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ING Bank (Australia) Limited “IBAL” Residential Mortgage Underwriting Guidelines

Version 12.2

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Residential Mortgage Underwriting Guidelines Version 12.2 November 2016 ING DIRECT is a division of ING Bank (Australia) Limited ABN 24 000 893 292

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1 OVERVIEW ........................................................................................................................................................................ 6 2 APPROVAL PROCESS ......................................................................................................................................................... 7 3 ELIGIBLE BORROWERS ...................................................................................................................................................... 9

3.1 PAYG .................................................................................................................................................................. 9 3.2 SELF-EMPLOYED – SOLE TRADERS AND PARTNERSHIP ...................................................................................... 10 3.3 COMPANIES ..................................................................................................................................................... 10 3.4 TRUSTS AND TRUSTEES .................................................................................................................................... 10 3.5 SPECIFIC RISK FOR OTHER BORROWERS ............................................................................................................ 11

3.5.1 Mixed parties .......................................................................................................................................... 11 3.5.2 Borrowers of convenience ...................................................................................................................... 12 3.5.3 "Straight" third-party security ................................................................................................................ 13 3.5.4 Sophisticated Investors .......................................................................................................................... 13 3.5.5 Family Support ....................................................................................................................................... 14

3.5.5.1 Guarantee and Mortgage for Security Support Only: ....................................................................... 15 3.5.5.2 Guarantee and Mortgage for Servicing & Security Support ............................................................. 16 3.5.5.3 Eligible Family Member as Co-Borrower/Mortgagor ......................................................................... 16 3.5.5.4 Eligible Family Member as Sole borrower ........................................................................................ 16

3.5.6 Non English Speaking Borrowers ............................................................................................................ 16 3.5.7 Retirees................................................................................................................................................... 16 3.5.8 Power of Attorney .................................................................................................................................. 17

3.5.8.1 Definition ......................................................................................................................................... 17 3.5.8.2 Australian Citizens Living Overseas .................................................................................................. 17 3.5.8.3 Other Borrowers – New Lending ...................................................................................................... 17 3.5.8.4 Existing Borrowers - Loan Account Transactions ............................................................................. 18

3.5.9 Diplomats ............................................................................................................................................... 18 4 PURPOSE ......................................................................................................................................................................... 18

4.1 ACCEPTABLE PURPOSE ..................................................................................................................................... 18 4.1.1 Refinance ................................................................................................................................................ 19

4.1.1.1 Private Mortgages ............................................................................................................................ 20 4.1.2 Bridging Finance ..................................................................................................................................... 20

4.2 UNACCEPTABLE PURPOSE ................................................................................................................................ 21 5 MAXIMUM LOAN TERMS AND AMOUNT ........................................................................................................................... 21

5.1 MAXIMUM TOTAL EXPOSURES .......................................................................................................................... 21 5.2 MAXIMUM TERMS AND REPAYMENT ARRANGEMENTS ...................................................................................... 21

6 REDUCED EQUITY FEE PRODUCT (REP)/LENDERS MORTGAGE INSURANCE (LMI) ............................................................ 21 6.1 REDUCED EQUITY FEE PRODUCT (REP) .............................................................................................................. 22 6.2 LMI DELEGATED UNDERWRITING AUTHORITY ................................................................................................... 22

7 CONSTRUCTION LOANS (SUSPENDED FOR NEW BUSINESS FROM 1 NOVEMBER 2015) ................................................................... 22 7.1 GENERAL REQUIREMENTS ................................................................................................................................ 22

7.1.1 Target Market ......................................................................................................................................... 23 7.1.2 Unacceptable criteria ............................................................................................................................. 23 7.1.3 Purchase vacant land and commit to commence construction within 12 months ................................ 23 7.1.4 Buy land and construct immediately ..................................................................................................... 23 7.1.5 Construction only ................................................................................................................................... 25 7.1.6 An increase to an existing vacant land loan ........................................................................................... 26 7.1.7 Where extensive renovations are proposed to the existing dwelling ..................................................... 26 7.1.8 Valuation ................................................................................................................................................ 26 7.1.9 Progress Payment Request .................................................................................................................... 27

8 FUNDS TO COMPLETE, GENUINE SAVINGS AND GIFTS ..................................................................................................... 28 8.1 FUNDS TO COMPLETE ....................................................................................................................................... 28 8.2 GENUINE SAVINGS ........................................................................................................................................... 28 8.3 GIFTS................................................................................................................................................................ 29

9 INCOME TYPES ................................................................................................................................................................ 29 9.1 PAYG INCOME EARNERS-MINIMUM EMPLOYMENT REQUIREMENT ..................................................................... 29 9.2 SMALL BUSINESS/COMPANY (SELF-EMPLOYED) INCOMES ................................................................................. 30 9.3 OTHER INCOMES .............................................................................................................................................. 31

9.3.1 Superannuation ...................................................................................................................................... 31 9.3.2 Other Investment Incomes ..................................................................................................................... 31

9.4 UNACCEPTABLE INCOME TYPES ........................................................................................................................ 31

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10 INCOME VERIFICATION .................................................................................................................................................... 32 10.1 PHONE VERIFICATION....................................................................................................................................... 36

11 COMMITMENTS AND LIVING EXPENSES ........................................................................................................................... 37 11.1 COMMITMENTS ................................................................................................................................................. 37

11.1.1 Existing Mortgage Loans ........................................................................................................................ 37 11.1.2 Personal Loans and other Loans ............................................................................................................ 37 11.1.3 Credit Card Repayment .......................................................................................................................... 37 11.1.4 Consideration of Negative Gearing on Tax ............................................................................................. 37 11.1.5 Margin Loans .......................................................................................................................................... 37 11.1.6 Vendor Finance....................................................................................................................................... 38

11.2 EXPENSES ........................................................................................................................................................ 38 11.2.1 Living Expenses ...................................................................................................................................... 38 11.2.2 Living Rent Free ...................................................................................................................................... 38

12 SERVICEABILITY .............................................................................................................................................................. 39 12.1 LOAN COMMITMENTS ....................................................................................................................................... 39 12.2 EXCEPTIONS ..................................................................................................................................................... 40

13 CREDIT CHECK REPORTS .................................................................................................................................................. 40 14 SECURITY ........................................................................................................................................................................ 42

14.1 ACCEPTABLE SECURITY .................................................................................................................................... 42 14.1.1 First Mortgages ....................................................................................................................................... 42 14.1.2 Normal Residential Dwelling ................................................................................................................... 42 14.1.3 Residential Acreage or Rural Residential Zoning (includes hobby farms) ............................................... 42 14.1.4 Inner City Apartments ............................................................................................................................ 43 14.1.5 Off-the-Plan Purchase ............................................................................................................................ 43 14.1.6 Favourable Purchases ............................................................................................................................. 43

