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1

1
Developing
professional knowledge
and self-management skills

Overview
1.1
Learning outcomes ................................................................. 1.1
1

Overview of the lending industry


1.2
What are credit and lending? ................................................... 1.2
The lending market in Australia ............................................... 1.2
Participants in the lending industry .......................................... 1.3
Satisfactory and unsatisfactory borrowers and borrowing
purposes ............................................................................... 1.9

Lenders
1.12
Depositor-based organisations .............................................. 1.12
Intermediary organisations .................................................... 1.15
Intermediary organisations related parties ......................... 1.17
Associated professionals ...................................................... 1.18
Relationships between parties .............................................. 1.20

The regulatory framework


1.22
Consumer credit regulation prior to July 2010 ........................ 1.22
The new credit regime .......................................................... 1.22
The National Credit Code (NCC) ............................................. 1.24
Responsible lending principles under the National Consumer
Credit Protection Act ............................................................. 1.33
Regulation of credit and regulatory bodies ............................. 1.37
Ethics and codes of conduct ................................................. 1.42
Duty of care ......................................................................... 1.44

The lending process


1.46
Fundamentals of lending ....................................................... 1.46
The loan application process ................................................. 1.50
Who is the borrower? ............................................................ 1.58
Obligations as a lender ......................................................... 1.63

Lending products
1.68
Consumer lending products .................................................. 1.68
Comparison rates ................................................................. 1.82
Business and commercial lending products ........................... 1.84
Loan packaging and choice ................................................... 1.95
Insurance products ............................................................... 1.96

Self-management and professional development


1.99
Setting life and work goals .................................................... 1.99
Managing yourself and your time ......................................... 1.103
Improving your performance ................................................ 1.106

Effective time management


1.108
Benefits of effective time management ................................ 1.108
Self-imposed time pressures ............................................... 1.110
Time management theory.................................................... 1.111
Time management matrix.................................................... 1.112

Stress in the workplace


1.119
What are the effects of stress? ........................................... 1.119
What situations can cause stress? ...................................... 1.120
Controlling stress ............................................................... 1.120
Employee assistance programs ........................................... 1.121

Professional development
1.122
Other development options ................................................. 1.122

10

Personal development action plan

1.124

Appendix 1: Personal development action plan

1.126

Topic 1: Developing self-management skills and professional knowledge

1.1

Overview
As a professional in the financial services industry, you need to have relevant
industry knowledge and to be self-directed in terms of your career and
professional development.
The first part of the topic provides underpinning knowledge of the industry,
including relevant legislation, guidelines, generic product knowledge and an
overview of the credit lending and loan evaluation process. You will apply this
knowledge in subsequent topics of the subject.
The remainder of this topic provides you with useful information and tools to help
you plan your personal and professional future. It will assist you to formulate
goals, to more effectively manage your time and to plan your own on-going
development in the industry.
The information provided in this topic and the others in the subject are generic in
nature and should be adapted to meet the needs and context of your
organisation and your job role, which should be expressed in your organisations
policies, procedures and guidelines.

Learning outcomes
On completing this topic, you should be able to:
demonstrate knowledge of industry products, legislation, regulation and codes
of practice relevant to your work in the industry
manage your own professional development in accordance with organisational
and industry requirements
manage and plan your work, taking account of constraints and available
resources.

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1.2

Certificate IV in Credit Management

Overview of the lending industry


The lending market can be divided into two main sectors. The first is the
consumer lending market, which mainly comprises individuals borrowing money
to fund purchases of houses, cars and consumer goods.
The second sector is the commercial lending market. The borrowers in this
market range from individuals and small businesses to international corporations.
Commercial lending has a much wider range of purposes.

What are credit and lending?


Credit
Credit refers to a person or entity providing another person or entity with financial
resources that do not need to be repaid immediately. Instead, an arrangement is
made to return the financial resource at a later time, either in one transaction or over
a number of transactions. The provision of the financial resource creates a debt.
The financial resource does not necessarily have to be money. The debt can be
created through the provision of goods and services (e.g. hire purchase and
lease arrangements) of non-monetary financial resources (e.g. guarantees and
underwriting commitments).
The credit worthiness (or reputation) of the person or entity taking on the debt is
significant and may impact on the terms and conditions that apply to the credit
offered, the amount of return (or interest) the credit provider expects for the
degree of risk involved, and, indeed, whether credit is available at all to that
particular person or entity.

Lending
Lending, in the context of this course, refers to making a wide range of secured
and unsecured loans available to consumers and other borrowers for a range of
purposes. Consumer lending can include the provision of funds for the purchase
of cars, boats, household items, travel and even medical and dental expenses.
Mortgage lending usually refers to the provision of funds for homes and
other real estate property.
Forms of lending and loan products are discussed in more detail later in this topic.

The lending market in Australia


Prior to discussing the participants within the lending industry, it is important to
gain an understanding of the size of the Australian lending market.
The Australian Bureau of Statistics (ABS) prepares a number of estimates of the
size and nature of the financial services sector in Australia. Table 1 provides a
summary and break down of borrowing in Australia as at November 2010 with a
comparison to the previous month.

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1.3

Table 1 Australian borrowings October/November 2010


Oct 2010
$m

Nov 2010
$m

Oct 2010 to
Nov 2010 % change

14,047

14,202

1.1

7,626

7,683

0.7

29,134

29,443

1.1

412

416

1.1

14,063

14,465

2.9

7,601

7,772

2.2

29,840

30,144

1.0

418

420

0.5

Trend estimates
Housing finance for owner occupation
Personal finance
Commercial finance
Lease finance
Seasonally adjusted estimates
Housing finance for owner occupation
Personal finance
Commercial finance
Lease finance

Source: ABS, Catalogue No: 5671.0 Lending Finance, Australia.

As Table 1 indicates, lending for owner occupied housing forms a significant


proportion of all lending and the majority of retail lending in Australia.

Participants in the lending industry


The participants in the lending industry can be divided into three major
categories:
borrowers
lenders
associated professionals and related parties.
Figure 1 provides an overview of the types of participants in the lending
environment. An explanation of the role of each of the participants in these
categories follows.

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1.4

Certificate IV in Credit Management

Figure 1 Participants in the lending industry


Participants in the lending industry

Individuals

Sole traders
Borrowers

Companies

Trusts

Building
societies

Credit
unions

Banks

Pastoral
finance
companies

Depositor-based
organisations

Finance
Foreign banks
companies

Partnerships

Investment
banks
Friendly
societies

Venture
capitalists

Mortgage
originators
Intermediary
organisations

Types of lenders

Cooperative
housing
societies

Mortgage
brokers

Insurance
companies

Investors

Money market Superannuation


corporations
companies

Solicitors and
conveyancers
Trustees

Valuers

Associated
professionals
Mortgage
insurers

Government
departments
and agencies

Credit reporting
agencies

Mortgage managers

Pool managers

Related parties
Funds providers

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Pool insurers

Topic 1: Developing self-management skills and professional knowledge

1.5

Borrowers and the types of borrowing entities (debtors)


Figure 2

Borrowers

Individuals

Sole traders
Borrowers

Trusts

Partnerships

Companies

The borrowers (debtors) are the lenders clients and are central to any loan
transaction. Without the borrower there is no reason for the lending process to
exist.
Borrowers incur rights and obligations under the terms of a loan agreement that
entitle them to receive the benefit of a financial resource, whilst obliging them to
meet the terms of repayment.
Individual (consumer) borrowers
Individuals borrow funds for many different reasons including: financing the
purchase of a home; for personal purposes; for financing investments or when
releasing the equity in existing property for other purposes.
Individual borrowers must be of legal age, that is, 18 years or older, in order to
enter into a contract and must meet other criteria as set out by the lender.
Business (commercial) borrowers
Businesses borrow funds for:
financing the cash flow requirements of the business
business expansion
acquisition of other businesses, and
purchase of plant and equipment, machinery and commercial property.
The commercial lending field has a much larger range of borrowers.
There are four fundamental ways in which a business can be structured:
sole trader
partnership
company, or
trust.
Note, that a trust structure can also be used for purposes other than establishing
a business. For example, family trusts, superannuation trusts and trusts to
operate not-for-profit organisations.

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1.6

Certificate IV in Credit Management

Following is a brief summary of each of these business structures.


Sole trader (Proprietorship)
A sole trader is a business owned and operated by an individual who is the sole
owner (proprietor) of that business. In other words, the business and the
business operator are a single entity. This is the simplest type of business to start
and is the least regulated form of organisation. Depending on state requirements,
a sole trader can start a business by simply registering a business name, or even
trade under their own name.
A sole trader keeps all the profits and is also responsible for all business related
debt. This means that creditors can look beyond business assets, to the
proprietors personal assets for payment which could result in the family home
being put at risk.
The amount of equity that can be raised is limited to the proprietors personal
wealth. This limitation often means that the business has difficulty exploiting new
opportunities because of insufficient capital.
Partnerships
A partnership is similar to a proprietorship discussed above, except that there are
two or more owners (partners). All the partners share in profits or losses, and all
have unlimited liability for the partnership debts. The way that a partnerships
profits and losses are divided is usually described in a partnership agreement.
This agreement can be an informal, even oral agreement or a formal written
document.
The authority and responsibilities of each partner are similar to those of a
proprietorship.
Companies
A company is a legal entity, separate and distinct from its owners, which has
many of the rights, duties, and privileges of a natural person under the law.
Companies can borrow money and enter into contracts, can sue and be sued,
and can own property. A company can even be a partner in a partnership, and a
company can own shares in another company.
Establishing a company is somewhat more complicated than other types of
business structures. Forming a company involves preparing a company
constitution, which must contain a number of things, including the companys
name, the amount of share capital, a statement that the liability of members is
limited and the names of the subscribers.
The constitution sets out rules describing how the company regulates its own
existence for example, how directors are elected. This may be a simple
document for a small company or a very complex document when a large
company is involved.

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1.7

There are two basic company structures: private and public. They are
distinguishable by their names. A private company must have proprietary limited
(abbreviated to Pty Ltd) in its company name while a public company uses
limited (Ltd). Generally, anyone can buy shares in a public company through the
stock exchange, while private companies are just that private, with a limited
number of shareholders. Private companies are often family owned.
Trusts
A trust is an entity recognised by law as an obligation the trustee to hold property
(real estate, shares, cash, etc.) for the benefit of others (beneficiaries).
The trustee may be one or more people or a company.
The trustee is appointed in accordance with the trust deed and must operate the
trust in accordance with the deed. A trustees duties include:

acting in the best interests of the beneficiaries

keeping proper accounts

exercising reasonable skill and care in carrying out the duties of a trustee.

A trustee cannot delegate responsibility and must not derive a profit from carrying
out their duties.
The rules that govern what the trustee can do are contained in the trust deed.
Once the trust has been established, if the deed permits it, it can establish and
operate a business. The trust can earn income and, at the end of the financial
year, may distribute the profits of the trust to the beneficiaries. The beneficiaries
individually pay tax on the distributed income.

Other terminology
Two terms common to borrowing and lending are mortgagors and guarantors.
Mortgagors
These are the people who provide security for the loan in the form of real estate.
The mortgagor is usually also the borrower, although this is not always the case
as another party can provide the security for a loan. For example, parents
sometimes provide additional security so that their son or daughter can purchase
a home. In other cases, people have used their own home as security for
business loans for themselves or their relatives.
If the mortgagor and borrower are not the same, the security is called a
third party security.
Under bankruptcy law, people who have been declared bankrupt cannot be a
borrower, nor can they provide security to cover a loan. This is because, while
bankrupt, the person cannot legally deal with property. Any property gained
within the bankruptcy period would normally go towards paying the outstanding
debt of the bankrupt.

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1.8

Certificate IV in Credit Management

Guarantors
A guarantee is taken from a guarantor so that the lender has recourse to the
guarantor and their assets if the borrower defaults under the loan agreement.
In effect, the guarantee is a promise to pay the debts of a borrower if that
borrowers payments fall into arrears or they default. Policies regarding
guarantees vary from lender to lender. However, a lenders right to recover a
debt from a guarantor under the guarantee is usually clear, and not restricted by
any obligation to recover the debt from the borrower.
A guarantee may not be restricted to any particular asset provided as security
under the credit document. It is therefore more encompassing than a mortgage
and may extend to cover all of the assets of the guarantor.
Apply your knowledge 1: Borrowers and types of borrowing entities
If you have not already done so, spend some time thinking about your
Identify the most appropriate structure or entity in relation to the different
scenarios detailed below.
a. A business has 15 owners. Each owner is liable for the debts incurred
by the business. The business distributes all profits to the owners.
Income earned by the owners is taxed as personal income.
Enter text here

b. This business has many owners who, in nearly all cases, are not
involved in the operations of the business.
Enter text here

c. An entity that manages assets on behalf of others and must distribute all
profits to those others.
Enter text here

d. This business has one owner who keeps all profits, while having
unlimited liability for business debts.
Enter text here

e. The management and shareholders for this business are the same.
However, the business is a separate legal entity.

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1.9

Enter text here

Check your answers to this activity against the Suggested Answers at the
end of the topic.
Apply your knowledge 2: Borrowers and types of borrowing entities
Read the scenario below and identify a suitable business structure to meet
Jack and Jills needs. Highlight the advantages and disadvantages of the
structure identified.
Jack and Jill want to establish a new nursery business attached to their
home property. There is plenty of equity in their home to support their
borrowing requirements. It is estimated that the business will have the
potential to earn profits in excess of $300,000 p.a. Their key desires are:
equal ownership in the business with equal decision-making abilities for
the business
in the event of the death of either Jack or Jill, their business share is
automatically transferred to the surviving party.
Enter text here

Check your answers to this activity against the Suggested Answers at the
end of the topic.

Satisfactory and unsatisfactory borrowers and borrowing


purposes
Lenders have a legal obligation to ensure borrowers and borrowing purposes are
lawful, and that their policies demonstrate responsible lending practices.
Due to these obligations, the purpose of all funding applications should be
investigated and recorded in interview notes, where applicable, and on the loan
application.

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Certificate IV in Credit Management

The following criteria normally apply to applications:


clear ability to be able to service (repay) the loan
adequate security to protect the lender in the event of default
appropriate and lawful purpose of the loan
acceptable business/industry risk outlook
legal borrowing entity
satisfactory credit history.
Examples of satisfactory and unsatisfactory borrowers and borrowing purposes
are set out in Table 2 and Table 3.
Table 2 Examples of satisfactory and unsatisfactory borrowers
Satisfactory borrowers

Unsatisfactory borrowers

An individual or joint borrowers aged 18 years or


over

Individuals younger than 18 years

A partnership

Applicants with an unsatisfactory credit history


(e.g. discharged bankrupts). However, it should be
noted that this is an underwriting standard, which
will differ from lender to lender

A company

Individuals currently serving prison sentences

Incorporated and unincorporated associations

Incorporated and unincorporated bodies declared


insolvent

A cooperative association

Any entity to whom the lender has previously lent


and has incurred a loss which remains
outstanding

The trustees of superannuation funds are


acceptable borrowers under certain conditions. It
is beyond the scope of this subject to detail the
conditions; however your organisations
procedures and guidelines will guide you in this
regard.

Non-residents

A body corporate

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1.11

Table 3 Examples of satisfactory and unsatisfactory borrowing purposes


Satisfactory borrowing purposes

Unsatisfactory borrowing purposes

Purchasing residential/commercial/industrial
property for owner occupation or investment

Using funds for facilities that are to be used for


illegal business

Purchasing or expansion of an established


business

Using funds for facilities that are to be used for


purposes incompatible with the lenders standing
in the community

Using funds to establish new business ventures


Financing capital purchases such as plant or
equipment
Using funds for construction and development
Financing personal purchases, such as a car,
boat, household and personal items, etc.
Financing lifestyle purchases, such as travel and
holidays

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1.12

Certificate IV in Credit Management

Lenders
Traditionally, the term lender was used to describe the entity which held funds
available for lending, either in their own right or on behalf of others
(e.g. depositors).
With the development of non-banking intermediaries and techniques such as
debt securitisation, the term lender may be applied to any credit provider,
regardless of where the funds come from.
The vast bulk of the money available for lending comes from banks, building
societies and credit unions. Each of these types of organisations can be broadly
classified as being Authorised Deposit-taking Institutions (ADI). These and other
funding organisations are discussed in the following sections.

Depositor-based organisations
Figure 3 Depositor-based organisations
Building
societies

Credit
unions

Banks

Pastoral
finance
companies

Depositor-based
organisations

Foreign banks

Finance
companies

Friendly
societies
Cooperative
housing
societies

Depositor-based (or deposit-taking) organisations have substantial cash reserves


built up through depositors or clients. The organisation draws on these reserves
to fund their lending. Depositor-based institutions are categorised by the
Australian Bureau of Statistics as banks or other depository corporations. These
types of lenders are detailed in the following section.

Banks
Banks are the largest depositor-based financial institutions in Australia. All are
authorised to operate by the Banking Act 1959 (Cth).
Four major banks (Australia and New Zealand Banking Group, Commonwealth
Bank of Australia, National Australia Bank, and Westpac Banking Corporation)
account for over half the total assets of all banks. These four banks (the Big
Four) provide widespread banking services and an extensive retail branch
network throughout Australia.
The Big Four banks have billions of dollars on deposit that they can potentially
lend to borrowers.
The remaining banks provide similar banking services through smaller branch
networks. These networks are sometimes located in particular regions or are
established to service particular states.

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1.13

Banks lend to many different types of borrowers, large and small, for many
different purposes.

Building societies
Building societies have existed in Australia since the 1840s. They were
established primarily to lend funds for housing. The profits they make on housing
loans are distributed back to their members through higher deposit interest rates
and lower loan charges.
Some building societies are cooperatively owned while others are owned by
shareholders. The number of building societies in Australia has decreased
because of the number of such organisations that have become banks
themselves through mergers and acquisitions. St George Bank (previously
St George Building Society) in New South Wales is an example. Some examples
of building societies operating in the current market are:
Newcastle Permanent
Australian Unity
IMB (Illawarra Mutual Building Society).

Credit unions
Credit unions originated as financial cooperatives for members who shared a
common bond, such as employment or community interests. Like banks and
building societies, they also offer savings accounts and loans to members. Some
of the larger credit unions in Australia are:
Credit Union Australia
Maroondah Credit Union
Police & Nurses Credit Society
Railways Credit Union
Telstra Credit Union
The Credit Union of Canberra.

Friendly societies
Friendly societies have been operating in Australia since 1830. These societies
grew from the notion of mutual self-help. Originally, members pooled their cash
reserves to assist each other in times of illness, death and financial difficulty.
Later this was extended to providing funds for home building and purchase.
Friendly societies operate on a not-for-profit basis. Any profit made is
redistributed to the members by way of higher interest rates paid on deposits, or
lower interest rates charged on loans. Some examples of these are:
Australian Friendly Society Ltd
CUA Friendly Society Ltd

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Certificate IV in Credit Management

Newcastle Friendly Society Limited


Manchester Unity Australia Ltd.

Cooperative housing societies


Cooperative housing societies have been in existence in Australia for over 60
years. They provide housing loans to people on welfare and low-to-middle
incomes, who do not qualify for loans with the other lending institutions. Funds
are provided either directly from the government or from banks whose loans
under this system are backed by government guarantees. Information about
cooperative housing societies can be located via the Fair Trading website of each
state and territory.

Finance companies
Finance companies make loans to individuals and businesses. Unlike banks,
they are not authorised to receive deposits but instead obtain financing from
banks, other financial institutions, and investors (e.g. debenture holders).
Finance companies include:
GE Commercial Finance
Esanda Finance.

Foreign banks
With the deregulation of the banking industry in the 1980s, a number of foreign
banks were granted a full banking licence. Foreign banks provide products and
services that compare and compete with Australian banks. Some of these
organisations are:
Bank of China Australia
HSBC Australia
Arab Bank Australia.

Pastoral finance companies


These organisations provide loans to households and small-to-medium-sized
businesses, mainly in the rural sector. These organisations engage in a variety of
borrowing and lending activities. Some examples of pastoral finance companies
are:
Rabobank Australia
Rural Finance Corporation
Rural Bank Ltd.

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1.15

Intermediary organisations
Figure 4 Intermediary organisations
Investment
banks

Venture
capitalists

Mortgage
originators

Mortgage
brokers
Intermediary
organisations

Investors

Insurance
companies

Money market Superannuation


corporations
companies

For many years, lending in Australia and much of the western world was dominated
by large deposit-based banks. However, in the early 1980s this situation changed
with the rise of intermediary lenders the so-called non-banks.
Intermediary lenders are unable to access deposit-based funding and instead gain
funds for lending from various external sources. These sources include
superannuation funds, private investors and international organisations.
This type of lending (particularly in the housing sector) has grown dramatically in
Australia over the last two decades, and provides strong competition to the major
banks in this area.

Mortgage originators
Mortgage originators play a significant role in the home loan process. They write
and process mortgage loans through to settlement. The growth in non-bank
mortgage originators has relied on the availability of mortgage funds sourced
from a form of funding known as securitised debt.
In some circumstances, the originator will also act as the ongoing mortgage
manager, taking their role beyond the settlement stage.
The loan products marketed by mortgage originators usually carry the originators
branding regardless of the source of funding. This is in contrast to products
marketed by lenders, which retain the branding of the funds provider. Some of
the better-known intermediary lenders in the mortgage lending market in
Australia are RESI, Mortgage Choice, Aussie and Mortgage House.

Investment banks
Investment banks typically involve international finance (because of their size and
complexity), long-term loans to companies, and underwriting. Investment banks
do not offer retail banking services to the general public. Rather, they assist
relatively large organisations to raise funds in the equity and debt markets.
They may also provide organisations with other, non-financial, assistance such
as management guidance or consultancy.

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1.16

Certificate IV in Credit Management

Most investment banks are large international organisations and some of the
better-known ones who operate in the Australian market are:
Macquarie Group Ltd
Deutsche Australia Ltd
Goldman Sachs & Partners Australia Pty Ltd
Citigroup Global Markets Australia Holdings Pty Ltd
UBS Holdings Pty Ltd.

