They entered into contracts months ago, the markets have moved and they are being forced to settle, says Martin Brennan, Gold Band Finance chief executive.

A combination of factors have led to this situation, he says. Interest rates went up, property prices went down.

“In other words, the house bought for say $10, is now worth $8, which obviously leads to impairment. Those investors are staring down a loss of value and an increase in funding costs. In a lot of cases, they can’t get funding because the asset values have gone down.

“It's a challenge. A lot of people have to settle on them and are selling them straight away. Some will sell for a loss. It depends on the circumstances.”

It’s one reason Gold Band Finance has given up on doing Credit Contracts and Consumer Finance Act (CCCFA) loans.

“They are just too hard and an operational risk when there is legislation saying directors can be personally liable for any non-compliance.”

Directors and senior managers may be personally liable, with penalties of up to $200,000 and/or court ordered damages or compensation.

“Part of the problem is people who write laws, and to be fair, essentially, half the time, it's not the law, it's the implementation and the interpretation of the law,” Brennan says. “The sector warned about the CCCFA’s shortcomings, but weren't listened to.”

He says the legislation had good intentions, but when ambiguous laws are passed it is problematic. The Act does not tell lenders how much borrowers can commit to servicing a loan. They have to make their own assessments and prove it and it is a big issue.

Once Gold Band had a consumer loan book of about $10 million. It's gone. Brennan’s question is where are those people borrowing money from now?

Many industry pundits believe it is from rogue lenders charging high interest rates – the type the National Party said before the election should be targeted in rewritten legislation aimed at protecting vulnerable consumers without unnecessarily limiting access to credit.

Although the previous government tweaked the legislation, Gold Band still has reservations and will wait to see how the new government will rewrite it.

“Based on conversations with people before the election, I got a real feeling a lot of people were waiting to see if there'd be a change in government to influence their borrowing and investment decisions.”

Banks and some non-bank lenders are still cautious about their liability under the legislation and will likely wait until a rewrite of the CCCFA rules. Brennan says if the sector can use its experience and have input into the legislation rewrite it would affect change quite easily.

Establishment fees

Gold Band now does mainly non-CCCFA lending because it can charge a decent establishment fee. “Establishment fees are a big part of the company’s income. For example, a $500,000 housing loan would mean a maximum establishment fee of $750, but the same amount for a spec house to be sold for a profit would attract an establishment fee of $5,000.

“The big issue around non-CCCFA lending is lenders have more interpretive discretion around debt servicing,” Brennan says.

It gets down to purpose, he says. “CCCFA lending applies to personal consumer borrowing. If it’s a company, it can't be a consumer, so it gets down to intent. What is the purpose of the loan?

“If the loan is for business or for profit purposes, it's not covered by CCCFA. If the loan is for personal purposes, from a car to a house, it is CCCFA.  The irony being, if a person wants a car loan, it's CCCFA lending, but if it’s a car loan for a taxi it is non-CCCFA lending.

“Some of our competitors, as a matter of policy, will no longer do CCCFA lending. We will look at it on a case-by-case basis, but it's not a big part of our current strategic direction.”

Gold Band has found loan demand this year the strongest it has probably been in the past three or four years for both types of lending. It’s not around budget, says Brennan.

“I think it's about psychology. I've talked with people who just think the change in government will lead to a change in culture that will make for a better environment. I don't think people are waiting for a specific piece of legislation, it is more a psychological view.”