14.1.6.1 Requirements ................................................................................................................................ 44 14.1.7 Security Property with Living Areas < 60m2 ........................................................................................... 44 14.1.8 Leasehold Property (Crown Lease) ......................................................................................................... 45 14.1.9 Residential Vacant Land Security ........................................................................................................... 45 14.1.10 Stratum Title ........................................................................................................................................... 45 14.1.11 Deed of Charge ....................................................................................................................................... 45 14.1.12 Second Mortgages .................................................................................................................................. 46

14.1.12.1 Government Loan Schemes for eligible Australian Defence Force members & ex-members ...... 46 14.1.13 Unencumbered Property ........................................................................................................................ 47

14.1.13.1 Queensland only .......................................................................................................................... 47 14.1.14 Guarantees ............................................................................................................................................. 47 14.1.15 Information about obtaining legal and financial advice ......................................................................... 49

14.2 UNACCEPTABLE SECURITY ................................................................................................................................ 50 14.3 CONCENTRATION LIMIT .................................................................................................................................... 51

15 POSTCODE CATEGORIES .................................................................................................................................................. 51 16 MAXIMUM LVR BY SECURITY ........................................................................................................................................... 52 17 VALUATIONS ................................................................................................................................................................... 54

17.1 OVERVIEW ....................................................................................................................................................... 54 17.1.1 Purchases ............................................................................................................................................... 55 17.1.2 Valuations for Existing Business and Refinance (including Top Ups) ...................................................... 55

17.2 VALUERS’ STANDING INSTRUCTIONS ................................................................................................................ 57 17.3 VALUERS .......................................................................................................................................................... 57

17.3.1 Contents of Valuation ............................................................................................................................. 58 17.3.2 Land Description ..................................................................................................................................... 58 17.3.3 Location Description ............................................................................................................................... 59 17.3.4 Property Improvements Description ...................................................................................................... 59 17.3.5 Marketability .......................................................................................................................................... 59 17.3.6 Sign-off and Acceptance of a Valuation ................................................................................................. 60

17.3.6.1 Environmental Risk Issues .............................................................................................................. 61 17.3.6.2 Activities on the Property............................................................................................................... 61 17.3.6.3 Substances ..................................................................................................................................... 62 17.3.6.4 Waste ............................................................................................................................................ 62 17.3.6.5 Noise .............................................................................................................................................. 62 17.3.6.6 Restrictions on Approval ................................................................................................................ 62

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17.3.7 Valuation Appeals- (Short Form / Full Valuations) .................................................................................. 62 17.3.7.1 Valuation Appeals Process ............................................................................................................. 63 17.3.7.2 Expected Turnaround Times for Valuation Appeals ....................................................................... 63

17.4 GENERAL INSURANCE ...................................................................................................................................... 63 17.5 VARIATIONS BETWEEN PURCHASE PRICE AND VALUATION .............................................................................. 63 17.6 SECOND OPINION VALUATION ......................................................................................................................... 64

18 VARIATIONS .................................................................................................................................................................... 64 18.1 FULL DISCHARGES ............................................................................................................................................ 64 18.2 PARTIAL RELEASE............................................................................................................................................. 64 18.3 SWITCHES ........................................................................................................................................................ 65 18.4 REP LOANS ...................................................................................................................................................... 65 18.5 SUBSTITUTION OF SECURITY ............................................................................................................................. 66 18.6 CONSENTS ....................................................................................................................................................... 66

18.6.1 Consent to a Second Mortgage .............................................................................................................. 67 18.6.2 Other Consents ....................................................................................................................................... 67

18.7 INCREASES ....................................................................................................................................................... 67 18.7.1 Non Structural Improvements ................................................................................................................ 68

18.8 INCREASE IN CONJUNCTION WITH OTHER VARIATIONS .................................................................................... 68 19 LEGISLATION ................................................................................................................................................................... 69

19.1 NATIONAL CREDIT CODE .................................................................................................................................. 69 19.1.1 Introduction ............................................................................................................................................ 69 19.1.2 Regulated and Unregulated Loans ......................................................................................................... 69 19.1.3 National Credit Code (NCC) ..................................................................................................................... 72

19.1.3.1 Introduction ................................................................................................................................... 72 19.1.3.2 What is the NCC? ............................................................................................................................ 72 19.1.3.3 Relationship of the Code of Conduct .............................................................................................. 73 19.1.3.4 When does the NCC Apply? ............................................................................................................ 73 19.1.3.5 Predominant purpose .................................................................................................................... 73 19.1.3.6 Accurate assessment..................................................................................................................... 73 19.1.3.7 Assume the NCC applies ................................................................................................................ 74 19.1.3.8 Personal Customers ....................................................................................................................... 74 19.1.3.9 Strata corporations ........................................................................................................................ 74 19.1.3.10 When Does the NCC Not Apply? ................................................................................................... 74

19.1.4 Disclosure ............................................................................................................................................... 74 19.1.4.1 Advertising ..................................................................................................................................... 75 19.1.4.2 Compliance with NCC Requirements .............................................................................................. 75

19.1.5 Account Servicing ................................................................................................................................... 76 19.1.6 Nomination Forms .................................................................................................................................. 76 19.1.7 Statements and Account Information .................................................................................................... 76 19.1.8 Fees and Charges ................................................................................................................................... 76

19.1.8.1 Commission ................................................................................................................................... 77 19.1.9 Sales Force Requirements ...................................................................................................................... 77

19.1.9.1 Interest Rates ................................................................................................................................. 77 19.1.9.2 Interest Restrictions ....................................................................................................................... 77 19.1.9.3 Quoting interest rates .................................................................................................................... 77 19.1.9.4 Default interest rates ..................................................................................................................... 78 19.1.9.5 Requirements for interest rate changes ........................................................................................ 78 19.1.9.6 Application to the court ................................................................................................................. 78

19.1.10 Changes to Fees, Charges and Repayments .......................................................................................... 78 19.1.10.1 Requirements for changes to fees or charges ............................................................................. 78 19.1.10.2 Requirements for changes to repayment amount ...................................................................... 78

19.1.11 Avoiding False and Misleading Representation ...................................................................................... 79 19.1.11.1 Selling Restrictions ....................................................................................................................... 79 19.1.11.2 Calling at Homes by Arrangement Only ...................................................................................... 79

19.1.12 Credit Related Insurance ........................................................................................................................ 79 19.1.13 Reduced Equity Fee Product/Lenders Mortgage Insurance .................................................................... 80 19.1.14 Unjust Transactions ................................................................................................................................ 80 19.1.15 Loan Documentation.............................................................................................................................. 80 19.1.16 Pre-NCC contracts covered ..................................................................................................................... 80

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19.1.17 Credit Contracts ...................................................................................................................................... 81 19.1.17.1 Changes to Credit Contracts ........................................................................................................ 81 19.1.17.2 Requirements for Changes to Credit Contracts ............................................................................ 81 19.1.17.3 Requirements for Fixed Rate Contracts ........................................................................................ 82

19.1.18 Regulated Mortgages ............................................................................................................................. 82 19.1.19 Prohibited Mortgages ............................................................................................................................. 82 19.1.20 Regulated Guarantees ............................................................................................................................ 83