Venture capitalists
Venture capitalists are investors who provide, generally, from $1 million to $3
million in chunks of money commonly referred to as rounds. These dollars go to
growing a company, for example, hiring employees, developing product
prototypes and commercialisation. Typically, they will only invest in individuals or
companies with successful track records in their fields.
Start-up companies that receive venture capital are likely to have excellent
growth prospects, but because they are generally private companies they do not
have access to capital markets. In return for venture capital, investors may
receive limited control of the companys management, as well as some
combination of profits, preferred shares or royalties.
Sources of venture capital include wealthy individual investors, investment banks,
and other financial institutions that pool investments in venture-capital funds or
limited partnerships. The risks and rewards of investing through venture capital
can be extreme.

Mortgage brokers
Mortgage brokers are intermediaries who match prospective borrowers with
various lenders offering mortgage loan products. They are usually paid an upfront fee by the lender for their services and may also receive an ongoing (trailer)
commission.

Insurance companies
After the deregulation of the Australian banking industry in the 1980s, some
insurance companies started to offer loans secured by mortgages. As well as
providing funds for mortgage loans, insurance companies play an additional role
in the lending industry. All mortgagees require security properties to be insured
against loss or damage. Insurance companies provide building insurance to meet
this requirement. In some cases they also provide a monitoring function by
advising mortgagees if the insurance is not being maintained, allowing action to
be taken to protect the property asset.

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1.17

Superannuation funds
Compulsory superannuation has provided much of the funds available to these
companies for investment lending. Superannuation companies have substantial
funds to invest both for the short and long term. Thus, investing some of these
funds in the mortgage industry provides long-term investments with relatively low
risk, although Australian super funds enthusiasm for the international property
sector may have been tempered somewhat by the recent sub-prime mortgage
crisis in the United States.

Money market corporations


These are similar to wholesale banks and for this reason they are often referred
to as merchant or investment banks. They borrow substantial dollar value
short-term loans, which they on-lend to fund business loans and investments in
debt securities.

Investors
Investors provide the money for lending. They may be individuals, companies or
other organisations.
The funds can originate from a normal savings account (called a passive
investment) or as a result of a more sophisticated strategy, such as the purchase
of mortgage-backed securities (an active investment).

Intermediary organisations related parties


Figure 5 Related parties

Mortgage managers

Pool managers

Related parties
Funds providers

Pool insurers

There are several related parties involved in establishing and managing loans
within the securitisation process. The related parties and their roles are explained
in the following section.

Mortgage managers
Mortgage managers are responsible for managing every aspect of the borrowers
loan until it is discharged. Although some mortgage managers are also mortgage
originators, the trend is to use independent mortgage managers.

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1.18

Certificate IV in Credit Management

Mortgage managers access and package invested money to lend as mortgage


loans. They typically access funds from investors who are attracted to the longterm and relatively secure nature of home lending but are unable, or do not want,
to establish the infrastructure necessary for their own loan origination. For
competitive reasons, mortgage managers tend to use more than one source of
funding.
One of the significant advantages mortgage managers have over banks and
other ADIs is their low overheads. This allows them to offer lower interest rates
to their clients.

Pool managers
A pool manager is another significant party to the securitised debt system.
They ensure that the pool of funds available for mortgage loans is invested in
home loan portfolios that meet criteria agreed to by the investors.
The pool managers responsibilities include:
setting the pool delivery rate (that is, the interest rate paid by the originators)
payment of a guaranteed return, or interest, to the funds provider
liaising with the funds providers, trustee, originators and pool insurer.

Pool insurers
The pool insurer insures every mortgage that is accepted as security for the
home loans funded by the pool of funds in the funds pool.
Although the same company may provide both lenders mortgage insurance
(LMI) and pool insurance, pool insurance is a separate form of coverage.
The borrower is usually unaware of pool insurance as the premium for the
insurance is paid from the pool managers margin.

Funds providers
Funds providers are the people or organisations who gather money from
investors by way of cash deposits or by the sale of mortgage bonds, and create a
pool of funds which they make available to mortgage originators.

Associated professionals
Figure 6 Associated professionals
Solicitors and
conveyancers
Trustees

Associated
professionals
Mortgage
insurers

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Valuers
Government
departments
and agencies

Credit reporting
agencies

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1.19

There are a number of associated professionals involved in the process of


lending, valuation of assets and in exchange of property.

Solicitors and conveyancers


Solicitors and conveyancers are extensively involved in the lending industry
because the purchasing and lending process is fundamentally grounded in
Australias laws. They provide the legal knowledge and sometimes the formal
documentation required for a loan. They also provide assistance to borrowers by
helping them understand their rights and obligations under relevant contracts and
agreements, and are unusually involved in the conveyancing process.
Conveyancing is the process by which ownership of real estate is transferred
from one party to another. This often requires a variety of dealings to be
undertaken including the registration and discharge of mortgages.
Solicitors may also become involved in litigation associated with any contract or
loan agreement. If any of the parties involved in the mortgage loan fail to meet
their obligations, legal action may be undertaken. Normally, such a course of
action only occurs after all other reasonable alternatives have been exhausted.

Valuers
Valuers provide a formal opinion of the value of the property and other assets
being offered as security for loans.
Valuers should know their markets in order to provide the lender with an accurate
assessment of the securities being offered. Valuers may not always be used in
the loan process. This depends on the policy of the lender with regard to factors
such as the size of the loan compared to the value of the property or other asset.

Government departments and agencies


Other parties involved in the mortgage loan process and transfer of property
include:
state or territory revenue departments that are responsible for collecting stamp
duties, vendor taxes and land tax, as applicable
state or territory land titles offices that are responsible for registering the
transfer of property.

Credit reporting agencies


An important aspect of the lending process is checking the credit history of
potential borrowers. This checking is carried out through a credit agency.
Veda Advantage and Dunn and Bradstreet are Australias largest credit reporting
agencies. They hold records on approximately 12 million individuals and more
than one million businesses and companies. The information held by Veda
Advantage is regarded as extensive and generally accurate.

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Certificate IV in Credit Management

Australia currently operates on a negative credit reporting system. This means


that any market participants credit record will only make reference to adverse
transactions, such as default situations and bankruptcy. Positive credit behaviour,
such as paying all bills on time, is not recorded.
Credit reporting agencies must adhere to strict privacy obligations set by the
Office of the Australian Information Commissioner (OAIC).The personal
information held by agencies is only available to agency members with a
legitimate commercial reason to access the information. A limited number of
government agencies with legal rights to do so can also access these files.

Mortgage insurers
Many mortgagees require mortgage insurance to be taken out in certain
circumstances, according to their lending criteria. This is to protect the mortgagee
in the event of loan default. If a mortgagee sale occurs and there is a shortfall in
the funds needed to repay the loan, mortgage insurance pays the outstanding
balance.
The major providers of mortgage insurance in Australia are:
QBE LMI (QBE acquired PMI Australia in August 2008)
Genworth Financial Mortgage Insurance.

Trustees
A trust is a fund of securities, cash or other assets, which is held by a trustee on
behalf of others. The trustee is legally responsible for the administration of the
trust.
Trustees may be individuals or companies. In the context of the mortgage
broking industry there are companies who specialise in this task.

Relationships between parties


Figure 7 shows a typical, simple loan application process involving the lender,
the borrower and other essential participants, such as a solicitor or conveyancer.
It also assumes the involvement of a mortgage broker.

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1.21

Figure 7 Basic loan process


Mortgage Broker

Borrower

Solicitor/
Conveyancer

Lender

Land Titles
Office

Valuer

Mortgage Insurer

Office of State Revenue

If other intermediaries become involved, or if the loan is securitised, the number


of participants and the interrelationships become more complex.

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1.22

Certificate IV in Credit Management

The regulatory framework


Consumer credit regulation prior to July 2010
In 1993, each state of Australia agreed to standardise its credit laws to formally
implement truth in lending principles across Australia. Prior to this, each state
had its own consumer credit regulation and protection laws.
The Uniform Consumer Credit Code (UCCC) became law in each state in 1996.
The purpose of the UCCC was to standardise credit information in a clear and
easy-to-understand format. It also became mandatory for credit providers to
disclose:
borrowers rights and obligations in any credit arrangement
all relevant information in a written contract, including interest rates, fees,
commissions and other information.
The UCCC regulated the supply of credit by lenders to individual consumers (that
is, natural persons) and strata corporations in situations where more than 50% of
the loan proceeds were for personal, domestic or household purposes. This
definition excluded many common consumer lending scenarios, such as loans by
private investors to purchase investment properties.
Loans that were subject to the UCCC were referred to as regulated loans, with
those outside the definition of the UCCC being unregulated. The distinction is
important because of the additional requirements and obligations placed on
lenders as a result of a loan being regulated.

Criticism of the UCCC


In the years following its introduction, there had been criticism of the largely
state-based approach of consumer credit legislation, despite the efforts of the
UCCC to standardise the approach across the country. Concerns over certain
lending practices and the failure to include consumer credit products in the
Corporations Act 2001 (Cth) (Corporations Act) also encouraged calls for reform.
Complaints about predatory lending practices, increasing levels of consumer debt
and the increasing complexity of lending products added to the need for
government intervention in the area of consumer lending.
In October 2008, the Commonwealth Government released a plan for reform,
including the acceptance by the Commonwealth of responsibility for all consumer
credit regulation.

The new credit regime


In 2009, the Federal Government enacted changes to the way credit is regulated
in Australia.

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1.23

The primary vehicle for the changes is The National Consumer Credit Protection
Act 2009 (Cth) (National Consumer Credit Protection Act) which includes the
National Credit Code (NCC) as Schedule 1 of the Act. The Act came into force on
1 July 2010. It provides national uniform regulation for the Australian credit
industry and replaced the previous state-based credit licensing legislation
systems that existed in the states.
The regulatory system that is now in place controls who may lend and how they
behave as a lender through licensing. The three key features imposed by the
regulatory system with regard to lending decisions are:
1. Consumers should have all the required information they need to make a
borrowing decision.
2. Lenders should view lending decisions from the borrowers point of view;
gaining an understanding of the borrowers objective as well as their capacity
to repay the loan.
3. Lenders should have a process in place to resolve disputes.
There is an obligation on the credit assistant that is, the loan originator or
broker as well as the lender to make a suitability assessment. This means that
the lender cannot simply rely on an initial assessment, and must make its own.
The new regime calls for a suitability assessment to be made based not only on
the consumers ability to repay the loan, but must also take into account their
objectives and other factors. The assessment of the consumers ability to repay
the loan extends to being able to do so without financial hardship.
Issues surrounding this judgement are discussed later in this and other topics
of the course.

Status of the NCC


Despite being named a code, the NCC is, in fact, legislation. It must not be
regarded as voluntary, as some of the industry codes of practice are. Breaches of
the NCC may incur severe penalties.

Phase-in arrangements for the National Consumer Credit Protection


Act
The requirements set out in the National Consumer Credit Protection Act have
been introduced in two phases:
Phase one elements of the National Consumer Credit Protection Act
(effective 1 July 2010)
These are:
enacting the existing State credit code legislations into Commonwealth
legislation
establishing a national licensing regime to require providers of consumer
credit and credit-related brokering services to have a licence originating from
the Australian Securities and Investments Commission (ASIC)

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1.24

Certificate IV in Credit Management

requiring licensees to observe a number of general conduct requirements,


including responsible lending practices
extending ASICs powers to be the sole regulator of the new national credit
framework with enhanced policing scope
requiring mandatory membership of an external dispute resolution (EDR)
body by all providers of consumer credit and credit-related brokering services
and advice
extending the scope of credit products previously covered by the UCCC to
regulate residential investment properties
extending the operation of the Corporations Act to regulate margin lending
regulating trustee corporations the National Consumer Credit Protection
Act
is applicable to mortgage brokers in phase one and brokers were required to
be compliant from 1 July 2010.
Phase two elements of the National Consumer Credit Protection Act
(anticipated effective date 1 July 2011)
It is expected that phase two of the National Consumer Credit Protection Act will
involve the following:
enhancements to specific conduct obligations to stop unfavourable lending
practices. This may include a review of credit card extension offers and other
lending issues that arise
regulating the provision of credit for small businesses
regulation of investment loans other than margin loans and mortgages for
residential investment properties
reform of mandatory comparison rates and default notices
enhanced regulation and disclosure of reverse mortgages.

The National Credit Code (NCC)


The National Credit Code (NCC) applies to the provision of credit to a natural
(real) person or strata corporation. It applies when the credit is provided wholly or
predominantly:
for personal, domestic or household purposes
to purchase, renovate or improve residential property for investment purposes
to refinance credit that has been provided wholly or predominantly to
purchase, renovate or improve residential property for investment purposes.
Residential property means land on which a dwelling exists or will be erected
for predominantly residential purposes.

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1.25

Transitional provisions
The date that determines whether a loan falls under the UCCC provisions or the
new NCC for the purpose of being classified as regulated or unregulated is the
date of the credit contract.
Loans previously regulated by the UCCC have now become subject to the NCC.
Residential investment loans that were unregulated loans under the UCCC and
where the loan contract was dated prior to 1 July 2010 are not subject to the
NCC. However, where an unregulated loan arrangement is changed, it is
possible for it to become a regulated loan under the NCC. Where additional
advances are made on an unregulated loan, the loan will remain unregulated
providing the loan product does not change, and:
the advance does not exceed 50% of the total loan, or
the portion used for residential property does not exceed 50%.

Purpose test
There is a presumption on the part of the NCC that it will apply to a loan.
However, this presumption can be overridden by a declaration from the borrower
that the loan being applied for is to be used primarily for non-code purposes.
That is, business or non-residential investment purposes.
The declaration must be in a form prescribed by the NCC Regulations.
However, under the NCC, the presentation of a declaration only leads to another
presumption that the loan is for the purpose stated. This is in contrast with the
UCCC where such a declaration was definitive.
If a matter went to court, the court would apply an objective test. This test would
involve determining what a reasonable person, in the position of the credit
provider, would understand the purpose of the loan to be. Therefore, simply
accepting a declaration from a borrower that the loan is for a non-code purpose
is not good enough if there is evidence that this might be untrue.
Apply your knowledge 3: Form of declaration and test of validity
Identify your organisations declaration of loan purpose. What is the
wording?
What process or procedure does your organisation have in place to validate
the stated purpose? Alternatively, what might trigger further investigation of
the stated purpose?
Enter text here

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1.26

Certificate IV in Credit Management

Products and transactions covered by the NCC


The NCC governs all transactions where consumer credit has been provided,
including:
personal loans
credit cards
overdrafts
housing loans
mortgages
the hire of goods
guarantees
continuing credit accounts.

Products and transactions NOT covered by the NCC


Following is a list of some of the main products and transactions that are not
covered by the NCC:
loans between friends and family members, where the lender is not in the
business of lending money
loans where no interest or other charges are applicable
short-term loans of 62 days or less, but only where the fees and charges are
less than 5% of the amount of credit and the interest rate is less than 24%
investment loans
margin loans (margin loans are regulated under the Corporations Act)
credit provided without prior agreement (for example, a cheque account
becomes overdrawn without a previously arranged overdraft facility)
loans provided by pawnbrokers and trustees of estates
loans, including leases, to employees made under concessional terms
bill facilities
insurance premiums that are payable by instalments.

The five key areas of the NCC


The NCC covers these key areas:
interaction with clients
unjust transactions
correspondence with borrowers
documentation

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1.27

liabilities and penalties.


Following is a brief summary of compliance implications and obligations in
relation to each of the key areas listed above. In practice, each organisation will
have policies, procedures and guidelines in place to help ensure compliance with
the requirements of the NCC and other legislation, regulation and codes.
Interaction with clients
All employees of credit providers may be held personally liable if they are in
some way connected with or responsible for a breach of the NCC. All actions of
contractors, intermediaries and employees will be deemed to be the actions of
the credit provider. In the event that a breach is confirmed, the courts will
determine which party bears liability.
Breaches of the NCC

Making false or misleading representations it is an offence under the


NCC to make false or misleading statements to induce a borrower to enter
into a loan contract, mortgage or guarantee.
Answering borrower queries statements regarding the performance of
products should not be made unless there is a reasonable basis for making
the statement. As a general rule, intermediaries are not licensed to give
financial, taxation or legal advice. They should refer clients to their accountant,
financial adviser or lawyer as appropriate.
Predicting interest rates rates quoted or stated in offer documents are
indicative only. The actual rate will be applied at settlement of the loan.
Documentation it is the responsibility of the credit provider and its
representatives to ensure that documentation is fully and accurately
completed. They must ensure that all borrowers and guarantors have correctly
completed the application form and other documents, and that appropriate
supporting documents accompany the application.
Canvassing clients neither a credit provider, nor its employees, nor an
agent of a credit provider may visit a clients home without a prior appointment
or induce that person to apply for or obtain credit.
Harassment persistent approaches by an introducer after a request has
been made to stop could amount to harassment. Single acts which are
sufficiently annoying or troublesome are also prohibited.
Advertising and marketing any advertisement stating or implying the
availability of credit is regulated by the NCC. The NCC is primarily concerned
with any statement regarding the cost of credit and the interest rate. If an
advertisement refers to cost, it can only contain the annual interest rate or
rates. It must also contain a statement that fees and charges are payable.
Unjust transactions
A credit contract, mortgage or guarantee may be declared invalid if a court
decides that the conduct of the credit provider or its representatives was unjust
around the time that the contract was entered into by the borrower.

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Certificate IV in Credit Management

A court may also review a loan and can invalidate a loan agreement where it is
found to be an unjust transaction because of the borrowers:
age
mental or physical condition
lack of both understanding and access to independent advice
having had unfair tactics used against them
capacity to repay the loan
understanding of the English language.
It is the representatives responsibility to ensure that correct and complete credit
information is analysed, and that the borrower has the capacity to repay the loan.
In particular, the lender or its representative must ensure that all reasonable
enquiries into the purpose of a loan have been undertaken.
Correspondence with borrowers
The NCC has very specific requirements regarding corresponding with
borrowers. Following are some of the key issues dealt with by the NCC:
Notification of changes and variations

Changes to a regulated loan must be specified in a notice sent to borrowers as


follows:
change by agreement (other than principal increases)
change by agreement (principal increases)
guarantors consent to change.
Changes to interest rates

Changes to interest rates will affect minimum repayment amounts. Lenders are
required to disclose interest rate changes in an advertisement in the Australian
Financial Review. Borrowers must receive notice in writing at least 20 days
before the new repayment amount becomes effective.
Statements of accounts

The NCC requires statements of accounts to be provided:


at least every six months for term loans and every month for transaction
accounts
within seven days of the borrowers request if they are one-off statements.
Statement of pay-out figure

The NCC requires that a statement of pay-out figure must be provided within
seven days of the borrowers request.

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Topic 1: Developing self-management skills and professional knowledge

1.29

Documentation
The NCC specifies certain regulations regarding documentation. Key points are
listed below. However, credit contracts under the NCC are dealt with separately
later in this topic.
Application form

Lenders application forms must include:


a declaration as to the purpose of credit needs to be signed if the loan is to be
used predominantly for business or investment purposes, and therefore not
subject to the NCC.
Joint borrower nomination form

The NCC requires that correspondence be sent to all borrowers. However,


borrowers living at the same address may nominate one of the borrowers to
receive documents and correspondence by completing this form.
Ongoing mortgage information

All borrowers and guarantors, if applicable, must be issued with a loan contract
that sets out the terms and conditions of the loan.
Repayments

The NCC requires that full details of loan repayments are clearly set out in the
loan documentation.
Credit fees and charges

All credit fees and charges, including those which may apply in the future, are
required to appear in the contract.
Collections

The NCC makes provision for borrowers to apply for hardship relief. Hardship
relief is discussed in Topic 3 of this subject.
Debt recovery

Prior to taking any debt recovery action, such as taking possession of any
security property, the lender must provide notice in writing, as specified by the
NCC, to the borrower. Further information on debt recovery is provided in Topic 3
of this subject.
Liabilities and penalties
Breaches of the NCC are subject to both civil and criminal penalties and the
consequences of a breach can be severe. Any person involved in any way with
the breach can attract criminal liability, which can result in fines and other
penalties, depending on the severity of the breach.

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Certificate IV in Credit Management

Credit contracts
The NCC sets out the minimum information a credit contract must contain and
how it can be executed. Following is a summary of the requirements in relation to
the credit contract.
The credit contract:
must be in writing and signed by the borrower and the lender
can be signed only by the lender if the offer can be accepted by the borrower
by drawing down or accessing the credit provided, or in some other way
meeting conditions that legally indicate acceptance of the offer.
The contract document must contain the following information:
the credit providers name
the amount of credit to be provided, or, if this is not known at the time, the
maximum amount to be made available
the persons, bodies or agents to whom it is to be paid and the amounts
payable to each of them; a description of land and its value if this is the
purpose of the loan; or a description of goods and their cash price
the annual percentage rate or rates under the contract. If there is more than
one rate, how each rate applies
how the interest rate is calculated and the frequency with which interest
charges are to be debited under the contract
the total amount of interest charges payable if the contract is for a period of
less than seven years
the total amount or method of calculating repayments and the total number of
repayments to be made, if ascertainable
a statement of the credit fees and charges that are, or may become payable
under the contract, and when each fee or charge is payable. If this information
is not ascertainable, the method of calculation of the fee or charge
information as to whether conditions, such as the interest rate, amount or
frequency of payment of credit fees, or charge or installments payable under
the contract may be changed, or a new credit fee or charge may be imposed.
The contract must state how the borrower will be advised of any such changes
the frequency with which statements of account are to be provided (except
where the annual percentage rate is fixed for the whole term of the contract
and there is no provision for varying the rate).
the default rate of interest which may be charged when payments are in
default
the current default rate
a statement that enforcement expenses may be payable under the credit
contract in the event of a breach
whether a mortgage or guarantee is to be or has been taken by the credit
provider and details of the guarantee

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1.31

if a commission is to be paid by or to the credit provider in relation to the loan,


the amount of the commission and to whom it will be paid must be included in
the contract
if the credit provider knows that the debtor is to enter into a credit-related
insurance contract and that the insurance is to be financed under the credit
contract, details of that insurance
any other information or warning required by the regulations.
Amendments to the contract

A new contract is required to be printed for the following changes:


loan type or product
regulated/unregulated status
loan amount
specified borrowers
primary loan security
any collateral security, such as adding or deleting a guarantor.
Minor corrections or amendments can be initialled by the borrower without a new
contract being prepared.
Apply your knowledge 4: Review the credit contract
Obtain a copy (or an indicative sample) of your organisations credit
contract.
Review the contract and identify the information requirements listed
above.
Are all of the requirements met by the contract document?
Are there any omissions or discrepancies?
If you identify any omissions or discrepancies, investigate why this is the
case. Refer to a more senior colleague or manager if necessary. Note your
conclusions and findings below.
Enter text here

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Certificate IV in Credit Management

Pre-contract disclosure
Before a borrower offers to accept a credit contract or signs the credit contract
under the NCC, the credit provider must give the borrower:
a pre-contractual statement setting out the matter that will be included in the
contract
an Information Statement setting out the borrowers rights and obligations.
Pre-contractual statement

The pre-contractual statement essentially contains similar information as


contained in the credit contract; however, the information must be in a table
format and shown separately from the contract.
Information Statement

The Information Statement, or Statement of Borrowers Statutory Rights and


Obligations, consists of 25 questions and answers which are specified in the
National Consumer Credit Protection Regulations 2010 (NCCP Regulations).
The questions are:
1. How can I get details of my proposed credit contract?
2. How can I get a copy of the final contract?
3. Can I terminate the contract?
4. Can I pay my credit contract out early?
5. How can I find out the payout figure?
6. Will I pay less interest if I pay out my contract early?
7.

