enhancing their protection.
Suggestion: Lenders should submit data on the interest rate expressed
relative to the prevailing prime lending rate (number of basis points
difference – positive or negative), as well as the contracted term of the loan.
15 Income category
Data on income requested by the act is currently in specific monthly income
bands. Analysis of data collected in this manner is thus restricted by the
bandings stipulated. Given that the bands are fairly wide, analysis of activity
and comparison of activity on the basis of real incomes from year to year (i.e.
adjusting for the impact of inflation) becomes fairly difficult.
Suggestion: Lenders should submit actual Rand values of gross monthly
income rounded to the nearest R100.
16 Status of Application
The Regulations ask for information on the status of the application but do not
require any indication for how long the process takes. It has been argued that
the entire property transaction process takes longer for low value properties.
While this has been demonstrated in recent academic work in respect of the
Deeds Registry process, there is no such information for the financing process.
This would be useful in determining the nature of access to housing finance.
Suggestion: Lenders should also provide the dates at which each step was
completed: date application offered to client, date final application
submitted, date approved, date taken up / declined.
17 Reason/s (if declined)
This section is likely to be the most sensitive and difficult for Lenders to
comply with. It is likely that the Officer of Disclosure will need to monitor
reporting in this area for some time, and engage with lenders specifically
around how they respond to these categories. To the extent possible, some means
of verification or proof should be required for each of the items in (a), (b),
and (c).
Suggestion: Lenders should be required to provide an additional column
of information that indicates the specific data in respect of the reason given.
General
Overall, there appears to be a difficulty with timing: item 16 asks if the loan
has been approved, and if so, if it has been taken up – in which case item 9
(repayment to income ratio and loan to value ratio) would be actual and not
proposed.
ANNEXURE “B” – DATA REQUIREMENTS
It is critical that the data
collected by the Office of Disclosure is made public, to assist researchers,
policy makers and financiers all in the development of better targeted housing
finance instruments that meet the needs of the poor and otherwise
disadvantaged. It is not clear whether Annexure B is the only information that
is to be made public. If so, it should be expanded considerably, including
additional data on product by category as well as income of the client.