19.1.20.1 Limit of guarantees...................................................................................................................... 83 19.1.20.2 Requirements for Changes to Guarantees ................................................................................... 83

19.1.21 External Fees and Charges ..................................................................................................................... 84 19.1.22 Managing Hardship, Disputed and Defaulted Accounts ......................................................................... 84

19.1.22.1 Hardship Accounts ....................................................................................................................... 84 19.1.22.2 Disputed Accounts ....................................................................................................................... 84 19.1.22.3 Defaults........................................................................................................................................ 85

19.1.23 Enforcement Proceedings ...................................................................................................................... 86 19.1.23.1 Postponement ............................................................................................................................. 86

19.1.24 Definition of Residential Property ........................................................................................................... 87 19.2 ANTI MONEY LAUNDERING AND COUNTER-TERRORISM FINANCING (AMLCTF) ACT 2006 .................................. 87 19.3 VERIFICATION OF IDENTITY (VOI) ...................................................................................................................... 89 19.4 PRIVACY ACT .................................................................................................................................................... 90 19.5 CODE OF BANKING PRACTICE ........................................................................................................................... 90 19.6 TRADE PRACTICES ACT ..................................................................................................................................... 91

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1 OVERVIEW IBAL Underwriting Guidelines provide the preferred framework to ensure an acceptable standard of loan application assessment is achieved. This document is designed to provide information and guidelines to enable approved and authorised IBAL and Mortgage Management (MM) staff to achieve and maintain the preferred standard when writing loans for IBAL. It provides an overview of IBAL lending guidelines, legislative requirements and acceptance procedures when assessing a loan application. This document contains the preferred parameters and guidelines which staff are required to follow in their business activities. These guidelines have passed through an appropriate approval process and IBAL Risk Management Department (RM, which includes Mortgage Management Funding Credit) is the business owner of this underwriting guidelines document. All Customer Operations (CO) (and Mortgages (M)/DIRECT Mortgages (DM) where relevant) & MM staff are expected to adhere to these underwriting guidelines when making an assessment. Deviations from these Underwriting Guidelines are to be considered /approved on a case by case basis by appropriate Delegated Lending Authority holders for credit worthy applications in line with a common sense risk based approach to decision making, subject to proper mitigation which needs to be documented. Primary motivation should focus on the financial strength of the applicant and ability to service, not the underlying collateral. When making an assessment and/or mitigating deviations to the underwriting guidelines due consideration is to be given to the following key principles: • Who is the borrower? (be comfortable with the borrower’s financial position, income (salary, self-

employed, casual etc.), employment history, repayment history and equity contribution to the transaction and willingness to pay).

• What does the borrower want? (what is the loan amount, relative to their income and financial position, and what type of loan facility is sought i.e. principal & interest, interest only, revolving etc?)

• What will the borrower do with the money/loan? (Is the purpose for owner occupation, investment or other worthwhile purpose?)

• How will the borrower repay? (by what means will the borrower pay us back and can a satisfactory servicing/repayment capacity be demonstrated over the term of loan? Debt serviceability and ability to pay)

• What happens if the borrower does not pay? (if the borrower fails to repay as anticipated consider our collateral position and how we will recovery our loan amount?)

Refer to CO & MM Delegated Lending Authority (DLA) for further details. Please note that this document is the property of IBAL and is strictly for the use of CO, M, DM & MM staff only. No part of this document may be reproduced without the prior authorisation of IBAL RM.

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This document will be reviewed and updated at least annually (see below), and it is recommended that this document be read in conjunction with Underwriting Guidelines Change Advices which may be issued from time to time and which communicate IBAL new or revised credit policies. The annual review process involves: - • Consultation with CO/M/DM • Consultation with ING Direct Head Office Risk Management (Amsterdam) • Approval by Chief Risk Officer (CRO) The following general guidelines define what an acceptable exposure is for IBAL: • Unless there is good substantiation of credit risk (with the appropriate level of approval), all loan

applications must comply with these underwriting guidelines. • Each loan application must have a legitimate legal purpose, both within the word and the spirit

of the law. • All loan applications must be completed on an “arms-length” basis. There must be no

concessions on acceptable commercial pricing, loan terms and/or loan structure that could compromise the profitability and/or the capital of IBAL.

• Each CO & MM staff involved in approving credits should be able to reasonably substantiate the client’s creditworthiness in presenting a credit proposal.

• Each CO & MM staff is expected to assess all loan applications in a prudent manner and ensure that each applicant has the requisite capacity to service all his/her commitments and the requisite authority/capacity to grant supporting securities.

• All new credit applications and loan variations are subject to appropriate approvals. Refer to CO & MM DLA for further details.

• CO/M/DM & MM staff must not engage in conduct where IBAL considers that they are seeking to refinance loans at a rate or in a manner that may constitute ‘churning’. They must not engage in conduct where the major reason for seeking to refinance is the generation of loan application fees rather than the servicing of their customers’ needs.

• CO/M/DM & MM staff must act efficiently, honestly and fairly in their dealings with applicants. • CO/M/DM & MM staff must ensure that customers are not disadvantaged by any conflict of

interest that they have with respect to the loans being considered by the customer. • CO/M/DM & MM staff must conduct all loan activities in accordance with IBAL's responsible

lending obligations under the National Consumer Credit Protection Act 2009, including: • providing a credit guide to customers; • making an assessment of unsuitability of the credit contract or any credit limit increase

under a credit contract before entering into it; and • ensuring that IBAL does not enter into a credit contract, or increase the credit limit of a credit

contract, with a debtor if that contract or credit increase is unsuitable. All CO & MM staff with DLA must adhere to the Terms & Conditions of that delegation. 2 APPROVAL PROCESS Where practical, all loans should pass through ING’s Scorecard/Decision Point (currently only new business in the branded channel however looking to improve this with a new workflow system) Borrowers are assessed based on what is known about them and what is derived from the application process. Applications are then ranked based on score and historical performance between Category 1 to Category 5 ( Category 1 being our preferred customer segment, Category 5 being higher risk of default), with any policy or bureau related issue also flagged during the process.

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Loan applications meeting specified credit criteria can only be approved by CO & MM staff with the appropriate level of DLA. In line with ING Global Policy an approval is valid for up to 3 months. After this period a new assessment is required. Any loan drawdown must also comply with the time limits covered by the Letter of Offer and the Terms & Conditions. If a loan application is within a CO assessor’s DLA, only this person’s sign-off is required. However, if a loan application falls outside a CO assessor’s DLA, the person needs to refer this application to an appropriate DLA Holder, their Team Leader or RM (whichever is applicable). Prior to submitting loans requiring Lenders Mortgage Insurance to an insurer (i.e. outside DUA), the loan must in the first instance be approved by an appropriate DLA Holder For loans approved within DUA they must comply with the LMI DUA criteria current at that time (DUA - see Section 6.2). With regards to loan approval process in the MMF business, the following procedures apply: Loans within MM Staff’s DLA: • Once the IBAL Loan Application Summary (LAS) is completed and signed off as “recommended”

by a MM employee, loan application is then provided to the appropriate MM DLA holder for decision.