Can my contract be changed by my credit provider?

8.

Will I be told in advance if my credit provider is going to make a change in


the contract?

9.

Is there anything I can do if I think that my contract is unjust?

10.

Do I have to take out insurance?

11.

Will I get details of my insurance cover?

12.

If the insurer does not accept my proposal, will I be told?

13.

In that case, what happens to the premiums?

14.

What happens if my credit contract ends before any insurance contract


over mortgaged property?

15.

If my contract says I have to give a mortgage, what does this mean?

16.

Should I get a copy of my mortgage?

17.

Is there anything that I am not allowed to do with the property I have


mortgaged?

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18.

What can I do if I find that I cannot afford my repayments and there is a


mortgage over property?

19.

Can my credit provider take or sell the mortgaged property?

20.

If my credit provider writes asking me where the mortgaged goods are, do I


have to say where they are?

21.

When can my credit provider or its agent come into a residence to take
possession of mortgaged goods?

22.

What do I do if I cannot make a repayment?

23.

What if my credit provider and I cannot agree on a suitable arrangement?

24.

Can my credit provider take action against me?

25.

Do I have any other rights and obligations?

1.33

Further resources
For more information the requirements of the Information Statement and
answers to the above questions, visit the ASIC website at
<www.asic.gov.au> and enter Credit Form 5 into the Search field.
(viewed 5 February 2011).

Responsible lending principles under the National


Consumer Credit Protection Act
The National Consumer Credit Protection Act imposes responsible lending
obligations that must be satisfied by all persons arranging and dealing with loan
applications.
Put simply, the concept of responsible lending is about the lenders (and their
representatives) obligation to ensure that borrowers are not placed into loans or
credit facilities that they cannot afford to service, or that are not appropriate for
the borrowers objectives and requirements.
The primary obligation is to ensure the credit facility is not unsuitable for the
borrower. A credit facility will be unsuitable where:
the borrower cannot meet repayments, or can only meet repayments by
incurring substantial hardship, or
the loan does not meet the borrowers requirements or objectives.
The requirement is to arrange a loan that is a not unsuitable loan, not the best
loan.

How does a lender satisfy the not unsuitable requirement?


There are two key tasks that a lender must complete to ensure that the
borrowers loan meets the not unsuitable requirement. The lender must:
make reasonable enquiries about the borrowers objectives and requirements,
and

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Certificate IV in Credit Management

take reasonable steps to verify the borrowers financial situation.


What is reasonable?
What is meant by reasonable will depend on the borrowers individual situation,
and is therefore scalable. The degree of enquiry into the borrowers objectives,
requirements and financial situation must be greater:
where the impact on the borrower is greater
where the borrower has limited capacity to borrow, and/or
if the borrower is confused or has conflicting objectives.
Borrowers requirements and objectives
Some of the reasonable enquiries that can be made to determine the borrowers
objectives and requirements include:
ascertaining the amount of credit required
ascertaining the timeframe for repayment
ascertaining the purpose of the credit and the benefit to the borrower
determining whether the desired loan product has appropriate features and
flexibility.
Borrowers financial situation
Some of the reasonable enquiries that can be made to determine the borrowers
financial situation include the following:
For PAYG applicants: standard evidence of income, such as payslips, must
be collected and efforts made to confirm employment with the employer,
normally by phone.
For self-employed applicants: standard evidence of income, such as tax
returns, BAS statements and documentation from an accountant, must be
collected.
Addition verification may be required:
where the information provided is inconsistent with information already
held, or
where the information provided is outside the range of acceptable benchmarks
for example, a shop assistant who presents evidence of income far in excess
of what might be expected.
Other reasonable enquiries that can be made include:
whether the consumer appreciates the risks that the features of a particular
credit product may present, given the borrowers circumstances
the borrowers:
domestic situation

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1.35

previous credit history


income-producing activity, age and language skills
savings history and expenditure patterns.
The principles of responsible lending also apply to refinancing and loan
variations, for example, switching from a variable rate to a fixed rate or increasing
a credit limit.

Responsible lending and non-standard loan products


Dealing with low-doc and no-doc lending, which normally requires minimal or no
evidence of income, presents some difficulties when applying the responsible
lending principle.
The rules regarding this type of lending remain subject to revision at the time of
writing; however, it is important to remember that even if a loan is not regulated
by the NCC, the loan agreement can still be varied or set aside altogether by a
court of law. Lenders should, therefore, make sufficient enquiries to satisfy
themselves that the loan product meets the not unsuitable test even for nonstandard loans.
In practice, no-doc loans are no longer viable under the requirements of the NCC.

Credit assessment under the National Consumer Credit Protection Act


The National Consumer Credit Protection Act imposes responsible lending
obligations that require a lender to ensure that a credit facility is not unsuitable for
the borrower.
There are two key elements that could affect the assessment of loan unsuitability:
The obligation to act efficiently, honestly and fairly this means that a
lender must put the borrowers needs above their own commercial interests.
An efficient, honest and fair lender might advise a borrower to go to another
lender who has a better product, or a product more suitable to that borrowers
needs.
The obligation to ensure clients are not disadvantaged by any conflict of
interest this requirement mainly applies to brokers and loan arrangers and
relates to these agents receiving more commission from one lender than
another. It could also relate to an organisations credit adviser if, for example,
they recommend a certain product in order to meet a sales target. If the broker
or credit officer recommends a less suitable loan simply because it is to their
advantage, and in doing so disadvantages the client, they will be in breach of
the National Consumer Credit Protection Act.

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Certificate IV in Credit Management

Regulation of privacy collection, storage and use of personal


information
The Privacy Act 1988 (Cth) (Privacy Act) was introduced to prevent unwarranted
gathering, processing and dissemination of personal information about
individuals. Prior to 21 December 2001, the legislation only regulated dealings
with credit reports. From that date all dealings with personal information are
regulated by the Act.
Collection of personal information must be lawful, that is, it must comply with the
Privacy Act. This is achieved by the lender ensuring that the Privacy Act and
General Consent statement (or other statement that serves this purpose) on the
loan application form is properly completed and that the names and signatures of
all parties to the loan are included and dated.
To minimise the risk of breaching privacy and confidentiality, the secure storage
of personal information must be ensured at all times.
Accessing credit information files without authorisation, or under false pretences,
can result in a severe financial penalty. There are harsh penalties for breaching
privacy rights, such as misplacing privacy documentation, disclosing private
information to third parties without authorisation or dealing with a credit report
that has been altered.
Privacy endures beyond the life of the account it does not cease when the
client stops using or closes the account.

The Australian Securities and Investments Commission Act 2001


(Cth)
The Australian Securities and Investments Commission Act 2001 (Cth) (ASIC
Act) regulates consumer protection for the provision of financial services, which
encompasses the finance broking industry and all consumer lending products,
such as:
deposit products
credit products
investment products
insurance products, and
superannuation products.
The consumer protection provisions in the ASIC Act, which were introduced in
2002, are modelled on the provisions of the Trade Practices Act 1974 (Cth)
(as it was then known) that apply to suppliers of non-financial goods and
services.
The ASIC Act is administered by the Australian Securities and Investments
Commission, which has authority to take action when a breach of the Act is
detected.
Misleading or deceptive conduct
Under the ASIC Act, the following conduct is prohibited:
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engaging in conduct that is misleading or deceptive, or likely to mislead or


deceive. This includes acts of omission, such as failures to disclose relevant
information. This part of the legislation has been used by borrowers and
guarantors against lenders alleging misleading and deceptive conduct in
areas including advertising and promising approval without authority for doing
so
falsely representing the standard, quality, characteristics, benefits, or price of
services
making representations or predictions without reasonable grounds.
Unconscionable conduct
The ASIC Act also prohibits unconscionable conduct for financial services
industry participants. Unconscionable conduct can be defined as one party to a
transaction being at a disadvantage through a lack of experience or business
acumen, impaired facilities or a poor grasp of English, and the other party taking
advantage of that disadvantage.
Conduct of corporations and individuals in consumer transactions which are
unfair or unreasonable, but not necessarily misleading or deceptive, is also
prohibited under the ASIC Act.
Lenders should take special precautions when dealing with borrowers that may
be held to be in a disadvantaged position, which may be indicated by advanced
age, language difficulties, a particular reliance on the advice of another person,
or other infirmities or vulnerabilities. Such situations can include relatively
commonplace occurrences, such as children advising elderly parents. In such
cases, it may be prudent for a lender to recommend that the disadvantaged party
seek independent advice before entering into a transaction, for example, from a
solicitor or accountant. In the enforcement of the ASIC Acts provisions with
regard to unconscionable conduct, the onus is on the stronger party to ensure
that no advantage was taken and the transaction was fair.

Regulation of credit and regulatory bodies


The Competition and Consumer Act 2010 (Cth)
The Competition and Consumer Act 2010 (Cth) (the CCA) (formerly known as the
Trade Practices Act 1974) prohibits certain actions by corporations that are
deemed in the CCA to be anti-competitive. Normally, such conduct will involve an
arrangement or agreement between the suppliers of a financial service, but may
also include conditions of supply designed to compel certain consumer
behaviours.
The range of prohibited conduct is extensive and includes:
collusion: entering into a contract, arrangement or understanding with a
competitor that has the effect of substantially lessening competition. Collusion
can include:
price fixing, in which competitors agree to supply goods or services only at
agreed prices

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agreements not to compete in certain geographical areas


agreements not to poach, or only to supply, certain clients
exclusive dealing: engaging in the practice of only supplying goods and
services upon certain restrictions or obligations being met, normally to compel
a client to acquire goods or services from a supplier that they may under
normal circumstances have sourced from another supplier
restrictive trade practices: where a company with substantial power in a
market abuses its power to eliminate or damage a competitor, prevent a
competitor from entering the market or deter or prevent competitive conduct in
a market. This includes monopolistic behaviour.
Where a borrower, mortgagor, guarantor or any other person has suffered a loss
as a result of a breach of the CCA, the credit provider may be ordered to
compensate that person or entity.
The CCA is administered by the Australian Competition and Consumer
Commission (ACCC) and applies to the conduct of corporations and their
employees, agents or officers.

The Code of Banking Practice


The Code of Banking Practice (the Code) is a voluntary code which seeks to
promote best practice between banks and consumers. The purpose of the Code
is to:
describe and establish good banking practice and service
promote disclosure of information that is relevant and useful to clients
promote informed and effective relationships between banks and consumers.
The Code requires banks to have dispute resolution procedures in place to assist
in resolving consumers complaints. The Financial Ombudsman Service (FOS) is
the banking industrys resolution scheme. If you work for or represent a bank, you
must comply with the Codes obligations.
The introduction of the new national credit regime has triggered a review of the
Code of Banking Practice, particularly in the area of compliance. The review
processes, and changes made, are set out in a series of progress reports
available on the Australian Bankers Association (ABA) website,
<www.bankers.asn.au>.

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Regulation of money laundering, terrorism financing and client


identification
The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth)
(AML/CTF Act) is Australias regulating legislation for the detection of money
laundering and terrorism financing. The AML/CTF Act brings Australias
prevention and reporting regime for money laundering and terrorism financing
into line with international norms.
The AML/CTF Act compliance relies upon a risk-based approach for reporting
entities and their agents. Any risk that the lender might facilitate money
laundering or terrorism financing must be identified, mitigated and managed,
which includes ongoing due diligence.
To facilitate compliance with the AML/CTF Act, lenders will generally have
compliance procedures which must be followed by employees and other
representatives when accepting and processing loan applications.

Regulation of financial services the Corporations Act


Chapter 7 of the Corporations Act includes the Financial Services Regulations
(FSR), which address a number of regulatory matters, including:
licensing and regulatory regimes for financial services participants
a uniform regulatory regime that can accommodate the entry of new
participants into the financial services industry
making the financial services industry more cost effective, and
enhancing disclosure requirements for providers of financial products and
services to consumers.
FSR aims to promote:
confident and informed decision-making by consumers using financial
products and services, while facilitating the efficient, flexible and innovative
provision of these products and services
fair, honest and professional financial service providers
a fair, open and transparent financial services market place.
These aims are achieved through a number of measures including:
the provision of comparable regulation of all financial products, which also
includes bank deposit products such as offset accounts
licensing financial markets, including the licensing of all financial advisers and
dealers through an Australian Financial Services Licence (AFSL) and
imposing statutory obligations on them designed to protect retail investors
the provision of clear and understandable disclosure documents by promoters
to assist prospective investors in comparing products and make informed
decisions.

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The Anti-Discrimination Act 1977 (Cth)


Discrimination occurs when a person is treated unfairly or unequally because of
their membership of a particular group, such as religion, gender, age, nationality,
ethnic background, disability and so on.
In lending, discrimination could occur in the process of approving a loan. The Act
is designed to protect people from unfair discrimination in such circumstances.
Discrimination can be both direct and indirect:
Direct discrimination occurs when a person is treated differently,
unfairly or unequally because of their membership of one of the relevant
groups.
Indirect discrimination occurs when there is a requirement that is nominally
the same for all persons, but which has an unequal or disproportionate effect
on certain groups, as compared to other groups.

Regulatory bodies and industry associations


There are a variety of regulatory and industry bodies at state and federal level
which participate in, or assist in regulating the lending industry, including:
the Australian Securities and Investments Commission (ASIC)
the Australian Prudential Regulation Authority (APRA)
the Consumer Credit Legal Centre (CCLC)
the Mortgage & Finance Association of Australia (MFAA)
the Finance Brokers Association of Australia (FBAA).
Australian Securities and Investments Commission (ASIC)
In March 2002, the Commonwealths regulatory powers over consumer credit
products were transferred from the Competition and Consumer Commission
(ACCC) to ASIC. ASICs authority to regulate credit is vested in the ASIC Act,
which allows ASIC to regulate conduct in relation to credit facilities.
Although detailed disclosure or contractual requirements relating to credit are
regulated by the National Consumer Credit Protection Act, the ASIC Act sets out
broad standards of conduct relating to credit facilities including:
the prohibition of unconscionable and misleading or deceptive conduct
the prohibition of making false or misleading representations, and
implied warranties of due care, skill and fitness for purpose into contracts for
the provision of financial services.
ASICs powers are responsive: it can only take action for breaches of the
legislation when an act of unfair conduct has already occurred.

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Further resources
For more information about ASIC and its role, visit the ASIC website at,
<www.asic.gov.au>.
Australian Prudential Regulation Authority (APRA)
APRA is the prudential regulator of approved deposit-taking institutions (ADIs)
such as banks, credit unions and building societies, as well as insurance
companies covering life and general insurances, superannuation funds and
friendly societies.
APRA is not responsible for the regulation of all ADI complaints. Rather, APRA
as a prudential regulator sets standards, including capital requirements, for the
prudent management of banks and other ADIs, insurance companies and friendly
societies to maximise the likelihood that they will remain financially sound and
able to meet their obligations to depositors and policyholders.
Consumer Credit Legal Centre (NSW) (CCLC)
The CCLC is a community legal centre specialising in financial services, in
particular, matters and policy issues relating to consumer credit, banking and
debt recovery. It focuses on issues that affect low income and disadvantaged
consumers. The goals of the CCLC are to:
provide assistance to consumers of financial services, particularly
disadvantaged consumers, to effectively assert their rights and protect their
legitimate interests
promote consumer understanding of financial services regulation, policy and
industry practice
achieve redress for individual clients
promote reforms to help create a fairer marketplace for consumers of financial
services and in particular disadvantaged consumers.
Their goals are achieved through:
the provision of information, legal advice and referral in relation to banking,
credit and debt and related matters to consumers and community/welfare
agencies
the provision of ongoing casework services, including legal representation at
tribunal or court hearings as appropriate or advocacy through industry dispute
resolution schemes
the conduct of community legal education to raise public awareness
concerning regulation, industry practices and consumer issues
the pursuit of pro-consumer reforms in financial services regulation, policy and
industry practice through casework, campaigns, and participation in policy
development and review processes.
The CCLC has made a significant contribution to regulatory review processes.Its
March 2003 report to ASIC on the finance industry was well received and had
significant influence on the industry.

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Certificate IV in Credit Management

Mortgage and Finance Association of Australia (MFAA)


The MFAA is the residential mortgage industrys representative body. It works
closely with the financial services sector, the Commonwealth and State
governments to set standards for the mortgage industry. It assists industry
consumers by dealing with industry issues on behalf of its members and
providing an ombudsman scheme to facilitate resolution of disputes and address
borrower concerns.
Finance Brokers Association of Australia (FBAA)
The FBAAs representation includes brokers who work in the chattel equipment
and commercial finance sectors. The FBAA administers a code of ethics and
requires that its members act in the best interests of clients by providing full and
accurate information, ensuring the validity and accuracy of all documentation,
and providing advice and guidance to enable clients to select the most
appropriate credit facility for their needs.

Ethics and codes of conduct


A code of ethics establishes and expresses an organisations corporate values,
responsibilities, obligations and ethical goals, as well as the way it functions. A
code of ethics provides guidance to individuals on how to handle situations that
may pose a dilemma between alternate courses of action, or when faced with
pressure to consider right and wrong. Sometimes also referred to as codes of
conduct or codes of practice, they assist in:
defining acceptable and unacceptable behaviour
promoting high standards of practice (sometimes known as best practice)
providing a benchmark for members to use as self-evaluation
establishing a framework for professional behaviour and responsibilities, and
providing a vehicle for occupational identity and a mark of occupational
maturity.
Ethical standards reflect the common morality for a particular occupational group.
Codes of conduct should reflect the concerns of members of a particular
organisation and the context of the business environment in which it operates.
Codes may differ in whether or not they provide a method of dispute resolution or
impose any sanctions for non-compliance.

Conflict resolution procedures


The emergence of external dispute resolution schemes has played a vital role in
establishing effective industry self-regulation. The advantages of having an
external dispute resolution scheme are that they:
provide an alternative to expensive legal action for both consumers and
industry

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enable industry to both ascertain the problems faced by their clients and take
steps to rectify them, negating the need for government intervention
enhance good business practices and the creation of better quality goods and
services for clients.
Resolution schemes reflect an informal style of dispute resolution, rather than a
formal and adversarial style. They aim to achieve early resolution by consensus.
However, external resolution schemes do not remove the need for businesses to
have their own dispute resolution mechanisms in place external
dispute resolution schemes should only be used when resolution between the
parties cannot be reached.
Two schemes currently operating in the credit sector are those of the Financial
Ombudsman Service (FOS) and the Credit Ombudsman Service Ltd (COSL).
The Financial Ombudsman Service (FOS)
FOS is the Australian banking industrys external dispute resolution scheme. It
considers complaints about banks and their affiliates operating in Australia. The
Ombudsman is able to investigate disputes and make decisions that are binding
on the service provider. FOS will consider disputes if:
they are about a financial service provided by a member bank or an affiliate
the dispute is lodged by an individual or a small business, or
the amount of loss claimed is less than $500,000.
FOS is unable to consider disputes about general policies, such as interest rates,
fees and branch closures.
The Credit Ombudsman Service Ltd (COSL)
The Credit Ombudsman Service Ltd (COSL), formerly known as the Mortgage
Industry Ombudsman Scheme (MIOS), is an independent industry supervisory
scheme provided to clients to resolve disputes. It is provided free of charge.
COSL facilitates disputes between scheme members and clients, and between
its members.
The aim of COSL is to provide an independent and prompt resolution of disputes
against the criteria of law, industry best practice, and fairness in all
circumstances. COSL can intermediate disputes involving sums of up to
$250,000, not limited to direct losses.
Clients referred to the dispute resolution service are not bound by the
ombudsmans decision and retain any legal rights they have to refer the matter to
a court or tribunal. However, if a client accepts the ombudsmans decision in
accordance with the rules of the scheme, then it will be binding on the scheme
member involved in the dispute.
COSL and FOS are approved by ASIC but are not regulators in themselves.
They provide a free service to consumers to facilitate the resolution of disputes
with member organisations.

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Certificate IV in Credit Management

Apply your knowledge 5: The Credit Ombudsman Service Ltd


Visit <www.cosl.com.au> and answer the following questions:
In summary, who can lodge a complaint with the Credit Ombudsman
Service Ltd?
What types of complaints are covered by the Credit Ombudsman
Service Ltd?
What complaints are not covered?
How do I make a complaint?
Enter text here

Check your answers to this activity against the Suggested Answers at the
end of the topic.

