s 86A(1) when
When these sections apply
“This Subdivision applies in relation to a credit contract for a reverse mortgage and a mortgage securing the debtor’s obligations under the contract if:
“the debtor’s accrued liability (whether or not due and payable) under the contract is more than the amount (the adjusted market value) worked out under subsection (2) for the reverse mortgaged property; and
“the credit provider receives an amount at least equal to the adjusted market value for the reverse mortgaged property either:
“as a payment accepted from the debtor under the credit contract; or
“as proceeds of the sale by the credit provider of the reverse mortgaged property.”
National Credit Code, section 86A(1)Two things must both be true. The debt has grown past the adjusted market value, and the lender has received at least that value, either as a payment it accepted from the borrower or from its own sale of the home.
s 86A(2) the value
The adjusted market value
The adjusted market value is a figure the Code works out in two steps: first the market value of the property, worked out in accordance with the regulations (if any), and then that value adjusted in accordance with the regulations (if any). The regulations for the adjustment “may prescribe different adjustments to be made in different circumstances.”
ss 86B–86D effects
What follows, section by section
| Section | Effect | In the Code’s words |
|---|---|---|
| s 86B | The borrower’s obligations end | “The debtor’s obligations under the credit contract are discharged by force of this subsection.” |
| s 86B | The mortgage ends | “The mortgage securing those obligations is discharged by force of this subsection.” |
| s 86C | Any excess goes to the borrower | “If the amount received by the credit provider exceeds the adjusted market value for the reverse mortgaged property, the credit provider must pay the excess to the debtor.” |
| s 86D | No further payments | The credit provider must not “purport to require payment under the credit contract” or “accept a payment purportedly under the credit contract”. |
Discharge happens “by force of this subsection”: the Code itself discharges the obligations and the mortgage. Section 86D then closes the door behind it, with one clarification the Code adds “to avoid doubt”: the ban on further payments does not apply to the payment from the borrower, if there was one, that made the Subdivision apply in the first place.
Section 86C carries two notes. The first: “If the credit provider contravenes this requirement, the court may order the credit provider to compensate anyone affected by the contravention: see section 124.” The second points to section 86E for the cases where it does not apply.
Example
The sections at work: an illustration
An illustration only, with round figures chosen for the arithmetic: not any lender’s loan, and not a value worked out under the regulations. Say the borrower owes $650,000, the adjusted market value for the home is $600,000, and the lender sells the home for $620,000.
| Step | Section | On these figures |
|---|---|---|
| Does the Subdivision apply? | s 86A | Yes. The $650,000 owed is more than the $600,000 adjusted market value, and the $620,000 received from the lender’s sale is at least that value. |
| The debt and the mortgage | s 86B | Both are discharged. |
| The excess | s 86C | The lender must pay the borrower the $20,000 by which $620,000 exceeds the $600,000 adjusted market value. |
| Anything further from the borrower | s 86D | Although $650,000 was owed and the sale brought $620,000, the lender must not require, or accept, any further payment under the contract. |
| If an exception in s 86E is met | ss 86E, 93A | Sections 86B to 86D do not apply. To recover the $30,000 through enforcement proceedings, where section 88 requires a default notice, the notice must specify the $620,000 received, the $650,000 owed just before, and the conditions in section 86E that are met. |
Which way a real sale lands depends on the adjusted market value, worked out in accordance with the regulations (if any), and on whether section 86E applies.
s 86E exceptions
The exceptions in section 86E
“Sections 86B, 86C and 86D do not apply if:
“the debtor engaged in fraud, or made a misrepresentation, relating to the reverse mortgage before, at or after the time the credit contract was made; or
“circumstances prescribed by the regulations exist.”
National Credit Code, section 86EFraud or misrepresentation counts whenever it happened: before the contract, when it was made, or after. The regulations can add other circumstances.
s 93A(1) after an exception
If an exception applies
Where the Subdivision applies under section 86A, the borrower’s debt just before the lender received the payment or sale proceeds was more than the amount received, and a condition in section 86E is met, which the Code says means “that sections 86B, 86C and 86D do not apply”, section 93A comes in. A lender that then seeks to recover the excess through enforcement proceedings, where section 88 requires a default notice, must first give a notice that specifies the amount received, the debt just before it, and the conditions in section 86E that are met, as the default notice sets out.
Section 18A still matters here: it bars a reverse mortgage contract from making certain events a basis for enforcement, set out in what the contract must not include.
Where to take a dispute
Moneysmart says credit providers belong to an external dispute resolution scheme, which hears complaints for free, and names the Australian Financial Complaints Authority (AFCA) as an independent scheme for disputes with financial firms. Financial counselling, it says, is free and confidential, from not-for-profit community organisations.