• If the loan amount is within DLA (amount and deviation limitations) the loan application can be approved in house.

• It is not necessary for the person preparing the deal to hold a DLA, only the person approving same.

Loans outside MM Staff’s DLA: • IBAL LAS must be signed off as “recommended” by a DLA holder where there is one or more

based in MM’s office, or by the MM’s designated “Credit Manager/Officer”, where there is no DLA holder in the MM’s office.

• Any relevant additional information (e.g. summary memo, comments within LAS etc.) should be provided to IBAL to assist in the assessing of the loan application.

Refer to the latest CO & MM DLA for the list of CO & MM staff with authority to approve deviations to this Underwriting Guidelines Manual. Policy exceptions can only be approved by Risk Management. NOTE: In recommending a proposal be approved by a higher DLA, the DLA recommending approval must be satisfied that the proposal is worthy of approval and highlight any deficiencies, deviations or exceptions. If that DLA Holder is not prepared to recommend the proposal, they can decline the application even if it is outside their authority. Policy Exceptions Many criteria in these Underwriting Guidelines originate from the “Retail Credit Risk Sub-Policy”, which every DLA Holder should review and fully understand.

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The approval of any loan that is outside the criteria detailed in the “Retail Credit Risk Sub-Policy” is defined as a policy exception. Policy Exceptions can only be approved by Risk Management. Refer “Retail Credit Risk Sub-Policy” for full details on policy exceptions monitoring and reporting requirements Underwriting Guideline Deviations The approval of loans outside these Underwriting Guidelines and not contained in the Retail Credit Risk Sub-Policy are defined as deviations. A deviation can be approved by an appropriately authorised DLA Holder. (CO & MM staff should refer to their DLA for further details.) This is with the exception of the Reduced Equity Fee Product (REP) loan, for which RM must approve any deviation or policy exception. Deviations to these Underwriting Guidelines (by specifically authorised staff under their Delegated Lending Authority) are only allowed when offset by other risk factors – noting:

• Deviations are only allowed if there are mitigating factors. • At approval the mitigating factors must be recorded.

Multiple deviations on any one deal should be avoided. Aggregate Exposure Calculation When determining whether a proposal is within the maximum amount authorised for a DLA, all pre-existing IBAL (Residential, Priority Commercial and Commercial Property Finance) & MM exposures (where able to identify) must be added at 100% of the approved limit, notwithstanding differences in the borrower mix (new and pre-existing).

3 ELIGIBLE BORROWERS Applicants must be either Australian citizens or permanent residents who reside in Australia and must be at least 18 years of age (a minor is not permitted to be a borrower, guarantor or mortgagor). Loan applications which involve overseas residents or residents in Australia holding a visa other than that of a permanent resident (e.g. foreign residents living and working in Australia) are outside these guidelines. No deviation is permitted. Any applicant who does not satisfy the criteria outlined in this section should be treated as outside underwriting guidelines. NOTE: Self-Managed Super Funds and not for profit organisations are not eligible borrowers

3.1 PAYG Individuals who are employed by unrelated entities are defined as Pay as you go (PAYG) Income Earners. Their employer will normally withhold the appropriate amount of income tax, with the employee receiving a net salary.

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Reference should be made to the minimum employment requirement under Section 9.1 and the verification requirements under Section 10.

3.2 Self-employed – Sole Traders and Partnership An applicant who derives their income from a business which is owned solely or jointly with other parties. A self-employed person can operate as a sole trader, partnership or through a company/trust structure. The applicant should have been self-employed in the current situation for at least 24 months.

3.3 Companies In order to limit risks involved in lending to companies, the following guidelines must be applied to all company applicants: • Obtain Australian Business Number (ABN) for GST purposes, if required; • Obtain Veda Advantage report on all directors who are also shareholders (if a private company).

Highlight any defaults, legal judgements etc. (if any) and attach a full explanation; • Consider the requirement to obtain personal guarantees from directors/shareholders. In cases

where these guarantees are required, it is normal to obtain personal guarantees from all directors who are also shareholders (if a private company);

• Ensure a minimum operating period of two consecutive years. Companies operating less than two consecutive years must show that management has the experience and skill to promote the company in its proposed line of business (cashflow projections for the next 12 months may also be required);

The above conditions are also applicable to any company related to: • The borrowing company; and • Guarantors of the borrowing company.

3.4 Trusts and Trustees The two types of trusts usually encountered by lenders are: • Unit Trust: Beneficiaries hold defined units which identify their entitlement in the trust; or • Discretionary Trust: Trustee at its discretion can select the beneficiaries and determine the level

of their entitlements; potential beneficiaries have no property and hold no units. NOTE: IBAL does not lend to Hybrid Trusts. Whether or not a trust is a separate legal entity varies from state to state (see “Requirements” below). A trust is always required however to have a trustee. The trustee is the legal owner of the trust assets and has a right of indemnity out of the trust assets. The following guidelines can be used to assist staff in ensuring that parties to a loan or security transaction are correctly identified where IBAL advances monies or takes security or a guarantee from entity acting in a capacity as a trustee of a trust as well as in its own capacity:

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Requirements States which recognise a Trust as a legal entity e.g. Queensland & Tasmania A Trust may be the registered proprietor i.e. on the title deed. Our loans in this instance should be setup as: • Trustee (ABC Pty Ltd) as trustee for the Trust (ABC Family Trust) as registered proprietor and

borrower, • Special conditions in the loan contract “trustee is liable in its own right and as trustee for the

XXXX trust”. States which do not recognise a Trust as a legal entity e.g. NSW Trust is not allowed to be the registered proprietor – the trustee must be the registered proprietor. Our loans in this instance should be setup as: • Trustee only (ABC Pty Ltd) as registered proprietor and borrower, • Special conditions in the loan contract “trustee is liable in its own right and as trustee for the

XXXX trust”. In all instances we should obtain a copy of the Trust Deed to ensure the Trust is authorised to do what is being requested. It is mandatory for a special condition that IBAL Solicitors are to be provided with a copy of the Trust Deed for perusal. Guarantors Where IBAL takes a guarantee from an entity/individual in its own capacity and as trustee of a trust, the “Security” section of the Loan Offer letter should refer to guarantor as: “ABC Pty Ltd in its own capacity and as trustee for the ABC Trust”. Independent legal advice may be required where a third party exists. Where it makes sense to do so and it adds value to the assessment all adult beneficiaries/unit holders should be guarantors. The following guidelines are also applicable to trustees: • Ensure that the trustee has the ability to service the loan; • Obtain Trust Deed and refer documents to a panel solicitor to identify if trustee can borrow

and/or guarantee on behalf of trust and beneficiaries in accordance with the trust deed; • Obtain Veda Advantage reports on the trustee and adult beneficiary(s)/unit holders(s) who are to

act as guarantors. Highlight any defaults, judgements etc. (if any) and attach a full explanation; • The Trust should have been established for at least 1 year, otherwise evidence must be provided

that trustee has the experience and skill to promote the trust in its proposed business activities in the best interests of the beneficiaries;

• Have beneficiaries sign letter of acknowledgment of the loan; and • Refer to CO & MM DLA for sign-off on loan applications involving trustees.