Duty of care
Duty of care is a broad-ranging legal concept, encompassing all areas of the
relationship with the client, including processing applications, requests for
information, the provision of advice and maintenance of records.
Duty of care is judged on what a reasonable person would do or what is normal
under the circumstances. An organisation must take reasonable steps to ensure
that its actions do not cause harm or loss to any individual.
All individuals working in the credit and lending industry have a duty of care to
ensure they conduct their business activities within the regulatory framework.
To ensure they avoid liability themselves, or on the part of their employer or the
organisation they represent, individuals working in the industry should:
learn how regulatory legislation affects their job
understand the application process and how lending criteria are applied to
applications
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1.45

know the key features and costs of the products they are using
not guess answers or make rash promises to clients
make relevant file notes
maintain the secure storage of private information
ensure they gain the consent of all parties prior to proceeding with
applications
not give legal or financial advice unless they are authorised and have the
capacity to do so
explain the effect of transactions to guarantors.

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Certificate IV in Credit Management

The lending process


Although loan application processes and approval criteria vary from lender to
lender and from product to product, there are fundamentals that are common to
all lenders and products. This part of the topic provides an overview of these
fundamentals and includes preliminary loan and borrower assessment, an
overview of risk and obligations of the lender.
This part of the topic also discusses some of the costs associated with
purchasing property and borrowing funds.
A more detailed examination of the loan processing and approval process is
contained in Topic 2 of this subject.

Fundamentals of lending
The fundamentals of lending do not change irrespective of the purpose for which
the funds will be used. What does change is the quantity and type of information
that is required, and the time and skills needed to analyse it. Most loan proposals
are assessed on the basis of key indicators, such as the borrowers capacity to
repay the loan, character, capital strength, collateral offered as security, and
conditions of the lending proposal.
The lenders role is to accumulate sufficient information on the borrower and the
finance proposal to enable a well-informed assessment of the risks. The risk
profile of a particular lending scenario will also be influenced by the alternative
sources of repayment funding available and the type and amount of security
offered. Consideration is given to the repayment capacity of the borrower
(servicing) and the investment potential/earning capacity if lending to a business,
together with alternative exit strategies available to the lender to ensure debt
repayment. For approval, most lenders will take into consideration servicing and
security.
An acceptable credit risk will be represented by a high level of assurance that the
loan will be serviced and repaid as the obligation falls due in accordance with the
lending approval.

An overview of risk
Financial institutions seek to engage in profitable lending through a process of
risk assessment and loan structuring in order to avoid or appropriately price risk.
The concept of risk, however, is broad and has a strong influence on all aspects
of business. This section of the topic discusses the general process of risk
identification and management which may be applied in a variety of contexts and
situations.
The process of risk assessment (which leads to the decision of whether or not to
accept a lending proposal) is based upon the exercise of informed judgment.
The lender will utilise a number of procedures and guidelines in evaluating the
risk attaching to a lending proposal.

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1.47

Risk is defined by the Australian/New Zealand Standard for Risk Management


(AS/NZS ISO 31000:2009) (the Standard) as the effect of uncertainty on
objectives. In other words, risk is the chance that something might happen that
impacts on objectives, resulting in either a gain or a loss. The Standard sets out a
process for:
establishing goals and objectives to be achieved
identifying risks
analysing risks (that is, determining the likelihood that something will happen,
and the consequences if it does happen)
evaluating the risks (that is, determining if the risk is acceptable or not)
treating the risk (that is, avoiding the risk, reducing the likelihood it will
happen, reducing the consequences, transferring it in some way, or accepting
it).
The process presented in the Standard also includes monitoring and reporting on
the effectiveness of risk treatments, which closes the loop and creates a
continuous improvement cycle.
This process is shown graphically in Figure 8.
Figure 8 Risk management process

Establish goals and cont ext

Analyse

Likelihood
Consequence

Monitor / R eview

Identify risks

Evaluate

Treat

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Certificate IV in Credit Management

Risks in the financial services industry


Every industry and organisation has its own unique set of risks that must be
addressed. In the context of this subject the risks for the organisation include
making inappropriate lending decisions and failing to comply with compliance
obligations.
Other risks, not unique to the finance industry, include those associated with:
the economy and economic circumstances a sudden downturn in our own
or the world economy can have a significant effect on all industries and
organisations
commercial relationships organisations frequently establish relationships
with other organisations and individuals for various reasons, including to
achieve a commercial advantage. All such relationships pose risks which must
be assessed
human behaviour and individual activity organisations have suffered in the
past and will continue to suffer because of the actions (or inactions) of
individuals. Fraud, embezzlement, even incompetence, must be recognised
as potential risks
the political environment rules governing how industries behave and what
they can and cannot do are often based on the politics of the time. Such
decisions can have a significant impact on the way a business operates, its
potential profitability, and even its existence.
Apply your knowledge 6: Areas of potential risk
The discussion of risk has, so far, identified a number of risk areas;
however, the areas of potential risk are much broader than those listed
above.
Consider and list other areas of potential risk in your organisation.
Enter text here

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1.49

Strategies and tools to control and mitigate risk


Organisations deal with risk in different ways. Often, the way organisations deal
with risk depends on factors such as the size of the organisation, the degree of
compliance involved, the attitudes of management and whether or not it is a
private company responsible only to its private shareholders, or a public
company answerable to a large shareholder base, the stock exchange and,
possibly, the wider community.
Organisations such as those involved in credit and lending are highly regulated,
and are potentially susceptible to large finance losses if risk is mismanaged. In
order to ensure compliance and to minimise the risk of financial loss as much as
possible, strategies and tools will be in place to guide the activities of employees
and other representatives working on its behalf.
Policies, procedures, guidelines, rules and reporting usually exist to deal with
risk. You might use checklists to ensure compliance or that clients fully disclose
their financial situation. In the same way, lending guidelines attempt to ensure
that clients have the capacity to service a loan without hardship.
Specific risks such as business risk and industry risk are dealt with later in this
topic.
Apply your knowledge 7: Risk factors
a. Identify the risk factors that exist in the job that you do.
Enter text here

b. How has the organisation managed these risk factors? What guidelines
or tools exist to help you and the organisation identify and deal with the
risks?
Enter text here

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Certificate IV in Credit Management

c. Are there any risks that are not being adequately addressed? If so note
and discuss them with your manager.
Enter text here

The loan application process


The loan application and approval process can vary for reasons such as:
the type of loan or loan product
the borrowers needs and risk profile
the lenders requirements
the nature of the security
the overall lending (economic) environment.
The lending process may also vary from one lending institution to another.
However, Table 4 presents a simplified view of the loan application process.
Whilst this table does not necessarily identify all the potential activities required
for a particular loan product and situations, it does present a high-level overview
of a typical transaction. The process presented assumes that real estate is
offered as security for the loan.
Although your job role may be involved you in only part of the process, an
appreciation and understanding of the whole process is critical to competent risk
assessment. Table 4 divides the process into separate stages and shows the
tasks that must be organised or carried out by the lender (or the lenders
representative) at each stage.

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Table 4 The loan application process


Stage

Lenders responsibilities

Stage 1: Identification of clients


(borrowers) needs

gather information on clients needs


gather data about the clients financial situation and
explain the process to the client

Stage 2: Analysis of the situation

analyse data
identify products

Stage 3: Present a solution

Stage 4: Submission of application

advise client of documents and evidence required


obtain completed application and supporting
documentation from the client

Stage 5: Approval

present the proposal to the client


negotiate a solution, if necessary
offer alternative solutions, if appropriate
address client questions and concerns
gain approval from client

liaise with client, if necessary


assess application
validate information supplied by the client
determine feasibility of the solution proposed based
on evidence submitted
grant conditional approval, if appropriate
arrange valuation
grant final approval
prepare documents
prepare offer letter and terms and conditions

Stage 6: Settlement

monitor progress
liaise with client, solicitors, conveyancers, etc. if
necessary
carry out settlement

Stage 7: Post-settlement

provide ongoing client care


provide account statements
monitor security provided, as appropriate

While the loan application process set out in Table 4 assumes separate stages in
the process, in fact, a number of stages may be merged into one. However, as
explained earlier, Table 4 has been set out this way for simplicity of explanation.
In other cases, a face-to-face meeting may not occur at all, with all contact being
carried out over the phone and by mail.

Preliminary loan assessment


A preliminary analysis of a proposal would normally include:
identifying the borrower
identifying the purpose of the loan
assessing the adequacy of the amount and term of the loan
determining general creditworthiness of the borrower and any proposed
guarantor/s

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Certificate IV in Credit Management

assessing the location and quality of the security offered


determining the borrowers financial position (from financial statements and
any cash flow projections) and gauging the corresponding ability of the
borrower to service the proposal
assessing the borrowers length of time and experience in their field of
employment or within their business (trading and property)
assessing the conduct of the borrower with regard to existing facilities of
the lenders.
Before proceeding with an application the lender should:
be satisfied with the quality of the borrower
be satisfied with the quality of the proposal
confirm that the purpose of the request is legal and is within the lending policy
identify the business structure of the borrower, if required
provide disclosure information to the client and any potential guarantors in
accordance with relevant legislation and codes.
Where borrowings are to be undertaken by joint debtors, there must be evidence
that all debtors will receive a direct benefit from the provision of the lending
facility. All debtors must be made aware that they may be liable for the full
amount of the debt.
The borrower must be positively identified in order to ensure eligibility to borrow
from the lender, ability to provide security and legal responsibility for the liability.

The key questions


Table 5 provides an indication of the key questions that need to be answered in
each situation before beginning to evaluate creditworthiness. In summary, there
needs to be an understanding of the borrowers needs, which a lender should
aim to satisfy, so that an appropriate level of investigation can be determined. It
is only after awareness of the basics of the transaction is achieved that
investigations can be made and creditworthiness analysed in an appropriate
manner.
Table 5 The key questions
Key questions

Possible answers

Who is the borrower?

Individuals and sole traders


Companies
Trusts and partnerships.

How much will be


borrowed?

What is the borrowing requirement, taking into account the purpose,


i.e. purchase property plus all associated costs and government charges
less the borrowers own contribution?

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Key questions

Possible answers

How long will the loan


term be?

For home lending the maximum term is generally 30 years. For commercial
property purchases, the maximum term is normally 10-15 years with
shorter terms for other business needs.
Other types of lending can vary greatly in duration. For example, personal
loans may be made for three to five years, while overdrafts may extend to a
few days or weeks.

How will the funds be


used?

How will the loan be


repaid?

Principal and interest over maximum terms


Interest only subject to periodic renegotiation
Payment from business cash flow.

How financially strong is


the borrower?

The overall financial strength of the borrower


Wide range from sole trader/fledgling entities to well respected major
corporations
Value of property and business varies widely.

How will the loan be


secured?

Who is giving security?

Often third party by directors or other entities within a client group.

1.53

Residential property purchase


Commercial property purchase
Plant and equipment purchase
Working capital
Consolidate debt
Purchase existing businesses
Purchase franchises
For the purchase of personal or household items.

Mortgage over residential or commercial property


Additional security over a businesss assets
Requirement of directors guarantees
Other charges over assets.

Preliminary assessment of credit, industry and business risk


The principles of lending
Each borrower must be assessed individually against the organisations policy
and lending criteria. One common method is assessment against the five Cs of
lending. This method of risk assessment is applicable to a broad range of
borrowers, including individuals and businesses.
Assessing credit risk using the five Cs of lending method involves investigating
and assessing five major categories of potential risk. These categories are listed
and explained in Table 6.

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Table 6

Assessing credit risk using the five Cs

Capacity

Capacity refers to the borrowers financial ability to repay the loan. Is their income or
revenue sufficient? Evidence for individual borrowers may include pay slips, tax
returns, statements or letters from employers, accountants or solicitors in the case of
low-doc loans.
Evidence for business borrowers may include company tax returns, financial
statements, cash flow forecasts, budgets and accountants reports.

Character

Character refers to assessment of the borrower to determine the likelihood that they
will, providing their Capacity allows, meet repayment obligations over the term of the
loan. Evidence may include previous loan history, credit agency reports and savings
history.

Capital

Capital refers to the borrowers financial strength, i.e. their assets compared to their
liabilities. It also refers to the amount they intend to contribute to the purchase.
Generally, it is considered that a large deposit leads to greater commitment to meet
obligations.

Collateral

Collateral refers to the security being offered. Risk considerations involve assessing if
the outstanding loan balance could be easily realised through the sale of the security
asset.

Conditions

This category includes any other conditions that might affect, and be beyond the
direct control of, the borrower and impact on their ability to repay the loan. For
individual borrowers these include job security, relationship stability, family issues
and dependants. For business borrowers they include other conditions such as the
economic situation and market conditions.

While the five Cs cover areas of potential risk, good judgement is essential
when processing applications. Look objectively at applications and consider if
everything appears to make sense and question areas that may warrant further
investigation.
When assessing credit risk for businesses, the five Cs method only provides a
preliminary view of the businesss risk profile. Because every business is
different, and the factors impacting on that business may also be different, other
risk assessment methods might need to be applied in order to improve the risk
assessment process. Other methods include conducting risk analyses of both the
particular industry (assessing industry risk) and the business itself (assessing
business risk).

Industry risk factors


Industry risk refers to the risks associated with a particular industry sector.
Different industries, at various times, might be affected by any number of factors
including those set out in Table 7.
Table 7 Industry risk
Risk factor

Issues to consider

Government
legislation and
regulation

Is the business focused on meeting its regulatory obligations in a timely and


cost-effective way?
What impact, if any, could a change in legislation have on the industry?

Seasonal factors

Is there product diversity or other management techniques to deal with peaks


and troughs in demand for particular products or services?

Economic cycles

How susceptible is the business to changes in economic cycles?

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Risk factor

Issues to consider

Competitor activity

Are strategies in place to discourage client migration to competitor products?

Dependence on
suppliers

Is supplier dependence minimised through identification of alternative suppliers


and varying product mix?

Maturity of the
industry

Are strategies in place to manage migration to other products and services in


the mature stage of the industry cycle?

Overall profitability

Are costs being controlled and is adequate emphasis being placed on the most
profitable products and clients?

Cost structures

Are strategies in place to lock in sales while developing a flexible cost


structure?

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Business risk factors


Business risk factors are those associated with a particular business. There can
be any number of risk factors that should be considered, as set out in Table 8.
Table 8 Business risk
Risk factor

Issues to consider

Business
characteristics

Business size is the business big enough?


Experience has the business been operating for long?
Competence is the business considered to be competent in its operations?
Integrity is the business regarded as having high integrity?
Reputation is the business held in high regard?
Maturity is the business mature and maintaining reasonable growth?
Diversity does the business have a large product range and diverse clients?

Market factors

Market penetration are products well established and in demand?


Market risk are the markets generally stable?
Market forces are competitive forces generally stable and predictable?
Product differentiation are there few alternative products?

Operations

Price can the business influence supplier price?


Continuity are supplies readily available?
Supply channel are alternative suppliers available?
Influence does the business purchase enough supplies to be able to
influence suppliers?
Is the production process legal and safe?
Is the capital equipment sufficient or will it need to be replaced/upgraded?
Are there any environmental concerns?
Is the business over- or under-stocked?

Production

Quality are the products and services of high quality that meet the clients
needs?
Consistency is production reliable, and are products and services always
available?
Technology is the business up to date with the latest technology?
Completion are all orders and contracts completed on time and to clients
satisfaction?
Disaster recovery does the business have a plan to deal with disasters?
Employee relations does the business have good relationships with its
employees?

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Certificate IV in Credit Management

Risk factor

Issues to consider

Distribution

Network does the business have networks that reach profitable markets?
Reliability is distribution reliable and achieved on time?
Market coverage is there wide market coverage, reaching the most profitable
segments?
Control does the business have full control over distribution and promotion of
its products and services?
Flexibility is there a strategy to help predict changes and plan ahead to
maintain profitability?

Sales and
marketing

Management

Board of Directors is the Board of Directors independent and experienced?


Management experience does management have wide industry experience
and a good performance record?
Is the business dependent on key personnel? If so, is key person insurance
held to cover these people?
Depth and breadth of experience is there a good mix of depth and breadth of
management experience?
Integrity is the business held in high regard in the industry?
Performance record does the business have a record of meeting its forecasts
and targets?

Accounting and
record keeping

Finance

How sensitive is the business to interest rate movements?


How susceptible is the business to foreign exchange movements?
Is the business highly geared?

Does the business have a marketing plan?


Sales mix are a wide range of products sold to major markets?
Competition is there little or no competition in major markets?
Demand are the products and services in demand?
Market concentration is the market diverse?
Bargaining power does the business control the sales prices?

Who maintains the records of the business and are they kept up to date?
What are the key performance indicators, e.g. sales, gross profit, etc.?
Does the business plan for its taxation commitments?
Does the business prepare budgets and plans?
Does the business have a system for debt collection and debtor follow-up?

As can be seen, the risk factors for analysing businesses are very varied and
good judgement needs to be applied to the task of risk assessment. Table 8
provides a guide only and is not an exhaustive description of the many factors
that might need to be considered when assessing a particular transaction.
Apply your knowledge 8: Identifying industry and business risk
factors
Read the following scenario and identify as many types of industry and
business risk factors that you are able to, based on the information
available.
ABC Air Conditioning Pty Ltd imports air conditioners from one main
supplier in China and distributes and installs these throughout the Sydney
metropolitan area. The company pays its supplier in US dollars.The
company is owned 50% each by Colin Bell age 49 and Martin Turner age
63.

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The company has been in operation for the past 30 years. Colin enjoys
interpersonal relations and as such he manages the sales and marketing
operations of the business. Martin is a qualified accountant and looks after
the financial affairs of the business. There is no succession plan in place. In
addition, no key person insurance is held for either Colin or Martin.
The companys sales have been solid over a number of years, however, a
new entrant has recently established in Sydney and as a consequence, the
company has had to slash profit margins by 15% to remain competitive.
This year the government has introduced a new tax levy on imports of this
type, amounting to an additional 10% import duty.
The company has a fleet of 20 vehicles used to distribute and install the air
conditioners. The average age of the fleet vehicles is 10 years.
Enter text here

Check your answers to this activity against the Suggested Answers at the
end of the topic.

Information gathering
Information on the borrower and related parties is generally obtained from a
number of sources including:

the borrower/debtor themselves

employers

directors/owners of a business

accountant/financial controller

physical inspection of a business site

observations and casual discussions with employees of a business

inspection of records, taxation returns, pay slips, financial statements,


budgets, etc.

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Certificate IV in Credit Management

credit reporting and research agencies, for example, Veda Advantage,


Dun & Bradstreet, Standard and Poors, IBIS

government records, for example, ASIC

local knowledge and discussions with people familiar with the area

valuers, solicitors and real estate agents.

Who is the borrower?


It is essential for a lender to gain a thorough understanding of the borrower.
The identification and understanding of the borrowing needs, which lead to the
financing requirements, are fundamental to the assessment of the lending
proposal.
To begin the assessment it is important to gather the necessary information to
assess the whos and hows of the proposal. Generally, the following details
would be required:
borrowers structure
borrowing purpose
borrowers financial information
borrowers summary and background
management/management information systems (for a business borrower)
industry outlook/competition (for a business borrower)
repayment
security
verification of information to prevent fraud.

Borrowers structure
individual or business (sole trader, partnership, company, trust or other)
list of directors and company secretary, if appropriate
management structure.

Borrowing purpose
details of existing borrowings and facilities are they still appropriate?
cause of current borrowing/purpose of finance sought, for example, purchase
home property, purchase commercial property, capital expenditure, special
project, etc.
type and term of facility sought and level of equity provided, if any
identification of future funding requirements.

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Borrowers financial information


an individuals taxation returns, preferably for the previous three years, pay
slips, etc.
historical financial statements (including notes), preferably for the previous
three years (for business lending)
interim management reports for the current period
explanation of any significant transactions and events reflected in the financial
statements
cash flow projections together with assumptions upon which the projections
are based, preferably covering the worst, expected and best-case scenarios
feasibility studies for the project currently being undertaken
statements of assets and liabilities of the owners/directors (for family and
small business)
businesss most recent taxation assessments, Business Activity Statements,
etc.

Borrowers summary and background


individual business history
significant events and activities
size of operations
historical trading performance
current business objectives and strategy
any competitive advantages the company possesses.
Apply your knowledge 9: Determining the borrower and the borrowing
requirements
Read the following scenario and consider the questions raised.
Robert and Diane Williams currently lease business premises to operate
their business, Cottage Furniture. The business manufactures wood
furniture and customised furniture. The business employs 15 staff. The
company name is Williams Pty Ltd trading as Cottage Furniture and the
directors are Robert and Diane Williams.
The premises from which the business operates has recently come on to
the market for sale. Robert and Diane would like to purchase the
non-specialised commercial property in the company name for taxation
purposes. The purchase price is $3,000,000. Purchase costs are $100,000.
Robert and Diane would like to contribute $1,600,000 via the company
Williams Pty Ltd.

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Certificate IV in Credit Management

Robert and Diane own their home at 3 Monto Drive, Marrickville


unencumbered and have offered security over this property in addition to a
mortgage over the commercial premises being purchased at 2628
Commercial Road, Jackman. Directors guarantees will also be required.
a. Who is the borrower?
Enter text here

b. How much are they seeking to borrow?


Enter text here

c. How will the funds be used?


Enter text here

d. How is the borrowing to be secured?


Enter text here

e. Who is providing the security?


Enter text here

Check your answers to this activity against the Suggested Answers at the
end of the topic.

Management/management information systems (for a business


borrower)
details of key management personnel including: qualifications, types of
experience and current responsibilities
scope and frequency of management reporting and the type of reports
prepared (examples may be provided)
role of external accountants and business advisers.

Industry outlook/competition (for a business borrower)


information on the borrowers industry, including current outlook
details of key market players and level of competition/relative market share
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future marketing plans and strategies


major suppliers and clients.

Repayment
proposed debt reduction program, if any
source of repayment funding, for example, rental income, trading income, sale
of assets, refinance, etc.

Security
where there is more than one entity in the group, who are the security
providers?
assets available and offered as security, and recent valuations (if available)
details of any prior charges over either the assets offered as security or the
companies themselves, for example, mortgage debenture.

Verification of information to prevent fraud


Fraud represents a significant risk to the profitable many businesses and,
unfortunately, lending fraud is one of the most common types of fraud. Lending
fraud can range from misrepresenting the truth on a credit card application
through to a complex fraud on a business loan, involving forged supporting
documentation and untruthful verification from third parties such as accountants
and suppliers.
All information provided in support of a loan application needs to be
independently checked and not relied upon at face value. This is why lenders
usually have minimum validation requirements in place. This validation is
particularly important to allow lenders to identify discrepancies in information
provided by their clients and to confirm, for example, that people actually earn the
income or have the assets they claim to.
Why people commit fraud
The most common reasons why people commit fraud include:
financial problems
lifestyle
addictions, for example, gambling, drugs.
As a significant amount of documentation is generated to establish and confirm
creditworthiness, it is essential that lenders can confirm and validate the originals
of any documentation provided.

