Citing examples of how people are struggling to pay back loans due to questionable lending practices as a direct result of a lack of regulation, Home Affairs Minister Walter Roban says it is time for new rules and greater protections governing lenders.
In a Ministerial Statement delivered in the House on Friday, the Minister disclosed plans to change the law to enforce a code of conduct for lenders and set up a tribunal to deal specifically with complaints to arbitrate disagreements.
According to Mr Roban, it will bring the island in line with regulations set out in other jurisdictions.
As a result, he said amendments to the Consumer Protection Act 1999 will be introduced during the next parliamentary session.
The Act excludes from the definition of “goods” financial transactions with lenders with no regulated code of conduct for lenders.
“Hence consumers and small businesses have little or no redress for unfair or inequitable conduct by lending agencies.
“A home is often a Bermudian family’s most valuable possession, therefore keeping families in their homes, preserving communities, and maintaining the family unit is a priority,” said Mr Roban.
“Through these amendments, we will be putting Bermuda on par with many other jurisdictions, and most importantly, we are putting Bermudian families first.
“Lending practices that intimidate and cause fear in those who aspire to a peaceful healthy financial future must end.”
As it stands now, he said there was an “imbalance” between lenders and the public.
“Agencies such as banks have a great deal of legal and financial clout as opposed to individuals and owners of small businesses,” said Mr Roban.
“Most customers do not read and understand the entire contract, nor do they understand the terms. Often they are not informed that there are alternative solutions to address their financial challenges. This problem affects persons at all educational and financial levels,” he added.
The amendments pending will allow the Minister with responsibility for consumer affairs the right to make regulations relating to consumer protection on mortgages and loans.
The planned tribunal will deal with consumer complaints, introduce penalties for non-compliance and provide community education to heighten public awareness on lending and the commitments that go with it.
The planned code of conduct for lending agencies and officers will oversee best practices for lending, define unfair customer treatment, unfair lending practices and introduce solutions.
It will also lay out new rules to govern foreclosures, including the disposition of property and any shortfall, and will require lenders to disclose to customers loan amount and payments, prepayment penalties, due dates and late charges, upfront fees, variable and fixed rates, payment default and foreclosures.
The Minister also outlined some of the lending practices of concern:
• On foreclosures: A lender forecloses on a property and sells the home then the customer’s property was sold at a fair market price and the net proceeds of that sale when applied to the principal balance left a shortfall of $100,000, leaving the customer to pay off the shortfall for approximately six years on a house they have already lost.
“In a number of other jurisdictions, this practice has been discontinued, as banks have insurance to underwrite the writing-off of bad debts,” said Mr Roban.
• On mortgages: A customer has a 30-year mortgage term and has made 180 payments on a regular and timely basis and is now in default. The lender could restructure the debt to lower the monthly mortgages repayment, or allow the property to be rented and set the interest rate very low, which can be changed to a higher rate when the customer’s financial position improves.
On that note, the Minister said: “None of these remedies were considered and the customer was threatened with foreclosure.”
• On home owners in arrears: An owner who was in arrears who was trying to find a way to save his house from foreclosure, submitted a long-term rental agreement where the rents could pay his monthly mortgage payment. The agreement was refused by the lender and the property was foreclosed. The property was later purchased by a senior member of the lending institution.
“This government is committed to levelling the playing field and providing oversight accountability to ensure protections are in place to safeguard consumers from financial harm.”