3.5 Specific Risk for Other Borrowers

3.5.1 Mixed parties Mixed parties arise where the borrowers have an interest in the security properties being offered, but not all parties have an interest in all properties used as security for a loan.

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For example, A, B and C are borrowers. A, B and C are mortgagors on Property 1. Only A and B are mortgagors on Property 2. In this case there is no third party as all borrowers are mortgagors. The incomes of A, B and C are all taken into account for servicing purposes. There is no need for legal or financial advice for any party because there is no element of guarantee; however DLA Holders should consider the circumstances surrounding the transaction when making a judgement as to the need for the applicants to seek independent legal and/or financial advice Ensure that mixed party loans are not artificial arrangements to avoid the prohibition on borrowers of convenience.

3.5.2 Borrowers of convenience Borrowers of convenience arise where borrowers wish to buy real estate, but their income is insufficient to satisfy servicing. In some cases an "artificial" borrower is introduced. Such a person is treated as an "artificial" borrower or borrower of convenience because he/she derives little/no benefit from the transaction however may be represented on title (i.e. usually less than 20% ownership). These transactions cannot be approved for 2 reasons: • Clause 26.1 of the Code of Banking Practice states that "We will not accept a person as co-debtor

… where it is clear … that the person will not receive any direct benefit". • Section 76 of the NCC provides that one of the considerations which can be taken into account in

determining whether a transaction is unjust is whether "at the time the contract … was entered into … the credit provider knew, or could have ascertained by reasonable enquiry of the debtor at the time, that the debtor could not pay in accordance with its terms or not without substantial hardship". (IBAL will only consider guarantors income under Family Support Policy (Section 3.5.5), Sophisticated Investors (Section 3.5.4) or from related Companies/Trusts).

Example: Borrowers A, B, and C apply for a loan for A and B to buy a property. C is clearly a borrower of convenience and the loan cannot be approved. A transaction can only be considered where C is deriving a benefit. The benefit can only be established if: • The purpose of the transaction is for owner occupation, full or part-time; or • The purpose of the transaction is for an investment property to be purchased in all names

(subject to a maximum of 5 parties). Where the ownership is not equal, each shareholding is to be a minimum of 20%. Note: Where borrowers are married or in a de-facto relationship and apply for a loan to buy a property with an ownership split of less than 20% (e.g. 99 to 1). This is considered acceptable where

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the transaction makes sense. Refer Sophisticated Investors (Section 3.5.4) if party A or B is to have no ownership of the property. Also refer to Section 14.1.15 Information about obtaining legal and financial advice.

3.5.3 "Straight" third-party security The borrowers apply for a loan on the basis of security provided by: • the borrowers and a third-party; or • A third-party only. The borrowers satisfy IBAL servicing requirements (i.e. there is no reliance on the third-party's income to satisfy IBAL servicing criteria). In this case the third-party must be a guarantor and a requirement to obtain independent legal advice should be considered. (Refer to Section 14.1.15 for Information about obtaining legal and financial advice). The guarantor must be a parent, child, de facto/spouse, company, Aunt or Uncle, or Parent-in-law of the borrower. An assessment of the financial strength and assets & liabilities of the third party mortgagor must evidence that the mortgagor/guarantor will not suffer substantial hardship if the security is called upon. The preferred security should not be an owner- occupier home. Where the relationship is defacto/spouse, we will accept the owner occupied property provided the reliance upon the property is no more than 33% of the value of the property. Example: Mr Jones is borrower. The security is a mortgage over the investment property being purchased by Mr Jones, and also the owner occupied home owned by Mr & Mrs Jones/Mrs Jones solely. This section is not to be confused with Section 3.5.5 Family Support.

3.5.4 Sophisticated Investors Sometimes for asset protection and/or taxation planning the ownership of real estate is vested in one party solely or one party has less than equal share in the ownership. Example: A and B are married. The loan (in A’s name only) is to enable A to purchase a property (in A’s name only). B is a "professional" and B's income will be taken into account to satisfy servicing. To consider an application structured this way: • All parties must be related by marriage or de-facto relationship. Relationship of parent/child is

not acceptable. • At least one of the parties must be

o a "professional" (i.e. involved in business or commerce requiring a degree of commercial sophistication) or

o considered by IBAL as a “sophisticated” investor, and as a result the ownership has been structured in line with financial, estate or family planning (structure make sense and not just to fit within these underwriting guidelines).

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In these cases, the income of the professional or investor can be taken into account in assessing the servicing position. We recommend all guarantors seek independent legal advice. Other Rules • All people providing security who are not borrowers must be guarantors. • Generally, where the guarantor is an individual, the guarantee must be signed personally by the

individual and not by a power of attorney. • A Credit Advantage report must be conducted on all individual and company guarantors. • If there are multiple guarantors, each guarantee must be provided on a joint and several basis. • A minor (a person under the age of 18) is unacceptable as a guarantor or third-party security

provider. • All guarantors must be Australian residents.

3.5.5 Family Support The Family Support Section allows suitable borrowers with a nominal shortfall in savings or servicing, the ability to purchase property or refinance associated loans with the assistance of immediate family members. Loans to a maximum of 100% of the purchase price may be considered, however evidence of genuine savings is preferred as this supports the ability to meet commitments. While the target market for this guideline is the first home buyer (whether owner occupied or investment), consideration will be given when upgrading the property, however additional care needs to be exercised to ensure this does not adversely affect the guarantor’s financial position. The intent of this underwriting guideline is not to leverage third party securities to build property portfolios. In terms of this section immediate family members can be described as:- • An adult child (including an adopted child, step child etc.) • A parent or grandparent • A sibling Under this section support can be achieved four ways:- 1. Guarantee and mortgage for security support only 2. Guarantee for security and servicing support 3. Eligible Family Member as co-borrower/mortgagor 4. Sole borrower – relative borrows in own name using own security and on-lends to the family

member Features & Benefits: • Borrowers who would normally be excluded from the property market can borrow sufficient

funds with the assistance of family members • In the case of security support the family member can assist without having to take on an

extra regular financial commitment Product Availability: This section is available on a P & I basis for all IBAL products. .