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Certificate IV in Credit Management

Accepting only original documentation


Originals of all documents should be sighted. Lenders have a responsibility to
sight original information supplied for a loan application because by accepting
copies or faxes of documentation there is a risk that the information may be
changed prior to the copy being received by the lender.
Read the documents, ask questions and analyse answers
Read all of the documents carefully. If there is something that the risk assessor
does not understand, is unsure of, or does not appear to be correct, they should
ask questions and continue asking questions until they fully understand the
situation. If a detail does not seem right, it probably is not. For example, is it likely
that a cleaner earns $150,000 p.a.?
Risk assessors should always analyse the borrowers response to a question.
Think about what the borrower is saying. Does it make sense? Does it fit with
earlier statements? By doing this the assessor can pick up on information that
may be distorted, out of the ordinary or unlikely.
Warning signs
Some of the warning signs to look out for are:
promises of high value business/funds to the institution in the future
if a borrowers home or business telephone number is a mobile
low income but high asset strength which may indicate overstated assets
the value of certain assets is out of line with total assets
purchase price of a property is not in line with the suburb average
borrowers income is out of line with their job title
a credit report that shows multiple applications to other lenders, but
corresponding loans are not on the borrowers loan application
if a company has been in operation for more than two years and their details
are not in the White Pages and/or Yellow Pages, Google Maps or any other
business listing facility.
Preventative measures
Fraud preventative measures include:
Lenders should not use any telephone numbers, addresses, etc. supplied
within a loan application. Verify information by obtaining telephone numbers
and addresses from the White Pages/Yellow Pages.
If lending to a business, lenders should visit the business to confirm that the
business exists. This is also a good way to build relationships with clients.
Confirm any company letterhead received shows the correct contact details
and ABN. The ABN can be confirmed against public records available via the
Commonwealth Governments website <www.abr.business.gov.au>.

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Ask the client about loan enquiries made on their Veda report, if appropriate.

Obligations as a lender
Regulatory compliance and ethical considerations in lending are critical as
breaches could leave the lender and their organisation open to severe penalties.
The regulatory and compliance framework for the financial services industry is
highly evolved. Industry participants need to keep up to date with changes and
ensure that they continue to comply with all the necessary requirements.
Consumers have varying levels of financial literacy and it may be based solely on
their own experience and knowledge of the borrowing process. Lenders have a
role in educating clients on the loan application and borrowing processes.

Assessing the borrowers level of knowledge


Consumer law is based on the objective of ensuring that borrowers make full
informed decisions. From an ethical point of view, and as sound business
practice, it is a good idea to verify and record the borrowers understanding of the
transaction they are considering. It is important to identify and eliminate any gaps
in the clients knowledge with regard to the borrowing process and the products
and services involved in the transaction.
Assessing a borrowers level of knowledge and experience can be achieved
simply through discussion and questioning. For example, they will invariably offer
information that will assist the lender, for example:
We are buying our first home
I need a loan to finance the purchase of equipment for my business
We are after a loan for an investment property
The lender can also gain information by asking some simple questions:
Are you aware of the assistance available to first home buyers?
Are you aware that there may be taxation concessions available for the
acquisition of the equipment?
Do you have any other investment properties?
Through conversation and by using active listening and questioning techniques,
the lender can assess a clients level of experience and knowledge, and can fill in
gaps in that knowledge.
A borrower who fully understands the processes and requirements associated
with taking out a loan will not be faced with any surprises. No surprises means a
happier experience for them and the lender, and a higher level of consumer
protection.

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Certificate IV in Credit Management

The costs of purchasing and borrowing associated with residential


and non-residential property
One of the main issues that borrowers need to be aware of are the potential
costs associated with purchasing property and borrowing funds. Total costs can
be significant and need to be accurately estimated when calculating the funds
needed.
The lender needs to know what costs are involved and how to calculate them in
order to properly advise their borrowers and to ensure that they have sufficient
funds available.
The cost components will vary depending on the purpose of the loan. For
example:
buying an existing house or refinancing
borrowing for business purposes
building a new house.
Costs are associated with both purchasing property and borrowing funds.
The following is a summary of the primary costs that should be allowed for in
each of these categories.

Purchasing costs
Purchasing costs are costs associated with the purchase and transfer of property.
The costs listed here are payable by the purchaser.
Stamp duty (on property purchases)
Stamp duty is a state-based tax and is payable on the transfer of property, leases
and mortgages. The amount payable is assessed on a sliding scale, based on
the amount of the transaction. The amount increases as the transaction amount
increases. The rate of duty varies for each state.
The purchaser or transferee is normally liable for the duty on property purchases.
Some states offer stamp duty concessions such as reductions or exemptions for
first home buyers.
Further resources
For details, visit your state or territory revenue office:
New South Wales <www.osr.nsw.gov.au>
Queensland <www.osr.qld.gov.au>
Australian Capital Territory <www.revenue.act.gov.au>
Victoria <www.sro.vic.gov.au>
South Australia <www.revenuesa.sa.gov.au>
Northern Territory <www.revenue.nt.gov.au>

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Tasmania <www.treasury.tas.gov.au/tax>
Western Australia <www.dtf.wa.gov.au>
Solicitor or conveyancer charges
Although it is possible for a purchaser to undertake the conveyancing process
personally, it may be a complicated and time-consuming process, and the
consequences of making an error may be significant. For these reasons most
people choose to retain the services of a solicitor or conveyancer. These people
are licensed and required to have professional liability insurance. This provides
protection for both the purchaser and the vendor in the event of error or
negligence that results in either party suffering a financial loss.
Conveyancing fees vary but most are based on a set scale. In addition to the fee
charged for conveyancing, solicitors and conveyancers also pass on to the
purchaser the incidental costs incurred in carrying out the service. These are
called disbursements and may include the cost of photocopying, mailing and
telephone calls. Disbursements also include the fees of others involved in the
process, including services such as pest and building inspection. These costs are
often paid for by the solicitor or conveyancer on behalf of the client and then
charged to the client.
Council and water rates
Purchasers of property are generally responsible for the payment of council rates
and taxes on a pro rata basis. The solicitor or conveyancer will verify these
charges, calculate the payment required and ensure the amount payable on
settlement is adjusted accordingly.
Land tax
Land tax is a state issue and varies for each state. In some states, such as New
South Wales, land tax is payable on all properties except the principal residence.
The principal residence may also be subject to land tax if its land value exceeds
a certain amount and/or is greater in size than prescribed land holdings.
The existing owner is generally responsible for the payment of land tax; however,
purchasers need to find out whether all taxes have been paid to ensure that they
do not inherit any of the tax liability.
Insurance
It is normally a condition of borrowing for the purchase of a property that any
buildings on the property that are part of the security are adequately insured. This
is to ensure that the value of the security is preserved and the mortgagees
interests are protected in the event that the building is damaged or destroyed.
This requirement applies to both residential and non-residential property offered
as security.

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Certificate IV in Credit Management

Borrowing costs
Borrowing costs are those costs associated with taking out the loan. The costs
listed below are payable by the borrower.
Application or establishment fee
Most lenders charge a loan application or establishment fee. This is a one-off fee
for the processing of the loan application and varies between lenders. The fee
may also vary between different loan products provided by the same lender.
It may be payable when the loan application is submitted or at settlement. At
certain times some lenders may offer no establishment fee loans to attract
clients for home lending.
In respect to commercial lending, the loan establishment fee can be substantial
to reflect the administration work required in assessing a business loan
application. As a general guide, the fee is represented as a percentage of the
loan amount, and is usually around 0.60% of the loan amount.
Stamp duty (on mortgages)
As well as stamp duty on the property purchase and transfer, stamp duty may
also be payable on the mortgage. Where applicable, it is normally a percentage
of the loan amount and is payable by the borrower.
Mortgage registration fee
Mortgagees protect their interest by registering the mortgage with the state land
titles office. This provides official recognition of the mortgagees interest in the
property. Registration is carried out through the state revenue office, which
charges a fee in the order of $100. The borrower is usually required to pay the
fee. Some state and territory authorities also charge a discharge registration fee,
incurred to release any mortgage/s held against a borrowers sold property or
properties.
Valuers fee
Lenders normally require a formal valuation of the security property. Valuers
base their valuations on their experience and research of the prices paid for
similar properties in the area. In many cases, for residential home lending, the
valuation fee will be incorporated into the loan application or establishment fee,
although this will generally cover only one valuation. If more than one property
needs to be valued, the additional valuation costs will usually be charged to the
borrower. Commercial property valuations can be substantially higher than that of
residential property to reflect the complexities of the property involved and
whether it is specialised or not.

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Lenders mortgage insurance in respect to residential lending


The lender will often require the borrower to cover the cost of lenders mortgage
insurance (LMI). This protects the lender in the event that the borrower defaults
and the value of the security property is insufficient to repay the outstanding debt.
There is a one-off premium that varies according to factors such as the LVR and
the amount of the loan.
Generally all securitised loans are covered by mortgage insurance, but this cost
may be passed on to the borrower only if a lenders LVR is exceeded for
example, when the LVR reaches 60% or 80%. Non-securitised loans can also be
covered by mortgage insurance; but, again, it will depend on a lenders risk
parameters whether the cost is passed on.
LMI should not be confused with mortgage protection insurance, which a
borrower may choose to take out. Mortgage protection insurance pays off the
mortgage if something happens to the borrower and they cannot make payments.

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Lending products
This part of the topic looks at the range of lending products available designed to
meet client needs. While it is not possible within the scope of this topic to explore
each of the product offerings of different lenders, it is possible to examine the
main loan product groups and their characteristics.
Today, there are a large number of different loan products on the market, each
with its own characteristics and features. Loan providers can apply flexibility in
the way they package and market their products to further expand the range of
product options.
The lending products discussed are broadly grouped into consumer and business
lending products.

Consumer lending products


There are numerous products on the market targeted at helping people meet
their personal financial needs. These range from credit cards and overdrafts to
personal loans and mortgages. For the purposes of study, these have been
divided into two different groups: personal lending and core property mortgage
products.

Personal lending
Types of personal lending product, their purpose and characteristics, advantages
and disadvantages are detailed below.
Overdrafts
When the amount of money withdrawn from an account is greater than the
amount available in the account the excess is known as an overdraft and the
account is said to be overdrawn.
The usual purpose of an overdraft facility is to fund temporary personal cash flow
requirements, although the facility can be put in place on a permanent basis, and
funds drawn if and when required.
The advantage of a permanent overdraft facility is that funds are available to fill
any cash shortfall when required, without the need to apply for a loan at the time,
as approval has been arranged in advance. In a sense, an overdraft can be
considered to be a line of credit, although this term is commonly applied to
home equity loans, discussed later in this topic.
Interest rates for such facilities are relatively high but vary from provider to
provider. The rate can also vary depending on whether it is a permanent
overdraft or temporary facility. Temporary overdrafts usually incur a higher rate of
interest. Interest is only changed on the amount drawn down at any particular
time and ceases once the amount is repaid.

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In addition to the interest paid on the amount borrowed, fees apply. Though fees
vary between providers, they may include the following components:
establishment fee
loan servicing fee
other banking fees, such as ATM charges.
The loan servicing fee, if applicable, may be based on a sliding scale and may
range from $0 upward, depending on the amount of the debt at a certain point in
time.
Some of the other features of overdrafts are listed below:
A limit is set on the total amount that can be overdrawn at any time.
There are usually no minimum repayments required. (However, note that
interest continues to accrue and compound until the overdraft is repaid.
Therefore, cautious and judicious use of the facility is essential.)
Overdraft facilities are normally linked to one or more of the clients working
accounts.
The use of overdrafts has become less common with the advent and proliferation
of credit cards which serve a similar purpose.
Credit cards
A credit card gives the borrower the ability to buy goods or services now and pay
for them later. It is a revolving line of credit to enable day-to-day purchases and
represents an approval by a bank or company to use their money. Credit card
issuers are usually banks, even though the card may bear another company
name or logo. The name of the issuer appears somewhere on the card.
Trade names such as Visa and MasterCard are not actually card issuers. They
are termed membership associations. Banks use them for their payment
processing services, policy setting and marketing assistance. Many different
lenders package their own cards and different terms of credit using the logo and
services of an association membership.
Common credit cards are:
Visa
MasterCard
American Express.
The range of credit cards available and the facilities they offer are extensive. Also
extensive is the range of fees and charges that can be incurred, especially
through ill-considered use by the consumer.
This topic will not attempt to cover all credit card variables available; however,
following is a summary of some of the combinations and options available:

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No fee card There is no annual fee for these cards and they usually provide a
number of interest-free days. That is, no interest is payable on the debt until the
due date, which will fall on a particular date each month. However, these cards
normally attract a very high rate of interest on amounts not paid by the due date.
The provider may also make it a condition of retaining the no annual fee status
that a minimum amount is purchased each year. It should be noted that most
credit card providers charge the merchant, from which goods or services are
purchased, a percentage of the price paid by the consumer. This rate usually
varies with the volume and value of transactions for each merchant the greater
the volume and value, the lower the percentage charged.
Low rate cards These cards incur an annual fee, but the interest charged on
the outstanding amount is usually lower than the no fee cards. These cards also
normally offer a number of interest-free days.
Reward cards These cards are linked to one of the many rewards schemes
available, where points are allotted to the consumer for purchases made on the
cards. For each dollar spent on the card, the client is awarded a certain number
of points. Usually, one dollar spent equals on reward point; however, this can
vary. Once a specified number of reward points are accumulated, the client can
exchange the points for the reward, which may be an airline flight, shopping
voucher or merchandise.
Fees are charged and vary depending on the type of scheme, but they can be
relatively high in some cases.
Store cards Some large department stores or groups issue their own credit
(or store) cards that operate in a similar way to other credit cards. They may also
offer rewards and options, such as fee or no annual fee cards, depending on
whether or not the consumer wishes to participate in the rewards or other
schemes.
Most of the other facilities applicable to other credit cards are also applicable to
store cards. It should be noted that most store cards are only designated as such
because they bear the name of the store or group. The credit provider is usually
a financial organisation, not the store or group. Therefore, the credit contact
associated with the card is with the credit provider, not the store. Consumers
should be made fully aware of who they actually have a contract with, and the
conditions of that contract, especially in relation to the interest rates that are
changed for outstanding balances, and other fees.
Personal loans
A personal loan is a pre-determined loan of a fixed amount borrowed from a bank
or other lender by an individual, generally for a specific purpose. There are many
purposes for which personal loans are approved. The more common ones are
consolidation of other debts, the purchase of cars and paying for travel, but other
purposes might include paying for medical and dental expenses.
Personal loans may be unsecured or secured. If they are secured, the security
usually consists of the item being purchased, which in most cases is a car or
other vehicle.
Depending on the provider, there may be flexibility to choose between a variable
rate loan or a fixed rate loan, and fixed repayments or variable repayments.

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A personal loan can have many advantages for the borrower. For example, if
used for consolidating a debt, several outstanding credit card debts, which
usually attract a high rate of interest, can be combined into one personal loan,
typically at a considerably lower rate of interest.
Although the interest rate on a personal loan is typically lower than credit card
debt, it is still higher than other forms of loan such as home equity lending.
Secured personal loans usually attract a lower rate of interest than unsecured
loans.
When fees and charges are factored into the interest rate equation, the rate can
be quite high. For example, the effect of establishment fees and loan servicing
fees, if applicable, can increase the interest rate from 15% p.a. to 18% p.a. This
is why the client is advised to review the comparison rate which takes account of
such fees and changes. Comparison rates are discussed in more detail in Topic
3 in this subject.
There are usually minimum and maximum amounts which can be borrowed using
a personal loan facility.
Other fees and changes
As well as the establishment fee and loan serving fee, other fees may be
applicable. These include:
guarantee fee (for adding a guarantor to the loan)
settlement cheque fee*
Late payment fee.
* Most providers offer at least the first cheque free, but may charge for subsequent cheques. Multiple cheques
may be required and drawn to consolidate a number of existing debts into one loan.

Consumer leases
A consumer lease is a form of finance obtained through a credit provider for the
acquisition of items such as cars and more expensive consumer goods such as
televisions, computers and whitegoods.
Under a consumer lease arrangement, the consumer does not immediately own
the product, but rather they lease it for an agreed regular payment and for an
agreed time. At the end of that time, the consumer usually has several options.
For example, they may have the option to:
pay an additional amount (usually agreed in advance) to buy the product, and
therefore acquire ownership
hand the item back to the provider
upgrade the product (and the lease) to a newer model of the product
Consumer leases are attractive to some consumers because they allow them to
have and use the product they desire or need without having to pay the full price
upfront. At the end of the lease period, they have options about what they can do.
There are a number of areas of caution of which consumers need to be aware.

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These include the following:


The consumer does not own the product when they start making lease
payments. Many consumers believe they own the product once they take
possession. This is not the case. The ownership remains with the credit
provider until they make the decision to pay whatever amount is required at
the end of the lease period.
Leasing is an expensive option. The total amount paid is high compared to
buying the item outright at the start and often higher than other forms of credit.
Defaulting on a payment can have severe consequences. Because the
consumer does not own the product, it may be repossessed even if one
payment is missed.
Consumer leases should be distinguished from business or commercial leases
which are often taken out for the acquisition of equipment (including cars) needed
to carry on a business or commercial enterprise. These types of commercial
leases are often attractive to business because of their potential for tax
deductibility of lease payments, and because they mean the business can retain
capital for other purposes.
The NCC and consumer leases
The NCC applies to consumer leases except in the following circumstances:
leases for a period of four months or less, or for an indefinite period
leases where goods are hired by an employee in connection with the
employees remuneration or other employment benefits.
Under the NCC a consumer lease must be in writing and contain at least the
following information, if ascertainable:
a description or identification of the goods
the amount or value of any amount to be paid by the lessee before the
delivery of the goods
the amount of any stamp duty or other government charge payable by the
lessee
the amount of any other charges payable not included in the rental and a
description of those charges
the amount of each rental payment to be made by the lessee, the date of the
first rental payment and the dates on which subsequent rental payments are
due or the interval between rental payments
the number of rental payments to be made by the lessee, and the total amount
of rental payable
a statement of the conditions on which the lessee may terminate the lease
a statement of the liabilities (if any) of the lessee on termination of the lease.

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Core property mortgage products


Core property mortgage products (home loan products) make up a large
proportion of all lending in Australia. Home loan products are packaged by
providers in such a way as to meet the many and varied needs of consumers.
They are usually distinguished in terms of features or characteristics such as:
interest rates
method of calculating the interest variable or fixed
portability the ability to keep the same loan if moving to a new home
loan term
fees and charges
redraw facility if the borrower has made additional loan repayments they
can access these funds by way of a redraw facility
top-up the ability to extend the credit limit on an existing loan
offset accounts the ability to link the mortgage loan account to a transaction
account. Funds in the transaction account then offset the loan account.
Table 9 lists the types of core property mortgage products along with their
distinguishing characteristics. The products, including their advantages and
disadvantages are described in more detail in the following sections.
Table 9

Core property mortgage products and their characteristics

Core property
mortgage products

Characteristics

Variable rate loans

The loan is subject to interest rate movements

Fixed rate loans

The interest rate has been fixed for a period of time

Capped rate loans

The interest rate has a ceiling set

Discounted variable
rate loans

Same as a variable rate loan except it has a discount to the standard variable
rate for a certain period of time

Low start loans

Low initial loan repayments increasing over the term

High start loans

High initial loan repayments decreasing over the term

Split or combination
loans

Part of the borrowing is on a variable interest rate and part of the borrowing
is on a fixed interest rate

Home equity loans

Revolving line of credit

Consolidation loans

Two or more loans consolidated into one to make managing loans easier and
in most cases reduces the loan repayments required

Low-doc and no-doc


loans

Little or no documentation provided to prove a steady income stream.

Equity release products

Ability to release home equity without the obligation to make regular


payments

Equity finance
mortgages

Boost borrowing capacity or reduce repayments in return for relinquishing a


portion of any capital gain

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There are a number of products that make up the basic core of all mortgage loan
products. The products discussed here are presented in generic terms. Each
organisation will combine, package and market products slightly differently to
produce their individual products. The activities in this topic will help to identify
your organisations product range and features.
Variable rate loans
These are Australias most popular type of home loan. The interest rate can vary
throughout the term of the loan, going up or down, in accordance with prevailing
economic conditions.
Loan terms can vary, with maximum terms typically up to 30 years, depending on
the age of the borrower.
Table 10 Advantages and disadvantages of variable rate loans
Borrower

Lender

Advantages

If interest rates drop, repayments also


drop.
Generally extra or additional
repayments from the principal can be
made without adjustment. Thus, the
loan can be paid off faster.

Lenders can pass on all changes in the


cost of funding to the borrower.

Disadvantages

If interest rates rise, repayments also


rise. This means the borrower must
make larger payments.

These loans are more difficult to sell in


a rising interest rate environment.

Fixed rate loans


A fixed rate loan means that the borrowers interest rate and repayments are
fixed for a set period, usually one to five years. Most fixed loans automatically
revert to a variable loan at the end of the term, unless the borrower decides to
roll the loan over for another fixed term (at a new fixed rate).
Table 11

Advantages and disadvantages of fixed rate loans


Borrower

Lender

Advantages

Fixed rate mortgages afford the


borrower some certainty about how
much their regular repayments will be.
When rates rise, borrowers are
guaranteed that their interest rate, and
consequently their repayments, will not
go up, at least for the duration of the
fixed term.

Fixed rate mortgages have premium


interest rates. Lenders are selling risk
management as a service to
borrowers.

Disadvantages

The interest rate does not drop if


variable rates drop.
It may not be possible to pay extra
amounts off the principal without
incurring a financial penalty.
There may be financial penalties for
changing from a fixed rate to a variable
loan, or changing lenders, before the
fixed term is over.

The lender could end up with a loan


that provides comparatively low profit if
interest rates were to increase
substantially during the period the loan
is fixed.

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Capped rate loans


A capped rate loan has an interest rate ceiling set. The rate cannot exceed this
ceiling during the period of the capped rate. The interest rate can move below
the ceiling.
Rates are normally capped for one year or less and then revert to the normal
variable rate. These loans are designed to attract new loan business.
Table 12 Advantages and disadvantages of capped rate loans
Borrower

Lender

Advantages

If interest rates increase, the mortgage


interest rate will not rise beyond the
lenders ceiling or cap.
If rates decrease, the interest rate will
probably fall in line with market rates.

Capped loans provide an incentive to


borrowers, while minimising the lenders
exposure.

Disadvantages

Capped loans are generally only


offered as a honeymoon rate to new
clients.
There is no guarantee that the variable
rate the loan reverts to will be lower
than other lenders rates. There are
exit penalties for early repayment.

If interest rates rise significantly above


the imposed ceiling, a lender may face a
loss on the transaction.

Discounted variable rate loans


This product is almost the same as a variable rate loan except that it offers a
discount to the standard variable rate for a certain period of time, usually one
year. This rate is sometimes referred to as a honeymoon rate.
If the standard variable rate decreases, the discounted rate decreases by the
same margin. For example, if the standard rate is 10% and a discount of 2% is
given, the borrowers rate is 8%. If the standard rate drops to 7%, then the
borrowers rate also drops proportionately to 5%. A discount may also apply for
the full term of the loan, although the loan will generally lack features such as
repayment redraw and interest offset.
Table 13 Advantages and disadvantages of discounted variable rate loans
Borrower

Lender

Advantages

A reduced interest rate often equates


to lower repayments, with the borrower
also having the ability to make
additional repayments without penalty.

Discounted variable loans give an


incentive to borrowers, while
minimising the lenders risk.
The cost of the discounted portion of
the loan can be easily calculated.

Disadvantages

Penalties for discharging the loan early


(generally within the first five years)
can be very high.

Because the National Credit Code


places limitations on exit fees, lenders
must be careful not to breach the
Code.

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Low start loans


Low start loans allow for low initial repayments, which increase over the term of
the loan.
Table 14 Advantages and disadvantages of low start loans
Borrower

Lender

Advantages

Attractive to borrowers with low incomes,


or large financial commitments, who
expect their income to increase during
the term of the loan.

Allows lenders to target a specific


borrower market.

Disadvantages

Very little principal is paid off in the early


years, so total interest payments are
greater than a standard loan over the life
of the loan.
Repayments increase by a certain
percentage each year while generally
incomes do not increase at the same rate.

Because these loans are offered to


lower income earners, there may be a
greater risk of borrowers default.
Higher level of delinquencies/losses
(e.g. Home Fund).

High start loans


The reverse of a low start loan applies repayments will decrease over time.
Table 15 Advantages and disadvantages of high start loans
Borrower

Lender

Advantages

Attractive to borrowers who have


access to higher income in the early
stages of the loan, thereby reducing
the loan principal earlier.

Allows lenders to target a specific


borrower market.

Disadvantages

If the borrowers lose some of their


income in the early stages of the loan,
they may have trouble meeting the
higher initial payments.

New loans are needed to replace these


rapidly repaid loans, so as to maintain
the lenders loan portfolio.

Split or combination loans


Split (or combination) loans allow borrowers to take up part of their loan at a
variable rate and part at a fixed rate.
Table 16 Advantages and disadvantages of split or combination loans
Borrower

Lender

Advantages

Offers borrowers the chance to


minimise risk in times of rising interest
rates by having a portion of their loan
with a fixed interest rate. This gives a
blend of repayment flexibility and
interest rate security.

The same advantages as for fixed rate


and variable rate loans.

Disadvantages

The variable interest rate portion of the


loan is still vulnerable to increases if
rates go up.
If interest rates drop below the fixed
rate, borrowers are still compelled to
make repayments at the higher rate for
that portion of the loan.

The same disadvantages as for fixed


rate and variable rate loans.

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Home equity loans (line of credit)


A home equity loan is a line of credit secured by a registered mortgage over a
residential property. Most home equity loans operate like an overdraft facility.
Funds drawn from the facility can be used for lifestyle and investment purposes.
Table 17

Advantages and disadvantages of home equity loans


Borrower

Lender

Advantages

When the loan is established,


borrowers can use the money, as
needed, for whatever purpose they
choose.
Interest rates are lower than other
forms of credit such as credit cards.

Allows lenders to provide loans for


purposes other than real estate
investment, secured with a mortgage.

Disadvantages

Easy access to money for any


purpose. However, a maximum limit is
established on the loan account,
usually within an acceptable lending
ratio, and therefore borrowers are
rarely able to extend beyond their
payment capacity.
Debt is not reduced over time, leaving
borrowers with an ongoing
commitment.

Reduction in the value of the asset


may lead to amount advanced not
being fully recovered.

Consolidation loans
These loans allow borrowers to combine or consolidate several loans into one
single rate loan secured by mortgage. For example, the borrower may already
have a home loan, but also be paying higher interest rates on a car and personal
loan, and a credit card debt. By consolidating all these loans into the home loan,
the overall interest rate is reduced.
Table 18 Advantages and disadvantages of consolidation loans
Borrower

Lender

Advantages

Consolidation of several of the


borrowers debts means a lower overall
interest rate and cheaper monthly
payments.

Allows lenders to provide loans for


purposes other than real estate
investment, which are secured with a
mortgage.

Disadvantages

Loans that would have normally been


paid off in a short period, for example,
five years with a personal loan, are not
finalised until the mortgage is repaid.

Consolidation loans can present more


risk to the lender. Although some
people consolidate loans for
convenience and ease of payment,
others rely on the smaller regular
repayments to carry them through
periods of financial difficulty.
If circumstances deteriorate, the lender
may have to deal with a default
situation.

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Low-doc and no-doc loans


Low-doc and no-doc loans were initially designed for those in business who could
not supply two years of trading and financial results. To be eligible for one, an
applicant had to supply an ABN. Low-doc loan applicants had to provide a
statement that their earnings were a certain amount, while no-doc loan applicants
simply required a Statutory Declaration that they could afford the loan. These
loans were available to both individuals and private companies.
Under the new credit regime, no-doc loans to consumers are no longer possible,
due to the requirement that lenders make reasonable enquiries about the
applicants financial position and objectives. There is also a requirement that the
lender make reasonable enquiries to verify the information provided.
Because the extent to which lenders need to identify and verify an applicants
financial position and objectives is scalable, low-doc lending is still possible
where, for example, the stated income is supported by the applicants accountant
or a loan with a low loan-to-valuation ratio (LVR) is being made to an
experienced consumer.
Every lending organisation will have its own policies and procedures with regard
to low-doc and no-doc loans. It is expected that the policies and procedures will
incorporate a process to counsel and advise clients of the risks associated with
these types of products if incorrect or inaccurate information is provided.
By their nature, low-doc and no-doc loans present the lender with a higher
degree of risk. This additional risk is offset by higher interest rates and, possibly,
costs associated with the loan.
Equity release products
Equity release products allow people to access the equity they have in their
homes whilst continuing to live in the home. Two types of equity release products
are discussed in this section reverse mortgages and home reversion schemes.
Reverse mortgages

Reverse mortgages (also known as equity tap or seniors loans) allow people to
access the wealth stored in the home (equity) without selling the home and
without needing to make regular loan repayments.
Reverse mortgages, as the name implies, work in the opposite way to a home
loan. A loan is made using the borrowers home as security. The principal and
interest are not repaid until the home is sold, which in many cases occurs when
the borrower permanently vacates the home. For example, if the person dies or
sells the home to move to a retirement village.
This type of loan is increasing in popularity with certain groups, particularly
retirees, who no longer have a permanent or sufficient income stream to maintain
their lifestyle.
It is difficult to estimate the total cost of a reverse mortgage as this depends on a
number of uncertain variables. These include:
future interest rate movements

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the duration of the reverse mortgage, which is unknown at the time of


establishment
future movements in real estate prices.
Risks of reverse mortgages

There are a number of risks associated with reverse mortgages of which both the
lender and the borrower must be aware. These include the following:
The borrower may use all the available credit for living expenses or lifestyle
purchases. This may result in a drop in income with no further credit available.
This may, in turn, result in the borrower needing to sell the home in order to
cover living expenses or to pay for emergencies, such as a sudden illness.
The borrower may reach the end of their credit limit and not be able to afford
to continue to maintain the property. This situation, too, may result in the need
to sell the property.
The combination of spending money derived from the equity in the home and
compounding interest could mean that all the equity in the home is exhausted.
After selling the home there may be insufficient funds left for the borrower to
fund satisfactory alternate accommodation, such as that in an aged care
facility.
Table 19 Advantages and disadvantages of reverse mortgages
Borrower

Lender

Advantages

Allows borrowers to free up the equity


in their homes to maintain or improve
their lifestyle.
Allows financial independence without
the need to sell the home.
No need to downgrade the home or
relocate to obtain additional funds.

Allows lenders to provide loans for


purposes other than real estate
investment, which is secured with a
mortgage.
Allows targeting of specific market.

Disadvantages

Reduces the value of the owners


estate.
There may be little or no equity left
after death.
Limits future options, such as the need
to move to residential care situation.
May cause family disputes.
May affect Centrelink benefits.

Expenses may be incurred in selling


the property on the death of the
borrower to repay the loan.
Debt may increase at a different rate
from the increase in value of the
underlying security property.

Home reversion schemes

Home reversion schemes are similar to reverse mortgages in that they enable
retirees to remain in their home and access the equity without incurring an
obligation to make regular repayments. However, there are significant differences
in the way that these two equity release products operate and consumers will
face different risks depending on which option they choose.

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Unlike a reverse mortgage which is based on a charge (i.e. mortgage security),


a home reversion scheme is based on a conveyance (i.e. part-sale of the home).
The customer receives a discounted payment in exchange for a fixed proportion
of the future value of their home. This discount compensates the provider for the
absence of any repayment cash flows over the term of the facility and the right
granted to the customer to continue to occupy the secured property.
For example, assume a home is valued at $200,000 and the owner wishes to
equity release 50% of the value of their home. Although this equates to
$100,000, they will only receive a discounted sum. This sum will be affected by
the location of the property and the customers age. The discounted sum may be
between 40-65% of the value or, in this example, $40,000-$65,000.
When the home is sold, the provider of the home reversion scheme will be
entitled to the equity release portion of the sale proceeds (i.e. 50% or $100.000 in
the above example).
Home reversion schemes are only currently available in certain post code areas
of Sydney or Melbourne, and there is currently only one home reversion scheme
provider in Australia.
As with a reverse mortgage, it is difficult to estimate the total cost of a home
reversion scheme as this depends on a number of uncertain variables.
These include:
the duration of the home reversion scheme
future movements in real estate prices.
Because the home reversion scheme is a real estate transaction rather than a
loan, home reversion customers do not face interest rate risk. The cost of a home
reversion scheme will depend on how property values change.
Table 20 Advantages and disadvantages of a Home Reversion Scheme

Advantages

Disadvantages

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Borrower

Provider

Allows borrowers to release the equity


in their homes to maintain or improve
their lifestyle.
Allows financial independence without
the need to sell the home.
No need to downgrade the home or
relocate to obtain additional funds.

Allows a provider to extend their client


base to include retirees.

May reduce the value of the owners


estate.
Limits future options to deal with the
property offered as security
May cause family disputes.
May affect Centrelink benefits.

There is no regular cash flow received


through ongoing repayments.

Enables investors that fund these


products to access high quality security
rights.

The cost of providing the facility may


increase if property values move at a
different rate to interest rate
movements.

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1.81

Advice regarding equity release

Particular care needs to be taken when dealing with and advising on Equity
Release products in order to protect the client and the provider. As with other
products, your organisation will have specific policies, procedures and guidelines
in place to ensure such protection, and to ensure compliance with relevant
regulation and codes.
Some of the protections may include:
being fully informed about the client and their financial situation when
assessing the suitability of an equity release strategy
ensuring that the client is fully informed about how the equity release option
they have selected works and the potential pitfalls
encouraging the client to discuss the proposed loan with family members,
as they too should be aware of the potential financial risks associated with the
type of product and how it might affect any anticipated inheritance
encouraging the client to seek independent legal and financial advice, and
discuss the implications with Centrelink
ensuring that the client is fully aware of conditions that are normally attached
to such facilities. For example, the need to maintain adequate insurance on
the property, to maintain the property in good condition, and may need to
obtain the providers approval for other people to live in the home, etc.
ASIC has prepared a number of publications and tools to assist consumers with
equity release products. These can be accessed through the ASIC consumer
website, <www.moneysmart.asic.gov.au> and typing equity release into the
search field.
Equity finance mortgages
An equity finance mortgage (EFM) works in conjunction with a traditional home
loan. It can boost a lenders potential borrowing capacity by up to 25%, or reduce
the size of their repayments by up to the same amount. The shared equity
portion, which can be up to 20% of the purchase value of a home, is funded by
the equity finance part of the mortgage. A borrower pays zero interest on this
part of their loan total; however, in return for trading off that interest, the equity
finance lender is entitled to up to 40% of any future capital gains or will absorb up
to 20% of any capital losses on the property as a substitute for a traditional
interest rate.
Key aspects of an equity finance mortgage include:
A borrower is allowed to borrow up to 20% of a propertys value.
There is no annual percentage rate applicable to the equity finance portion of
a loan, unless the borrower is in default.
Borrowers are not required to make any regular monthly interest repayments
throughout the EFM loan, which they can hold for 25 years.
When a borrower sells the property or repays the EFM for some other reason,
they repay the EFM amount they originally borrowed plus up to a 40% share
of any increase in the value of the property.

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An EFM can also reduce current monthly mortgage repayments for borrowers
refinancing their existing loan, or allow borrowers to buy a more expensive
property than they might otherwise be able to afford.
However, consumer groups have warned borrowers to ensure that they are
aware of the number of fees, charges, terms, conditions and lending criteria
applicable to an EFM before considering whether it is appropriate to their
circumstances.
Further resources
More detailed information regarding equity finance mortgages can be found
on the EFM website <www.efm.info>.

Comparison rates
To assist prospective consumer borrowers in understanding exactly how much
they are paying for their loan, the National Credit Code requires that credit
providers supply a comparison rate when they advertise the interest rates of their
loan products. For example, a bank might advertise its home loan interest rate as
5.5% p.a. However, when fees and charges are added, the real rate might be
6.75% p.a. They must also advertise this figure, which is known as the
comparison rate.
Calculation of the comparison rate is complex. It is determined using a standard
formula which takes into consideration factors including the following:
amount of the loan
interest rate
term of the loan
frequency of repayments
fees and charges connected with the loan.
Fees and charges do not include government charges such as stamp duty,
mortgage registration fees and fees and charges which are not ascertainable at
the time the comparison rate is provided.
Table 21 demonstrates how applying the comparison rate can change the
perspective of two loan interest rates.
Table 21 How comparison rate can change perspective of two loan interest rates
Interest Rate

Fees and charges (as a %)

Comparison rate

Loan A

6.00%

0.5%

6.5%

Loan B

6.25%

0.1%

6.35%

Using the comparison rate it becomes clear that the loan which at first appears to
be the most expensive is, once fees and changes are taken into consideration,
the cheaper of the two.

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Other factors
Because the comparison rate does not include government fees and charges,
and other changes that cannot be determined at the time, it may not provide a
complete summary of the total cost of a loan.
Consumers also need to take into account factors which may make one loan
more attractive than another, such as free banking services, flexibility of
repayment arrangements and redraw facilities. For these reasons, consumers
should careful to consider the whole loan package being offered and the price
being charged. However, the comparison rate provides an excellent starting point
in determining the most suitable loan for individual circumstances.
When providing the comparison rate, the credit provider is obliged to tell the
client the amount of credit and the term on which it was based. The credit
provider must also include a statement that informs the consumer that the
comparison rate applies to the example or examples only, and that it will differ
under different circumstances.
Apply your knowledge 10: Comparison of rates
Research the interest rates charged on similar products by three (3)
different organisations, your own included if you wish.
Note the interest rate and comparison interest rate quoted for the product.
Which organisation has the biggest difference between the interest rate
quoted and the comparison interest rate?
Organisation 1 Enter text here
Product:
Advertised rate Enter text here

Comparison rate Enter text here

Organisation 2 Enter text here


Product:
Advertised rate

Enter text here

Comparison rate Enter text here

Organisation 3 Enter text here


Product:
Advertised rate

Enter text here

Comparison rate Enter text here

The product with the greatest variation between the advertised rate and the comparison rate is:
Product:

Enter text here

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Business and commercial lending products


This is a wide range of lending products available for a similarly wide range of
commercial purposes. Some of the purposes which are encompassed by
commercial lending include:
purchase of commercial property or industrial property (either for owner
occupation or investment)
import or export of capital equipment and/or stock for a business
purchase or expansion of an established business
a new business venture
purchase of plant and equipment
provision of working capital
construction and developments
rural enterprises.
In fact, commercial loans are available for any genuine business-related need.
The range of commercial lending products generally offered to these clients
includes:
Overdraft facilities are principally used for working capital needs of a shortterm nature.
Term loans usually cover borrowings for business or commercial property
purchases or major plant and equipment upgrades. There are also market rate
commercial loans which are offered at competitive rates for more complex
business clients for specific projects.
Forward start loan agreements are for business clients wishing to borrow
funds at a set date in the future.
Bank guarantees pay a nominated beneficiary a defined amount on demand.
Commercial bills are suitable for sophisticated business borrowers seeking a
more flexible lending product.
Debtor finance assists cash flow to fund growth for businesses with a
substantial annual turnover.
Leasing finance is used by business clients to finance plant and equipment,
or for the purchase of motor vehicles used in the business.
Trade finance is for business clients undertaking international trade
(exporters and importers).
An overview of commercial lending products available under these categories is
set out below.

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Bank guarantee
A bank guarantee is a guarantee issued by a bank to pay a nominated
beneficiary, in a fixed amount and on demand. This product is normally only
available to established clients of high financial standing and integrity.
Bank guarantees are typically used by businesses as a security deposit to the
property owner of rented premises, in place of cash, and similarly by government
entities for statutory requirements. This facility may also be used by businesses
for their suppliers.
Typical features of bank guarantees include:
The guarantee should be unconditional, irrevocable, be in Australian dollars
and be drawn in an Australian financial institution.
The guarantee is secured in the same way as other business products.
Example: Bank guarantee requirement
A long-term client of the bank wishes to move to larger, more modern
premises. The business seeks a long-term lease of five years with a further
five-year option. The owner of the new premises has not previously had
dealings with this client and seeks a security deposit of one years rent
totalling $250,000.
In lieu of the business providing a cash deposit, the business can request
the bank to issue a bank guarantee for $250,000 in favour of the owner.
The facility will need to be secured along normal commercial requirements.
The owner will accept the bank guarantee in lieu of cash, as the document
is payable on demand with the risk being borne by the bank instead of the
lessee.

Commercial bill facility


This product suits borrowers looking for a more flexible borrowing instrument than
normal market rate commercial loans.
Commercial bills are discounted securities. A bank adds their acceptance to the
bill before seeking to sell the bill(s) to investors. By adding its acceptance, a bank
takes on the liability to the investor for payment at maturity.
Being a discount security, the drawer (borrower) receives a discounted amount
from the face value on the drawdown date and pays back the face value on the
maturity date, the difference being the interest charged.
The size of the facility determines the interest rate on a bill. The borrower is also
charged an acceptance fee, which varies with the clients level of credit risk.
Typically, a commercial bill facility funds business needs that are of a capital
nature, or a substantial sum is required.
Typical features of a commercial bill facility include:
drawn by borrowers, accepted by banks, meaning the bank takes on the risk
to repay the buyer at maturity

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an acceptance fee applies


terms are usually 90-days
a fixed rate may be available if structured as a loan for longer periods with
intervening rollover dates.
Example: Commercial bill facility requirement
Top Fashion Designs is a large retail clothing chain of stores. It has 400
outlets Australia wide. Strong sales are achieved during the summer and
winter seasons when the businesss cash flow is high. During spring and
autumn, sales are not so strong and the business needs to borrow during
these periods, usually requiring a minimum of $2 million. Therefore, the
business needs a flexible facility to draw down in spring and autumn and
the ability to repay the facility during summer and winter.
A commercial bill facility would be the most appropriate product as the
facility can be drawn down during the time of need, for example, a 90-day
bill during spring. At the maturity of the bill, that is, at the end of 90 days,
the facility need not be rolled over until the business next requires funding.
The product would be competitive as it is aligned to a market rate. A market
rate commercial loan does not have this same flexibility.

Debtor finance
Debtor finance is a cash flow product which provides cash for business growth or
to support cash flow.
Typical features of debtor finance include:
the facility may be secured against business assets, such as outstanding
debtors, that do not include real property
funds can be provided at very short notice if paperwork is in good order
each business is assessed on factors such as how profitable it is, the quality
of debtors, future prospects.
This kind of financing suits businesses that are growing quickly but have
insufficient assets available to offer as security.

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Example: Debtor finance facility requirement


Beverly Hills Educational Book Productions Pty Ltd produces educational
material for secondary educational needs, that is, for high schools. The
companys annual turnover is $2.5 million. Its main client is the State
Government who purchases the books for all public secondary schools
across the state. As a government body, they are slow with payment of
invoices and funds are generally not received by Beverly Hills Educational
Book Productions until, on average, 70 days after the invoice date. At any
given time, the State Government has outstanding debts to the company of
$380,000.
The company rents its operating premises, and production equipment is
fully financed under a lease arrangement. The owners of the company, Max
and Judy Johnston, also rent their home property as all equity has been
invested in the company.
In this example, neither the company nor its owners have acceptable assets that
could be provided to the bank as security support for the companys borrowing
needs. Its main client, however, is considered very safe and reliable for payment
of its debts, though they are slow paying. Therefore, this would represent an ideal
client for a debtor finance facility whereby the bank could fund up to 80% of the
moneys owed by the State Government, that is, on average $304,000, to assist
with the companys cash flow and ability to grow further. When the State
Government does pay its invoices, the balance, that is, the remaining 20% - on
average $76,000 - is then reimbursed to the client, less the banks fees and
interest charges.