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Restrictions: • Funding to a maximum of 100% of purchase price • No LMI • No cash out or refinancing of other debts • No interest only or equity type facilities • Unsupported guarantees for servicing support only, are not allowed • Guarantor’s security is to be acceptable to IBAL • Secondary postcode areas are unacceptable for either the primary or the support security • Our overarching position is that any guarantor should not be placed in a position of hardship in

guaranteeing or supporting a loan approved under this section • As a minimum, financial assessment is to be made of the guarantor’s position both now and

what could be reasonably expected in the future if the primary borrower were to default on the loan (This could take into account such issues as age, asset position and a “fall back” position for the guarantor should a default occur)

This section is not to be confused with Section 3.5.3 “Straight” third-party security. Refinance under Family Support: In addition to the requirements contained above for borrowers requiring family support, a refinance under one of the four options can be considered for approval when the following conditions are met: • The existing loan structure with the current lender was provided under similar parameters (i.e.

same borrowers, security and guarantors, if any). A copy of the Letter of Offer or Contract for their current facility should be provided for confirmation.

• Refinance of existing home loan only, with maximum cash out of $5,000 to apply (subject to maximum LVR restrictions).

• The consolidation of credit cards/ other debts, or refinance of a partially constructed property is not allowed.

• All guarantors must obtain new independent legal advice.

3.5.5.1 Guarantee and Mortgage for Security Support Only: • Guarantee provided by an eligible family member to be supported by a registered first

mortgage over the guarantor’s security property. A registered second mortgage is also acceptable but only where IBAL holds the first mortgage

• Acceptable security includes an owner occupied property • Our preferred position is for the guarantee to equal the amount of the loan. Limited guarantees

can be considered where requested, provided the amount is sufficient for security support. Minimum amount of guarantee would be total loan amount less maximum security support (LVR) of primary security amount.

• Normal maximum security LVR’s (without LMI) are applicable. The preferred maximum LVR to be allocated to the support security is to be capped at 33% of its value plus any other IBAL borrowings. (i.e. primary security @ 80% LVR plus support security @ 33% LVR should not exceed 100% of purchase price)

• Guarantees are provided for the life of the loan. A later request to release the guarantee and supporting security could be made when the primary security is within normal LVR requirements, subject to a normal servicing assessment based on current criteria and an up to date A & L statement of the borrowers.

• Guarantor(s) must seek independent legal advice prior to entering into the transaction • Borrowers must be able to service the loan in their own right

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• Asset position of guarantors to be such that they will not suffer undue hardship should the guarantee be called upon

3.5.5.2 Guarantee and Mortgage for Servicing & Security Support In addition to the requirements detailed above for security support only. • Servicing assessment to be completed using incomes and existing commitments of borrowers

and guarantors • Guarantor’s income can only to be considered to assist the transaction at minimal levels – it is

not intended that the Guarantor be the major income contributor • There must be a realistic expectation that the borrower will/can meet the repayments on their

own in the foreseeable future.

3.5.5.3 Eligible Family Member as Co-Borrower/Mortgagor • An eligible family member to support servicing of an owner occupied housing loan as a co-

borrower/mortgagee • Family member(s) to be on title either as a joint tenant with the primary borrower(s) or as a

tenant(s) in common for a minimum of 20% share of the security property • Maximum LVR of 80% - LMI not available • Servicing assessment to be completed using incomes and existing commitments of all

borrowers

3.5.5.4 Eligible Family Member as Sole borrower (Relative borrows in own name using own security and on-lends or gifts to the family member)

• Subject to standard IBAL assessment guidelines for the borrower on a standalone basis It is preferable to assess application in tandem with the family member’s application so that a complete picture of the transaction is gained by the credit assessor

Note: IBAL Gift Underwriting Guidelines will apply to the family member’s loan application

3.5.6 Non English Speaking Borrowers The following conditions must be met: • A qualified professional translation service is required to be used to interpret the documentation

and an appropriate certificate provided • The translator must be independent of the borrower

3.5.7 Retirees The following conditions must be met: • Repayment capability is demonstrated over the term of the loan at approval; and • An acceptable exit strategy is advised and evident at the time of approval. In addition, the following documentary evidence will be required to support an exit strategy: • Superannuation/Annuities statements; • Savings history; and • Proof of asset and investment ownership (e.g. property, shares, managed fund investments etc.)

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Note: For those mature age applicants who will rely on this income to repay the loan once they retire, their asset and liability position should also be carefully assessed to determine how the debt will be paid in the future – i.e. can the debt be cleared by: • Normal income cash flows, or • By sale of investment assets (e.g. shares/bonds/managed funds), or • By superannuation payout, or • Realisation of equity in other real estate investment. Income derived from a superannuation annuity may be assessed at 100% for the purpose of determining the loan serviceability.

3.5.8 Power of Attorney

3.5.8.1 Definition A Power of Attorney (POA) is a document that appoints one person (the attorney) to act on behalf of another person (Donor). Any lawful action taken by the attorney under the POA is binding on the Donor. There are currently two types of POA in Australia:-

• A standard POA which can be used to cover a variety of transactions, including dealing in property and loan applications. This can be revoked at any time and also ceases when the Donor loses his or her faculties.

• An enduring POA which continues even after the Donor loses his or her faculties. POA’s need to be registered in accordance with the laws of the state of residence of the person giving the POA.

3.5.8.2 Australian Citizens Living Overseas In terms of underwriting guidelines IBAL requires that Australian borrowers living overseas provide IBAL with a POA to act on their behalf in Australia to receive notices etc.

3.5.8.3 Other Borrowers – New Lending It is not IBAL policy to approve borrowings where the request for borrowing or the execution of all relevant security documents comes from an attorney acting under a POA. These underwriting guidelines apply to:-

• New borrowers • Existing borrowers where the original borrowing was approved on a first party basis but we

are asked to approve further borrowings under a POA executed by the borrower at a later date

• Guarantors • Third party security providers

Whilst an attorney can legally apply for finance on behalf of a Donor, IBAL does not wish to expose itself to any reputational risk in the event that the attorney is not acting in the best interests of the Donor.

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The only deviation to this policy is where it can be confirmed that borrowers/guarantors/third party security providers are overseas at the time of requiring security documentation executed. This is subject to:

• Borrower/guarantor/third party security provider to confirm by facsimile the execution of the documents by POA

• ING Solicitor to ensure the POA is registered. (N.B. In limited cases registration is not mandatory in Victoria)

• POA to specifically allow for execution of mortgages. • The identification of attorney through the normal process.

Authority to accept documents under power of attorney will be restricted to either:

• Managers and Team Leaders in the Credit Assessment teams • Senior DLA holders in both Retail (Level 4 and above) and MMF channel (Level 6 and above).

3.5.8.4 Existing Borrowers - Loan Account Transactions Where IBAL is asked to carry out normal administration tasks (e.g. account balances, rollover of fixed rate loans, release of security etc.) for a borrower under a POA given by the borrower to a third party, IBAL must sight the original of the POA and verify that it is registered as required under the various state laws. The POA must be produced on each occasion a request is made to deal with a borrower’s account together with a Statutory Declaration from the attorney stating that the POA has not been revoked. (Withdrawn/cancelled/expired)

3.5.9 Diplomats IBAL does not lend to foreign diplomats. No deviation permitted.

4 PURPOSE

4.1 Acceptable Purpose IBAL will consider loans for any worthwhile purpose including: - • Purchase or refinance of :

o Residential owner occupied property; o Residential investment property.

• Construction of residential property (Construction Loans were suspended for new business from 1 November 2015).

• Purchase of vacant land with intent to build a home • Non-structural home renovations. • Consolidation of other personal debts (including leases/ hire purchase) – (see Section 4.1.1). • Purchase of investments • Repayment of gifts (Where a loan purpose is to repay a gift the application is to be considered as

an Equity release (i.e. cash out) and assessed under those guidelines). • Business purposes, secured against residential properties:-

a. Refinance b. Equipment purchase c. Business purchase

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NOTE The front and special conditions pages (at the minimum) of the Contract of Sale are to be perused by the approving officer to ensure there are no rebates/incentives involved when a loan involves the purchase of: • Land; or • A house and land package; or • An “off the plan” unit (see Section 14.1.5 for definition). If there are, then the Valuer will need to be advised accordingly, and adjustments may need to be made to the security value.”

4.1.1 Refinance An existing residentially secured loan can be refinanced up to 80% LVR. This can include equity release, cash out or debt consolidation (e.g. personal loans, credit cards, etc. including lease, hire purchase, and business commitments). Any debt consolidation should be thoroughly assessed to ensure that the borrower(s) are not consolidating their debts in order to provide a short-term remedy to their financial difficulties. Rates, Valuer General’s and Department of Natural Resources (Qld only) Notices are required as standard supporting documents and should be perused for rate arrears. They will also assist in deciding whether a formal valuation can be waived by IBAL where adequate LVR coverage is ascertained from the rates notice, based on land value alone. (Capital Unimproved or Site Value/value of the vacant land). Refer to Section 17.1.2. The following conditions must also be met for all refinance applications: • An applicant has to provide the latest available bank statements of all the loans to be refinanced

evidencing good repayment history – bank statements must cover at least 6 months transactions, with the last transaction being no more than 1 month old at the time of assessment. Current loan account balance must be provided in the form of either an interim bank statement or account balance print-out clearly stating account name, account number, approved limit and current loan account balance (ATM receipts are not acceptable for this purpose).

• For the consolidation of credit cards, only the latest monthly statement is required. Any evidence of arrears should be viewed as adverse credit history ( see Section 13 Credit Check Reports);

• Identify and highlight if the applicant has changed financiers on more than one occasion in the last 2 years;

• No concurrent request for a 2nd mortgage will be allowed. • Where an adverse credit listing exists including evidence of arrears on the loan/s being

refinanced (see Section 13 Credit Check Reports for definition), approval can only be given by an IBAL DLA holder with full deviations authority, suitably mitigated via additional information/explanation.

• Specific attention must be paid where more than 6 separate credit enquiries are listed within the last 12 months. The credit assessor is to read the Credit Check Report, and satisfy themselves that the results do not adversely affect the applicant(s) creditworthiness, if necessary by seeking additional information/explanation.

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• Any redraw included in the borrower’s available limit with the existing lender, can be included in the refinance and is not classified as cash out.

4.1.1.1 Private Mortgages Private Mortgages are those mortgages not provided by Banks, Credit Unions, Building Societies (that would appear on APRA’s list of Authorised Deposit-taking Institutions) & Mortgage Managers. Private mortgagees do not generally provide loan statements. For those refinances where we are taking over a private mortgage, a letter from the mortgagee, plus the latest Council rates notice for the subject property are required. Additional care must be taken when refinancing a private mortgage to ensure the conduct of the loan to be refinanced is acceptable to IBAL. This may be evidenced by such items as a loan statement, a signed letter from the mortgagee if no statements are issued, or a statement of the account from where the payments have been paid, clearly identifying the destination of the payment.

4.1.2 Bridging Finance Bridging finance is acceptable on a short term basis to assist customers meet the challenges of buying and selling where settlements are not simultaneous. Therefore a borrower may require an increased level of debt during this period until the sale of their existing security has taken place and the level of debt can reduce to a more sustainable level Eligibility for Bridging Finance

• Existing Home Loan Customer • Proposed Loan is Owner Occupied • Existing Loan conducted within arrangements

Requirements:

• Maximum bridging period is 3 months • Maximum LVR is 80% during the bridging period • Maximum LVR Post Bridging period is 80% • Contract of Sale on existing security must have exchanged and be unconditional/enforceable

(cooling off period expired) • Rental income or negative gearing benefits cannot be used for either existing or proposed

securities • Residual loan amount to be confirmed using sale price less minimum selling costs of 10% • Borrowers must be able to demonstrate the can meet repayments on new and existing

facilities. Servicing

• Where borrower satisfies normal servicing requirements based on existing and proposed debt, can be approved by appropriate DLA Holder.

• Where borrowers do not meet normal servicing requirements based on existing and proposed debt but can demonstrate serviceability on the residual loan amount • Where borrowers can demonstrate the ability to make interest only repayments on the

proposed bridging loan during the short term bridging period, can be approved by DLA 6 or above

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• Where a servicing shortfall still exists but borrowers have sufficient cash reserves to supplement expenses during the bridging period, can only be considered by Credit Risk

• Approval must contain a condition which includes “Sale proceeds of (existing property being sold) to reduce total debt to a maximum of $xxx,xxx (residual loan amount) and sales proceeds placed in permanent reduction”

4.2 Unacceptable Purpose Unacceptable Purposes:- • Refinance of loans where there is evidence of arrears/overdue payments/direct debit: cheque

returns. • Provide working capital. • Property development of a commercial nature • “Takeout” of property development finance where servicing is reliant solely sale of asset • Pay taxation liabilities. (In general borrowing for taxation expenses is unsatisfactory however

where we can satisfactorily determine the reason for the liability and it would appear to be a one off expense, tax liabilities can be considered on a case by case basis using an appropriate repayment term aligned with the general reason for the expense)

5 MAXIMUM LOAN TERMS AND AMOUNT

5.1 Maximum total exposures The preferred maximum exposure is $3.0m with a minimum of $20,000-

5.2 Maximum Terms and Repayment Arrangements Loans approved under these guidelines have a maximum loan term of 30 years. Repayment arrangements can include principal and interest, interest only and for Broker /Direct Business interest in advance. The maximum interest only period is 5 years. (Investment loans can request additional 5 year interest only periods, refer Section 18.3, switches). Maximum LVR including any capitalised LMI premium:

• 95% for owner occupied properties with principal and interest repayments • 90% for investment properties with principal and interest repayments • 80% for loans with interest only repayments

(Further details on security types contained in Section 16)

6 REDUCED EQUITY FEE PRODUCT (REP)/LENDERS MORTGAGE INSURANCE (LMI) LMI is required for all loans where the LVR exceed 80%. (see Section 16. For security LVR limits) Prior to submitting loans requiring Lenders Mortgage Insurance to an insurer (i.e. outside DUA), the loan must in the first instance be approved by an appropriate DLA Holder

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6.1 Reduced Equity Fee Product (REP) This product has been removed from sale. Variations and/or increases can still be approved for existing accounts under these guidelines. (Refer Section 18)

6.2 LMI Delegated Underwriting Authority LMI Insurers may delegate, authority to approve mortgage insured loans on their behalf (DUA). For loans approved within DUA, they must first satisfy the Bank’s current Risk appetite and then comply with the Genworth LMI Master Policy DUA Criteria current at that time Failure to comply with IBAL’s policies, underwriting guidelines and DUA criteria may jeopardise the effectiveness and enforceability of our LMI cover (claims assurance) Note: Authority to operate under DUA does not extend to Mortgage Manager DLA’s. Lenders Mortgage Insurance (LMI) Insurers have separate “Underwriting Guidelines” which can be referred to as appropriate where applications fall outside these guidelines and therefore DUA.