Forward start loan agreement


This type of product suits clients who wish to borrow funds at a date in the future,
but want to fix the interest rate for a loan. The benefit of this approach is that the
borrower knows in advance what the interest rate will be, hence reducing their
exposure to movements in interest rates until the loan is drawn down.
This involves a separate agreement to the loan. If the loan does not go ahead,
the client may be required to pay a fee to break the arrangement.
Typical features of a forward start loan agreement usually include the following:
large minimum loan amount
underlying loan is for a fixed term
two sets of documentation are required - one for forward start agreement and
one for the loan.

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Example: Forward start loan agreement requirement


Smith Wholesalers Pty Ltd is constructing new warehouse premises.
The construction is being progressively financed by the companys own
cash resources. However, upon completion, estimated in one years time,
the bank has pre-approved a $2 million business term loan with a fixed
interest rate with monthly principal and interest repayments over five years.
There is market speculation that interest rates will increase over the next
12 months and the management of the company wishes to reduce their
interest rate exposure and take advantage of the banks current five-year
fixed interest rate.
The benefit of the product for this client is that they know what their
borrowing requirement will be in the future and so they will be able to
satisfy their need to lock in the interest rate now even though the loan will
not be drawn down until 12 months time.

Leasing facilities
There are various forms of lease (equipment) finance, many offering the same
features. The main differences between products relate to the item being
financed and the possible tax benefits. The different types of leasing facilities are:
Chattel mortgage is a commercial bill of sale facility that can be used by a
business client to finance equipment used in their business.
Lease facility is used to fund the purchase of plant and equipment used in
the business.
Commercial hire purchase can also be used to purchase equipment.
Novated leases are appropriate for salaried employees who are entitled to
salary sacrifice a car. The vehicle does not have to be for business use and
the lease rentals are paid on behalf of the employee from their pre-tax salary
by the employer.
Revolving lease limit facility, also known as a master lease, is used to put
in place a pre-approved finance lease limit. Master lease documents can then
be executed by all parties to the transaction and authorised signatories for
drawdowns determined. This facility makes lease drawdowns simpler and is
useful for company borrowers where there are several directors.
Typical features of lease finance include:
the bank provides 100% finance, meaning that no deposit is required
the finance is specific to a piece of equipment
the interest rate is fixed and repayments determined at the start of the
arrangement
the facility can be set up quickly and easily
tax benefits may be available.

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Example: Lease facility requirement


David and Mary have owned restaurants for many years. An opportunity
has come up to purchase a well-known, upmarket restaurant in the heart of
the city for $300,000. David and Mary have sufficient cash resources to
purchase the restaurant; however, the premises are run-down and the
restaurant requires a total refit, which will cost $150,000. David and Mary
do not own any residential property; however, they have a long relationship
with the bank and a good credit history. They have approached the bank for
funding of the $150,000 requirement. Under traditional bank finance, David
and Mary would probably only be able to borrow up to 25% of the value of
the business, that is, $75,000, because of the limited security they are able
to offer. Under a lease facility, however, the total cost of the refit could be
financed with the sole security being the financed plant and equipment.
There would also be tax benefits for David and Mary as they may be able to
claim the full lease repayments as tax deductions.

Market rate commercial loans


Market rate commercial loans cater for more complex business clients that
require market competitive interest rates for specific projects such as acquiring a
new business or developing a property. These loans are for business needs of a
capital nature, or where a substantial sum is required.
Market rate commercial loans can usually be structured according to the clients
needs, including:
variable rate
interest capitalised variable rate
fixed rate
interest pre-paid.
Examples of other product features include:
minimum loan amount (this varies with lender)
maximum loan term (this varies with lender)
interest-only payment option available
scheduled principal reductions available.

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Example: Market rate commercial loan requirement


Shortbread Biscuit Manufacturing Ltd is a large company employing over
500 people. They wish to acquire a significant local competitor for $10
million. They require a loan of $2 million. Because of the significant cash
outlay towards the purchase, the company is unable to make any principal
repayments for the next five years. Given the large loan amount, the
interest rate offered must be competitive and thus a market rate is
requested. The company would also like to make interest payments three
months in arrears.
In this example, a market rate commercial loan is more appropriate than a
business term loan for the following reasons:
The loan amount is substantial and requires a market-related interest rate to
be competitive.
The company wishes to make quarterly interest payments, an option which is
usually not available for a business term loan.

Overdraft facilities
This offers an approved line of credit attached to a business cheque account.
A business overdraft facility assists with funding the short-term cash flow
requirements of businesses, mainly the timing difference between paying
expenses and purchasing inventory until income is received from its clients.
Typical features of a business overdraft usually include the following:
ongoing line of credit with on-demand drawing of funds
choice of repayment amounts and frequency, provided the balance remains
within the approved limit
maximum loan amount is usually only restricted by the businesss capacity
to repay
may be for short-term usage (with a specific clearance date) or it may be
ongoing.
Example Business overdraft requirements
ABC Pty Ltd sells computers to business clients. The inventory is
purchased four times per year from a supplier in Melbourne. ABC Pty Ltd
offers its clients 30 days terms of trade for payment following installation.
In this example, the company has a high cash outflow at the time of purchasing
goods from its supplier with a timing difference, or gap, until it receives payment
from sales from its clients.
This gap can be funded from the companys own cash resources, however,
given the purchase of supplies occurs four times per year, the purchase amount
would be substantial and most businesses would not carry sufficient cash
reserves to self-fund this part of the operations.

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In this example, the company has a high cash outflow at the time of purchasing
goods from its supplier with a timing difference, or gap, until it receives payment
from sales from its clients.
This gap can be funded from the companys own cash resources, however,
given the purchase of supplies occurs four times per year, the purchase amount
would be substantial and most businesses would not carry sufficient cash
reserves to self-fund this part of the operations.

Term loans
Variable or fixed interest rate loans are offered for business borrowings, such as
the purchase of major assets.
Typically, a term loan to a commercial client funds business needs of a capital
nature or where a substantial sum is required. Business term loans can be
secured by property and/or the assets of the business.
Typical features of commercial term loans include:
minimum loan amount is required (this varies with lender)
maximum loan amount generally depends on the security provided and ability
to repay
no additional repayments are allowed on fixed rate loans
lump sum repayments are usually allowed into a variable rate facility
various repayment options are available
interest-only payments are usually available.
Example Business term loan requirement
Hardys Retail Store Pty Ltd wishes to purchase the commercial premises
from which it operates. The purchase price is $3,000,000 and the business
wishes to contribute $1,500,000 towards the purchase. Net impact on cash
flow is nominal as the client is replacing current rental expense of $140,000
p.a. with an estimated interest expense of $150,000 p.a. The residual
amount required to fund the purchase ($1,500,000) is still substantial and
the business will therefore require long-term funding. The directors of the
business are conservative in nature and would like the comfort of fixing the
interest rate for five years.
A business term loan at a fixed interest rate will therefore be the most
appropriate product in this example.

Trade finance
This product is available to clients who are exporters and importers. Funds can
be borrowed to assist in financing the production of goods or to manage cash
flow between the time of shipping, and receiving payment.

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Trade finance is available in various currencies, which is useful in managing


currency risk. The interest rate on these arrangements is fixed and may be
determined by each clients level of credit risk. Trade finance is a short-term form
of financing.
Typical features of trade finance usually include:
maximum term for each transaction is often 180 days
the interest rate is fixed for the term
facility is generally available in the major currencies
the facility is available for international trade purposes only.
Example Trade finance facility requirement
Tims Toyworld imports toys, games and novelty items on a revolving
quarterly basis from a main supplier in Taiwan. There are regular imports of
$US100,000 per quarter. Payment terms are in USD and due approximately
six weeks after the arrival of the goods in Australia. Tims Toyworld closely
manages its currency exchange risk by taking a forward exchange facility at
the time of arranging its import requirements. Once the stock arrives in
Australia, it generally takes three months to sell the goods through Tims
Toyworld retail outlets. How would this facility work for this client?
The bank would issue a letter of credit in USD in favour of the
Taiwanese supplier. This is to confirm that Tims Toyworld has the ability
to pay the supplier, thus providing assurance to the Taiwanese supplier
that they can send the goods to Australia prior to payment.
A forward exchange facility is put in place at the time of issuing the letter
of credit, thus allowing the exchange rate to be predetermined now with
payment due in approximately six weeks time.
When payment for the letter of credit is required, that is, in six weeks
time, the funds are debited to a short-term import facility during the time
it takes Tims Toyworld to sell the goods and generate sufficient funds to
repay the facility.
As this is a revolving facility, there may be different exposures to different
parts of the facility that is, some exposure to an outstanding letter of
credit, some exposure to a forward exchange facility, and some exposure
to an outstanding balance within the short-term import facility, and all at the
same time. This aspect would normally be managed by the international
department of the bank which would also manage the exposures to ensure
each individual transaction is repaid in full within an overall maximum term
of 180 days.

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Apply your knowledge 11: Identifying business/commercial lending


products
Identify the most appropriate product(s) for the borrowing needs in the
following scenarios:
a. A company requires a loan of $350,000 to undertake renovations to the
premises it owns and operates from. The company is able to repay the
loan monthly over 10 years and prefers to have a variable interest rate.
Security for the property will be a mortgage over the commercial
property plus directors guarantees.

Enter text here

b. A business is entering into a new five-year lease for the premises from
which it operates and is required to provide a security deposit to the
owner of the premises.

Enter text here

c. A sophisticated business client anticipates a long-term borrowing


requirement of $1 million within the next 18 months, but would like to
lock in a fixed interest rate today.

Enter text here

d. A company is expanding operations into a different state and its


projected cash flow has led the business to forecast it will require
short-term funding every three months of $100,000 for 30 days at a
time.

Enter text here

e. A company wishes to refinance a facility from another bank of $800,000,


with interest pre-paid yearly in advance.

Enter text here

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f. The company seeks to purchase the specialised cooling warehouse for


$500,000 and has offered residential security for the loan.

Enter text here

g. The company needs to provide the overseas supplier with letters of


credit in EUR, which then need to be post-financed.

Enter text here

h. The business requires a fleet of 20 vehicles, but does not want to outlay
the cash for them. It seeks 100% funding, and wants to maximise tax
benefits.

Enter text here

Check your answers to this activity against the Suggested Answers at the
end of the topic.

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Loan packaging and choice


There are a number of elements that combine to make up a loan. Some of these
elements are the interest rate, the way interest is charged, the loan term and the
flexibility of repayments.
The way these elements are combined by organisations is called packaging and
it determines product offerings. In many cases, it is difficult for clients to easily
identify which product is best suited to their needs. The role of the lender is to
help clients understand the features and benefits of the various packages.
Apply your knowledge 12: Who are my clients?
This activity asks you to research the client base of one of the lenders in
your local area.
You may not be able to obtain all the information requested but provide as
much as you can.
You can make assumptions and educated guesses if necessary.
Use the questions below, and any others you can think of, to profile the
organisations clients.
What group or groups do they fall into (for example, first home buyers,
investors, commercial borrowers)?
What geographic areas do the consumer clients come from?
What geographic areas do the commercial clients service?
What are the clients main occupations or business groups?
What features are they looking for in their loan products?

Enter text here

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Insurance products
When providing loans to both individual and business clients, there are a range of
insurance products available to mitigate against any unforeseen circumstances.
The circumstances of every person, family and business are different, therefore,
their specific insurance needs will vary. While it is outside of the scope of this
topic to undertake any in-depth study of insurance products, there nonetheless
needs to be a broad understanding of these products and what they insure
against to enable lenders to identify when to advise clients to seek independent
advice from a qualified adviser with regard to their specific insurance needs.
The following section, with information in tabled format, is provided as a guide
only to the main types of insurance cover, which may be required by individuals
and businesses.

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Insurance for individuals


Table 22 and Table 23 summarise the main types of insurance which should be
considered by an individual, depending on their circumstances.
Table 22 Home, contents and vehicle insurances
Insurance

Cover provided

Building (home)

Provides protection against damage to, or destruction of, residential buildings,


including flats, units and townhouses. It generally includes other structures on the
property such as garages, carports, sheds, fences and decks. Usually, this is the
minimum insurance required by a lender when the security comprises property.

Contents

Covers loss or damage to domestic goods or property owned, or being purchased


by, the person insured. Building (home) and contents insurance are often combined
in the one policy.

Legal liability

Legal liability refers to the insureds responsibility to pay compensation for causing
injury, illness or death to another person, and loss or damage to property owned by
another person.
Legal liability insurance usually forms part of building and contents insurance
policies.

Domestic
workers
compensation

Covers injury to domestic workers such as babysitters, cleaners and gardeners.


Domestic workers compensation might be included in building and contents
insurance or taken out as a separate policy.
It does not cover people who are considered to be employees who must be
covered by a regulated workers compensation policy.

Owner-builder

Protect owner-builders from losses while the building is under construction.


This cover may be optional under a standard building policy or it may need to be
taken out as a separate policy.

Landlord

Provides landlords with extra protection against, e.g. malicious acts and theft by the
tenants, or financial loss if the tenant fails to pay their rent.
Landlord insurance may be available as an option under building insurance or
taken out as a separate policy.

Boat and
caravan

Covers owners for the loss of, or damage to, pleasure craft such as boats and
caravans.
These polices also usually cover the owner for property and personal liability.

Insurance

Cover provided

Motor vehicle

Compulsory third party insurance (CTP)


Covers the insured against claims by a third party, such as a passenger or
pedestrian, for personal injury. This insurance is compulsory in all states of
Australia.
Comprehensive cover
Covers damage to the insureds car, and to other peoples property, if the car is
involved in an accident and the driver of the insureds car is covered by the policy.
Also covers damage to the insureds vehicle caused by fire and theft. It may include
a range of optional or additional benefits.
Third party property damage (TPPD) and third party property damage, fire and theft
(TPPD F&T) can be taken out as separate insurances if the client does not wish to
be comprehensively insured.

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Table 23 Personal insurances


Insurance

Cover provided

Life cover

Provides a lump sum payment in the event of the death or terminal illness of
the insured.

Consumer credit
insurance

Provides protection for people with personal loans, mortgages, credit card
debt and other forms of loan contracts.
It is a way for the borrower to ensure that loan repayments are met in case
they become ill, disabled or injured and cannot work.

Income protection

Provides the insured with compensation, in the form of a regular income


benefit, if they are sick or injured and are unable to work.

Trauma

Provides a lump sum payment in the event that the insured suffers and
survives a major medical condition such as a heart attack or stroke.

Total and permanent


disability

Provides a lump sum payment if the insured suffers an illness or injury which
results in them being totally and permanently disabled.

Business insurance
Table 24 summarises the main types of insurance which should be considered by
a business. Many business risks can often be covered in one umbrella business
insurance policy.
Table 24 Business insurances
Insurance

Cover provided

Key person insurance

Provides financial protection for the business in the event of the loss of a
person who makes a significant contribution towards the profitability of the
business.

Fire and damage (fire


and perils)

Covers loss or damage to buildings, business contents and stock against fire
and other events such as water damage.

Business interruption

Covers the business for loss of profit or gross rental as a result of damage
that interrupts or interferes with business.

Accident damage

Covers the business premises, stock and contents of the business against
accidental loss or damage.

Burglary

Theft of stock or contents resulting from forced entry to the business


premises.

Money

Loss of money from the business premises, or when in transit between the
business premises and a bank or the clients home.

Insurance

Cover provided

Public liability

Covers claims for compensation for personal injury or death of another


person, or damage to their property, while on the business premises.

Product liability

Covers claims for compensation for personal injury to another person, or


damage to their property, as a result of defective product produced or sold
by the business.

Machinery or electronic
equipment breakdown

Sudden and unforseen breakdown of business machinery or electronic


equipment that calls for immediate repair or replacement.

Professional indemnity

Indemnifies professionals, such as architects, lawyers, engineers, doctors,


accountants and financial advisers, for their legal liability to clients and
others who rely on their advice.

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Self-management and professional


development
Effectively managing your personal and professional performance involves
factors such as setting realistic targets and goals, organising your activities in an
efficient way, and achieving a balance between your work and personal life.This
part of the topic looks at how developing an honest understanding of yourself can
help you to achieve more in your life and to gain greater personal fulfilment. This
ability is examined in the context of aligning your personal goals with the goals
and expectations of your organisation.

Setting life and work goals


When we consider successful people in any field of endeavour, we usually find
they all have one thing in common. That is that they all have a clear vision of
where they are going they have specific goals. The need to have clearly
defined and measurable goals is also one of the keys to organisational success.

Why set goals?


Having clearly defined goals helps you to focus on what is really important in your
life. Goals can be long-term and short-term. Someone who has thought about
their life and what they want from it will have one or more long-term goals, and a
number of short-term goals leading to the long-term ones.
Goals help you prioritise all the competing issues you need to deal with every day
and concentrate on the ones that really make a difference. They also provide the
basis for decision-making. If we have clear goals we can use them to establish
the criteria against which decisions are made. This makes decision-making and
life in general, a little easier.
Setting goals is not always easy; however, the time and effort spent in goal
setting and planning will bring significant benefits.
Keep in mind that as your life changes, your goals will also change. Goals are
not, and should not, be static. We need to constantly reassess our goals to
ensure that they are still current and relevant.
Apply your knowledge 13: Establishing life goals
If you have not already done so, spend some time thinking about your
future and the things that matter to you. You might like to think about goals
in terms of the key areas of your life, for example:
family
career
financial
educational
social

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physical health
spiritual/humanitarian.
Write down one (1) or two (2) goals you would like to achieve in each area.
Remember, these are your goals at this time of your life and may change
over time.
Life area

My goals

Family

Enter text here

Career

Enter text here

Financial

Enter text here

Educational

Enter text here

Social

Enter text here

Physical health

Enter text here

Making your goals SMART


People might have goals but they can often be vague and fluffy. For example:
One day Im going to Europe to see all those places Ive read about
and seen on TV and at the movies.
Phrased in this way there is no commitment. Another way to state this goal is set
out below.
Starting next pay day I will begin saving all my spare money in a
high-interest earning account so that in two years time I will have
$10,000 put aside to pay for a month-long holiday in Europe.
The goal is now better stated because it is framed in a SMART way. It is:
Specific

Objective statements that state exactly what is to be achieved.

Measurable

The objective should be measurable.

Action-orientated

The statement has action verbs and is a complete sentence.

Realistic

The objective is attainable while still presenting a challenge.

Timely

A specific time is set by which the objective is to be achieved.

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Applying the SMART formula to the revised objective above, we can see why it is
SMART.
Specific

Starting next pay day I will start saving all my spare money

Measurable

in two years time I will have $10,000 put aside

Action-orientated

I will start saving I will have $10,000

Realistic

in two years time I will have $10,000

Timely

in two years time

Apply your knowledge 14: SMART life goals


Now go back to the life goals you developed in Apply your knowledge 1
and rewrite one of them as a SMART goal using the criteria described
above.

Enter text here

Setting short-term goals


To achieve a major goal in your life, you may need to set some smaller goals
along the way. For example, your major career goal might be to be general
manager of your organisations finance division. A shorter-term goal might be to
achieve the necessary educational qualifications and business experience to fill
such a role. An even shorter-term goal might be to research which qualifications
are most relevant and how you can obtain the necessary business experience.

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Apply your knowledge 15: Matching short term goals to long term
goals
Choose a long-term professional or personal goal.
Now think about the shorter-term goals you need to achieve on your way to
the main goal, and put a time frame on achieving those goals.
Long term goal:

Enter text here

Sub-goals

Action required

By when

Enter text here

Enter text here

Enter text here

Enter text here

Enter text here

Enter text here

Enter text here

Enter text here

Enter text here

Enter text here

Enter text here

Enter text here

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Setting work goals


People who are successful professionally apply the goal-setting and planning
process to their work life as well as their personal life.
To do this, you need to consider the alignment of goals and the values that
underpin those goals. That is, our personal, work-team and broader
organisational goals and values should complement each other. In this way the
desired outcomes are more easily reached.
Organisational aims and goals flow from the organisations mission statement
and strategic plan. Problems can arise if your goals and values are in conflict with
those of the organisation.
Figure 9

Alignment of personal and organisational goals and values

Corporate mission

Strategic
imperatives

Organisational
goals and values

Alignment
Team goals
Personal goals
Individual goals

Managing yourself and your time


Self-awareness
Time management techniques can be taught, but effectively managing yourself
and other people requires self-awareness. By objectively assessing your
competencies, values, needs and the way you do things you can gain
self-awareness.
Once you achieve self-awareness, you can determine your goals and priorities
and start constructing a work and personal lifestyle that is consistent with your
real needs. Inconsistency between your real needs and your goals can lead to
feelings of stress and a lack of fulfilment.
Figure 10 demonstrates how self-awareness is at the core of self-management.

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Figure 10

Relationship between self-awareness and self-management

Source: Adapted from Developing Management Skills, Whetten and Cameron 2004.

The Johari Window


Self-awareness is about understanding how others see you and how you see
yourself, and identifying the similarities and differences between those two views.
There may be components of your own behaviour that you can identify easily,
but there are probably parts of which you are unaware.
The Johari Window provides a way of thinking about the different parts of your
self. According to Johari, we all have an open self, a hidden self, a blind self and
an unknown self, as demonstrated in Figure 11.
Figure 11

Joharis view of self


Known to self

Not known to self

Known to others

Open self

Blind self

Not known to others

Hidden self

Unknown self

The theory suggests that, as the size of one self changes, the size of the other
selves will change in response.
Following is a brief explanation of the various Johari selves.
Open self
Your open self is all that you and others know about your behaviour, attitudes,
likes, dislikes and potential reactions. Your open self is related to your ability
to understand yourself and communicate with others. A larger open self requires
higher levels of communication and more willingness to let others get to know you.

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Hidden self
Your hidden self is what you hide from others. A person with a large hidden self
could be seen as unwilling to disclose, while someone with a small hidden self
might be seen as disclosing too much. Most of us fit somewhere between the two
extremes, revealing certain things but keeping other things hidden.
Blind self
Your blind self refers to all of the things that other people know about you but that
you cannot see yourself. Most of us have come across people who appear to be
oblivious to their (good or bad) habits and behaviour these are usually people
with a large blind self.
Working at being a good communicator and establishing close relationships can
help to reduce a large blind self.
People who fear their blind self may continually seek reinforcement or
reassurance.
Unknown self
Your unknown self is that part that you, nor other people, are aware of.
The unknown self might be revealed in extreme circumstances or clinically,
through psychological analysis or hypnosis.
The theory states that you cannot change the unknown self, but be aware that it
does exist in you and in others.

Developing self-awareness
Achieving an adequate level of self-awareness helps you to develop personal
and business relationships that are satisfying and beneficial. When you have
reached an adequate level of self-awareness you are accepting of your own
character traits and are more able to express your needs to others.
The Johari Window theory suggests ways to help you develop these abilities:
Be self-questioning. Who better to ask questions about yourself than you?
Questions such as: What do I want to get out of this relationship? What
direction do I want to take in my career? and What obstacles am I putting in
my way?
Asking these sorts of questions of yourself will mean that you can become
aware of any necessary goal changes before anyone else.
Listen to feedback. People can provide you with valuable feedback in every
interaction. This feedback can help you to see yourself as they see you.
Feedback may be in what they say to you or in the way they behave towards
you. Take note of feedback and give it careful consideration and analysis.
Avoid knee-jerk reactions that is, trying to change after every critical
comment.
Ask others about yourself. You can seek information about yourself from
others to try and reduce your blind self. Do not overuse this strategy as you
might be seen to be anxious and needing reassurance.

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Increase your open self. By increasing the amount you are willing to reveal
about yourself, you may also learn more about yourself. By doing so, you may
also open up new opportunities to develop relationships that will be of benefit
now and in the future.

More on the open self


The theory says that we are at our most creative when our open self is
maximised. Increasing the open self can lead the way to a character change.
Two ways to increase the open self are:
decrease the hidden self through self disclosure. This can seem threatening
as we must be willing to share our problems with others. In putting our feelings
at risk we may become hurt or offended. However, if we do not reveal our
hidden self, we cannot get honest feedback and advice on how we might
change.
obtain feedback to decrease the blind self. This strategy poses the same
challenges and threats as decreasing the hidden self. However, again, if we
are not aware of a problem that may be affecting others we cannot take steps
to adjust.

Improving your performance


Self-management also involves self-improvement and the first step to
improvement is monitoring your existing performance against agreed criteria or
standards, and then identifying ways to improve.
The criteria or standards might be agreed with your managers, colleagues, team
members or other stakeholders. They might be stated in key performance
indicators (KPIs) or other measures derived from competency standards, job
analysis, business targets or budgets.
Feedback on your performance is essential to self-evaluation. Formal feedback is
critical and usually a part of the performance review process.
However, informal feedback and ongoing communication with managers and
team members should not be ignored. If communication channels are kept open
there should be no surprises when the time for formal feedback comes.
Apply your knowledge 16: Matching short term goals to long term
goals
In the spaces below:
List the ways you get formal feedback about your performance at work.
How often do you get that feedback?
List the ways you get informal feedback. How often does this occur?
List some of the feedback you have received in the last 12 months and
the actions you have taken as a result of the feedback.

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a. I get formal feedback about my performance in these ways and at these


times:
Enter text here

b. I get informal feedback about my performance in these ways and at


these times:
Enter text here

c. Summarise at least some of the feedback you have received in the last
12 months and outline the steps you have taken in response to this
feedback.
Enter text here

d. If you have not received any feedback over the last 12 months, take the
time to seek some feedback now. Speak to your manager, colleagues
and/or team members. Ask them how they think you are performing. Ask
them what your strong points are or areas where you might improve.
Once you have received their feedback, decide what you can do to
improve. List these in the table below:
Feedback

Actions I have taken or will take

Enter text here

Enter text here

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Effective time management


With the pace of change and the demands of work and personal life being as
great as they are, you need to use the limited time available to best advantage.
Unless you do this, you are at a significant personal and professional
disadvantage.
There are a number of theories about time management, some of which are
discussed in this unit. However, time management is really a matter of
establishing the discipline required to manage yourself.

Benefits of effective time management


Apply your knowledge 17: Identifying the benefits of time management
In the space provided below, list at least four (4) benefits to you personally
and professionally of effective time management.
Enter text here

Check your answers to this activity against the Suggested Answers at the
end of the topic.

Common time wasters


We all waste time now and then, and this is not always a bad thing. Some wasted
time, or time spent on less important things, can help us to relax and take some
time out before tackling more complex issues.
However, some wasted time is destructive and frustrating, especially when you
are distracted from attending to really important issues.

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Apply your knowledge 18: Identifying time wasters


Caroline works in the customer service section of Big Bank Australia. She
is senior member of staff and has a number of tasks to deal with every day,
such as logging and monitoring customer enquiries, cross-sales targets to
meet, staff training, answering complex customer queries and dealing with
customer complaints.
She has good working relationships with her colleagues and makes herself
available to help them with their work (and sometimes personal) problems.
Some of Carolines colleagues are frequent visitors to her desk with one
problem or another.
Caroline sees maintaining good relationships with her colleagues as being
as being very important and always manages to find the time to help
everyone with their problems. The downside of this is that she often falls
behind with her other duties. This means she needs to work late at times
and she often feels stressed.
Think about Carolines situation then answer the questions below.
1. Caroline has an effective relationship with her colleagues. However, the
way she deals with issues raised by her colleagues could have
detrimental effects. List some of the possible effects this could have on
Carolines work and personal life.
Enter text here

2. In what ways can Caroline change her current work style to help her to
overcome stress, but still maintain good relationships with her
colleagues?
Enter text here

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3. Given your response to the above question, what would be your


suggested way for Caroline to implement the desired changes?
Enter text here

Check your answers to this activity with the suggested answers at the back
of the module.
Apply your knowledge 19: Identifying time wasters
Think about the way your own time is wasted by you and by other
influences (also consider the processes and systems you need to deal with
at work). Write your conclusions below.
Self-generated time wasters

Imposed time wasters

Enter text here

Enter text here

Self-imposed time pressures


We all suffer imposed time pressures in our day-to-day lives. Such pressures can
be:

Boss-imposed time pressures


These are activities which must be completed. The consequences of not
accomplishing these are severe.

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System-imposed time pressures


These are activities or requests which come from our peers and colleagues.
The consequences of not achieving these are not so severe but we may still
suffer if these things are not done.

Self-imposed time pressures


These are activities that we initiate or agree to do ourselves. If you find yourself
saying things like, I can do that for you, Why dont I do that, it will be quicker or
I think Id better do that, I know the process, you are initiating activities which
can impact heavily on your time. The consequence of not doing these is stress.
If this happens too often, you will soon be carrying too many activities, with a
resultant loss of discretionary time that you need to reduce stress and become
more productive.
The first step in ensuring that you have sufficient discretionary time, and are
therefore as productive as possible is to avoid self-imposed time pressures.
If you already have too many self-imposed activities, think about what you should
do for yourself and for others.
Keep in mind that helping to develop team members is an important role. You
should be providing them with help in the form of training, coaching, mentoring
and confidence building to take responsibility. This may involve training yourself
to let go a little, even relinquishing some control. Only by doing this will you
provide yourself with more discretionary time to devote to other activities and, in
the end and most importantly, become more productive.

Time management theory


Stephen Covey identified four different generations of time management theory
in his book The Seven Habits of Highly Effective People (Covey 2004):
1. First generation checklists
2. Second generation diaries and calendars
3. Third generation prioritising and goal setting
4. Fourth generation self-management.
Many time management theories and strategies focus on the first and second
generation with the assumption that being better organised, and doing things
faster and smarter will make us more time efficient. This is partly true, but is not
the whole story.
What also needs to be considered is whether we are spending our time on the
things that will generate the greatest benefit.

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The Pareto Principle


The Pareto Principle, or 80/20 rule, was developed by a 19th-century economist
and philosopher, Vilfredo Pareto. The principle states that the majority of results
achieved by any work group or individual are achieved by a relatively small
number of items of work. Hence the 80/20 rule 80% of the results come from
20% of the items or effort.
This idea is very useful when prioritising work and other issues and can be seen
to apply in a variety of situations, for example:
80% of system failures arise from the same 20% of causes
80% of client complaints arise from 20% of the whole process
80% of your most constructive work is performed in 20% of your day.
Apply your knowledge 20: The Pareto principle and my work
Think about how the Pareto principle applies to you and your work. List an
example below.
Enter text here

Time management matrix


The matrix in Figure 12 is a model to help us focus our attention on important
issues that are based on the four quadrants (IIV) identified by Covey.

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Figure 12

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Coveys time management matrix


URGENT

NOT URGENT

IMPORTANT

Quadrant I

Quadrant II

ACTIVITIES
Crises
Pressing problems
Deadline-driven projects
Reactive activity

ACTIVITIES
Prevention
Relationship building
Recognising new opportunities
Building health and fitness
Planning, recreation
Learning new skills
Pro-active activity

DO

DECIDE

NOT IMPORTANT

Quadrant III

Quadrant IV

ACTIVITIES
Interruptions, some calls
Some mail, some reports
Some meetings
Close pressing matters

ACTIVITIES
Trivia, busy work
Some mail
Some phone calls
Time wasters
Escapist activities, e.g. T.V.

DELEGATE

DUMP

Source: The Seven Habits of Highly Effective People, Covey 2004.

How the four quadrants affect you


Figure 13 demonstrates the likely results of spending most of your time in any
one of the quadrants of the time management matrix.
Figure 13

Results of the four quadrants of time management

Quadrant I

Quadrant II

Stress
Burnout
Crisis management
Always putting out fires

Vision, perspective
Balance
Discipline
Control
Fewer crises

Quadrant III

Quadrant IV

Short-term focus
Crisis management
Reputation as changeable/directionless
See goals and plans as worthless
Feel victimised, out of control
Shallow and broken relationships

Irresponsibility
Being dependent on others
Seen as not credible

Urgent and important


Two factors to consider about any activity are its urgency and its importance.

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If a matter is urgent, it requires immediate attention. For it to be important means


that the activity has an impact on results and outcomes. If something is
important, it contributes to your high priority goals.
Apply your knowledge 21: Urgent and important
Michael is a loan officer with Big Bank. He has been working on assessing
a loan proposal for a number of days. The proposal is from one of the
banks valuable customers who wishes to purchase a new home. Michael
has yet to write a loan submission to his credit manager seeking approval.
He has been stalling on preparing the loan submission as the clients
income is complex and he doesnt really know how to analyse this to
determine if the client can afford to purchase the property. The property
goes to auction at 3.00 pm today and the customer is anxious to find out
whether he is able to bid at the auction or not. Michael has spoken to the
customer this morning and promised to give him an answer before midday.
It is now 10.00 am and Michael receives a call from his sons school to say
that his son has been in an accident and has been taken to hospital. He is
advised to go to the hospital as quickly as possible.
Analyse Michaels situation then address the questions below.
1. What should Michael do immediately in relation to the outstanding loan
proposal?
Enter text here

2. What should Michael have done differently to avoid the current


predicament?
Enter text here

3. List some of the possible consequences if Michael is unable to provide


his valuable client with a decision in time to bid at the auction.
Enter text here

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4. If the client does not receive a response from the bank in time, do you
think the client would blame Michael or Big Bank? Explain your reasons.
Enter text here

Check your answers to this activity with the suggested answers at the back
of the module.
Because we usually need to react to urgent matters immediately, they can be a
disrupting influence on our time management. Often, urgent matters can be
avoided with advance planning and consideration, at other times they are
unavoidable.
Important matters are not necessarily urgent and therefore you can demonstrate
more initiative in their completion. By not attending to important matters in a
timely and planned way you can easily reach the situation of having to deal with a
matter that is both urgent and important.
Apply your knowledge 22: You and the time management matrix
Think about the activities you undertake and the issues you need to deal
with at work over a week or two. Plot them on the time management matrix
below.
Quadrant I
Urgent and important tasks/issues:

Quadrant II
Less urgent and important tasks/issues:

Enter text here

Enter text here

Quadrant III
Urgent and less important tasks/issues:

Quadrant IV
Less urgent and less important tasks/issues:

Enter text here

Enter text here

You will have seen that the ideal place in the matrix in which to spend most
of your time is Quadrant II.
1. Where is most of your time spent?
Enter text here

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2. What strategies can you think of to move yourself to Quadrant II?


Enter text here

Moving to Quadrant II
In order to move to Quadrant II you need to address five important criteria that
deal with the way you manage yourself:
alignment
balance
Quadrant II focus
people
flexibility.
Alignment
There should be alignment, unity and integrity between your:
vision and mission
roles and goals
priorities and plans
desires and disciplines.
In your planning there should be room for your personal mission and goals
you should refer to these constantly.
Balance
Your health, family, professional career and personal development must be
included. True effectiveness requires balance. Life is more than just your work
life.
Quadrant II focus
You need to focus on prevention in preference to prioritising the particular crises
you need to deal with each day.
This can be done by organising on a regular basis, then adapting and prioritising
as the need arises.
If you can organise on a weekly basis, this provides balance and context for
decision-making.

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People and flexibility


Dealing with time leads to efficiency. Dealing with people leads to effectiveness.
There are times when schedules will need to be put aside for people. You need
to accept this reality to avoid feelings of guilt if a schedule is not followed.
Apply your knowledge 23: Analysing my work tasks
In this activity you will analyse the tasks you perform on a day-to-day basis
and identify if you can apply the theories and ideas discussed so far in this
unit to find better ways of doing things.
The better ways might include doing things in a different order, doing
things differently, not doing them at all or gaining additional knowledge and
skills to deal with certain tasks.
Firstly, list your daily tasks below:
Enter text here

Now for each of the tasks you have listed, consider the following:
Efficiency

How effectively and efficiently am I doing this?

Competency

How skilled am I to carry out this task? Do I need to improve my skills


and knowledge in certain areas?

Focus and relevance

Is this something I am employed to do? Is it a core task? If not, why


am I doing it?

Systems and tools

Do I have the systems support and tools to carry out this task?

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After you have considered each of your tasks against the dimensions listed
above, consider what you can do to improve the way you carry out those
tasks. List your conclusions below:
Enter text here

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Stress in the workplace


We all have to put up with some degree of stress in our lives. Without some
stress we would be less than human and would probably not achieve our full
potential.
It is generally recognised that there are two types of stress good stress and
bad stress.
Good stress can be motivating. We have probably all experienced some stress
in our lives that has made us a better person in some way. Perhaps taking on our
first part-time job as a teenager or learning to drive was stressful. These are,
quite understandably, stressful situations, but in dealing with these situations we
have become more mature individuals and learned useful skills.
Generally, useful stress is stress where we, or someone close to us, benefits in
some way situations where we see a positive outcome.
Bad stress is stress that often results when we feel powerless to change a
situation, or feel that nothing positive will come from it.
Stress is only partly a result of the situation itself. It is also caused by our attitude
to the situation.
Our individual predispositions and genetic make-up result in a wide range of
personality types, some of which are particularly vulnerable to stress.

What are the effects of stress?


Stress is the unwelcome result of not being able to keep up with all the
challenges and pitfalls of life today. We all experience it for one reason or
another.
The way you handle stress can be one of the major factors that influences and
potentially limits your ability to demonstrate managerial competencies, and
achieve your career dreams.
Stress can have both physical and psychological effects on us. Some of those
effects are:

Physical
increased blood pressure
increased metabolism (for example, faster heartbeat, faster respiration)
increased cholesterol and fatty acids
increased production of blood sugar for energy
increased stomach acids.

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Psychological
tension
anxiety
conflict
addiction.
You might respond to a situation with both psychological and physiological
triggers in your body, that is, you might feel panic - psychological effects - and
nausea - physiological effects. How you respond is determined by your skills,
knowledge, abilities, experience, psychological make-up, physiology and support
network.

What situations can cause stress?


Everyone is different and people react differently to similar situations.
Some typical work-related situations that can cause stress include:
Our personal lives can also cause us stress that can carry over to our work life.
Some examples are:
illness in the family
relationship problems or break-ups
financial problems.
unsafe working conditions
change in the workplace
troubles with the boss or others at work
meeting deadlines
long working hours
boredom.

Controlling stress
Work can involve a diverse range of stressors: tight deadlines, change, efficiency
demands, people problems, isolation, lack of support and insufficient resources
to mention just a few. You will know best which factors cause stress for you.
Sometimes you will have little control over factors within your work environment
and your only option is to try to manage your responses to these stressors.Some
options include:
better planning so you can be more in control of events
relaxation exercises to allow time to switch off
good time management to balance the urgent and important tasks
delegation as an effective way of cutting your workload
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eating well and drinking lots of water


open dialogue as a communication technique to reveal assumptions and
insights
a willingness to accept the inevitable.

Employee assistance programs


Many workplaces have employee assistance programs in place. These programs
provide confidential counselling and assistance to employees in many areas of
their personal and work life, including stress management. Some programs even
extend to members of the employees family.
Apply your knowledge 24: What stresses me and what can I do about
it?
In the table below, list the factors that cause unhealthy stress in your life.
Give each some thought and decide what, if anything, you will do about
each factor.
Once you have decided on a course of action, give yourself a target date to
aim for.
Stress factor

Action I can take

Target date for action

Enter text here

Enter text here

Enter text here

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Professional development
To keep ahead in the business world, we need to be committed to a program of
lifelong learning. We need to be constantly aware of the opportunities for ongoing
professional development and many employer organisations have implemented
such programs.
Apply your knowledge 25: Organisations professional development
initiatives
What professional development programs and opportunities has your
organisation implemented? If you dont know, speak with your manager,
training or human resources department about what is available.
In the space below, list possible areas of development. Briefly describe
what, if any, programs or opportunities your organisation provides in these
areas.
Program or opportunity

Developmental area addressed


(e.g. Leadership, professional competence)

e.g. Certificate IV in Financial Services

e.g. Industry and professional competence

Enter text here

Enter text here

Other development options


Other ways in which we can stay in touch with trends and developments, include:
joining a professional association appropriate to your area of work
subscribing to a professional journal or newsletter
finding yourself a workplace mentor
volunteering for any strategic work committees where you might be able to
contribute
enrolling in a further education program appropriate to your career plan.
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Networks and associations


Establishing networks and joining, and being involved in, professional
associations are excellent ways to keep up to date with current and future
industry developments. Networking can also be very useful in your planned
career development.
Groups of people with common interests can support each other in many ways.
They can help to keep each other up to date with new developments in the
industry: new products, services, processes, training programs, etc. Belonging to
and using networks may help you to solve a problem, or help you to solve a
problem for someone else. People with common interests and problems can also
help to support each other emotionally when difficulties arise.
Networking should be planned. It takes commitment and ongoing effort to keep a
network going, and the same applies to getting the most out of belonging to a
professional association. It is one thing to join a network or association, but full
value will not be achieved without effort.
Networks can be formal or informal. Formal networks are the type you join,
sometimes at a fee, which conduct regular meetings or get-togethers.
Professional associations may fall into this category.
Informal networks may include current and ex-colleagues, and friends with similar
interests. There is usually less organisation with these networks, but the informal
nature may make it easier to make contact with others when you need
information or help.
Keep in mind that belonging to a network involved both giving and receiving you need to be willing to share what you know, and contribute what you can, to
make a network work for all involved.
The following points will help you to identify and establish network opportunities:
Identify opportunities depending on your circumstances, there may be
many network opportunities all around you. On the other hand, you may need
to seek them out by searching newsletters, asking colleagues or searching the
internet.
Make contact if you have identified a number of possible opportunities, list
them and consider the benefits of each. Also, consider the practicality of each,
for example, which will be the easiest for you to maintain? Take care with the
number of networks and associations with which you become involved. Do not
take on more commitments that you can comfortably manage.
Once you have identified one or more networks you want to explore, make
contact. If they are formal networks you may need to apply; joining an informal
network may simply be a matter of phoning a friend or colleague.
Remember, that you can start a network yourself. Talk to people, send emails
or establish contact in some other way. People are often very receptive to
such ideas, but someone has to be the initiator.

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Personal development action plan


Appendix 1 is a personal development action plan template. It will help you to
identify areas where you can:
assess your current situation
look at where you want to be in the future
determine how to get where you want to be, both in the short term and in the
long term.
By working through the steps in the template you will build a plan for your future
professional development.
It is suggested that you complete the template as you work through the rest of
the topic. In this way, issues may be highlighted for attention that are not
apparent or obvious at the moment.
Review questions
Access the online review questions and test your knowledge of this topic.
Read the key points before you begin.

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1
Appendix

Personal Development Action Plan template

1.126

Certificate IV in Credit Management

Appendix 1: Personal development action


plan
Factors to consider when preparing your
development plan

Notes for my development plan

1. Assess your current work


Examine sources of information about the
requirements of your current position. For
example:
KPIs
objectives
general work competencies
job description.

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2. Assess your current performance


Identify any gaps in your competencies,
skills, ability and knowledge by looking at:
outcomes of performance review
feedback from others
your own self-assessment.

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3. Consider your future work and life


List your values and goals:
Ask yourself what sort of work you want
to do in the future.
Determine the skills and knowledge
needed for this work.
Think about your personal goals and
values What sort of future do you
visualise for yourself?

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4. Your future performance


Identify the gap between your current
situation and what you need to do to
achieve your goals:
What further education and training will
you need?
Who would be a valuable mentor to
you?
What networking opportunities would
assist you?

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5. Future key factors


Try to make some predictions regarding
future factors which will impact on your
development plan, such as:
How will you be able to adapt to the
changing business environment?
What changes might occur in your
family and home life that might have an
impact on you?
What might be your organisations
expectations of future performance and
roles?
How will you manage your stress
levels?
What personal traits may be of benefit
in your future work performance?

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Topic 1: Developing self-management skills and professional knowledge

1.127

Now that you have worked through the template you will probably have some
long-term goals and action points, and some short-term ones.
Some of your major long-term goals may need to be broken up into smaller subgoals. Follow these steps:
Consider your long-term and your short-term goals and plans.
Consider the Pareto principle what possible actions will have the greatest
results?
List the three most important issues that you need to address, decide how you
will address them and put a time frame against each of these actions.
Issue

How I will address it

When I will do it

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