7 CONSTRUCTION LOANS (Suspended for new business from 1 November 2015) N.B. Home construction on vacant land that was funded with a condition to construct within 12 months will still be considered for existing customers (Refer Section 7.1.4)

7.1 General Requirements Eligible for borrowers building a new owner occupied or investment property (subject to LVR restrictions), or where extensive renovations are completed to an existing dwelling with all works encompassed in a single fixed price building contract. Construction is to be for single dwellings only e.g. not duplexes. In all cases, IBAL will require to have first registered mortgage over the completed property. IBAL loan contracts for construction loans must clearly state that owner’s equity contribution is first utilised to meet progressive payments, as per funding proposal in the original loan application, prior to drawdown of funds from approved facility. Note: Various regulations/approval authorities apply in different States e.g. in NSW in addition to the normal Council Approval Officers, there are Private Certifiers who carry out this duty. Where mentioned herein, Council approval also infers approval by a certified Private Certifier. In addition, there may also be different Housing codes in each State, which may, for example, exempt some matters from requiring formal approval. These guidelines therefore must be viewed as subject to any local regulations.

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7.1.1 Target Market The target market for construction loan is as follows: • first home buyers with evidence of the deposit and a strong ability to repay; • second home buyers; • applicant(s) wanting to undertake extensive renovation; and/or • Investors with strong asset position who wish to build investment dwellings.

7.1.2 Unacceptable criteria • Construction of property that is zoned non-residential; • Loans to any owner builders • Kit homes / demountable homes /display homes/transportable/mobile homes • Non-fixed or cost plus contracts • Building contract that does not cover the complete construction (i.e. partial construction to be

done by owner or another sub-group contractor, “Labour-only” and “Managed Labour-only” building contracts etc.)

• Non approved construction • Refinance of partially completed construction • Construction of duplexes or units/townhouses (including Split Contracts or individual properties

under a Strata Title); or • Any property that is outside IBAL existing lending guidelines.

7.1.3 Purchase vacant land and commit to commence construction within 12 months Requirements:

• Loan serviceability to be assessed including a minimum of $200K construction costs. • Loan covenant to commence construction within 12 months • Available only for properties located in category 1, 2, 3 and exception postcodes • Maximum LVR of 80% for investment securities and 90% (including capitalised LMI premium)

for owner occupied securities • No Bank commitment to provide construction funding • Loan to be funded via the construction loan product • As a minimum, the front and special conditions pages of the contract of sale are to be

perused by DLA holder prior to final approval, for the existence of rebate clauses which may affect the valuation of the property.

7.1.4 Buy land and construct immediately Suspended for new business from 1 November 2015. Home construction on vacant land that was funded with a condition to construct within 12 months can still be considered for existing customers. This instance applies where the borrower has an executed fixed price and fixed time building contract, and we will be able to obtain an “on completion” valuation prior to any loan drawings. (See below for documents required for assessment) Requirements • Loans are to be funded via the construction loan product • IBAL will consider lending up to $500,000 in construction costs (i.e. excluding the land component).

Amounts over $500,000 will require RM approval.

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• Maximum LVR without LMI is 80% for properties located in category 1, 2, 3 and exception postcodes; subject to normal security LVR restrictions.

• Construction of investment securities above 80% is not allowed • Maximum LVR when secured by owner occupied securities and supported by LMI.

• 90% (including any capitalised LMI premium) for properties located in category 1 postcodes. Refer to the notes contained in Section 16.

• 90% (including any capitalised LMI premium) for properties located in category 2, 3 and exception postcodes

Building Contract An executed building contract is required prior to Formal Approval or funding, and must satisfy the following criteria: • It is a HIA/MBA approved contract; • It is in the name of the borrower; • The fixed price aligns with that on the application form • Industry standard progress payment schedule (typically 5 draw downs, however consideration

will be given where up to 6 are required); • Address of the property where the dwelling is to be constructed is the same in all

documentation; • There is a fixed time limit clause (must not be greater than 12 months from date the loan is

approved or from date the land loan is settled); and • A GST clause is included. Note: Consideration must be given to how any additional costs possibly outside the building contract (e.g. drive way, turf, floor coverings, window furnishings and fencing) are to be funded to complete the property to a basic/marketable position. IBAL may request a building costing report where there are uncertainties/complexities with regard to any aspect of the a contract price, payment schedule, if the contract price is over $500,000, construction is of an unusual nature uncommon or the contract between parties is not arm’s length. For information purposes below are links to a number of industry/association websites Housing Industry Association – www.hia.com.au Master Builders Association – www.masterbuilders.com.au Master Builders Association NSW – www.mbansw.asn.au Master Builders Association ACT – www.mba.org.au Master Builders Association VIC – www.mbav.com.au Master Builders Association WA – www.mbawa.com Master Builders Association SA – www.mbasa.com.au Master Builders Tasmania - www.mbatas.org.au Queensland Master Builders Association – www.masterbuilders.asn.au Master Builders Association NT – www.mbant.com.au

Documents required for assessment For the purpose of credit assessment, the following are required supporting documents for construction loans:

http://hia.com.au/

http://www.masterbuilders.com.au/

http://www.mbansw.asn.au/

http://www.mba.org.au/

http://www.mbav.com.au/

http://www.mbawa.com/

http://www.mbasa.com.au/

http://www.mbatas.org.au/

http://www.masterbuilders.asn.au/

http://www.mbant.com.au/

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Builder’s quotation and/or tender document (to be held at initial assessment, in the absence of an executed fixed price contract);

Evidence of borrower genuine savings and funds contribution must be verified in full at the time of assessment (savings plans are unacceptable)

Draft plan/specification Documents required for first progressive drawdown Prior to the first progressive drawdown for construction costs to builders (Refer Section 7.1.10), the following documents must be sighted: • HIA/MBA approved executed building contract (Refer above) • Evidence that the builder holds a current Builder’s Licence (i.e. Copy of Builder’s Licence or print

out from the appropriate on-line website) • NSW- www.fairtrading.nsw.gov.au • VIC- www.buildingcommission.com.au • QLD- www.qbcc.qld.gov.au • SA- www.cbs.sa.gov.au • WA- www.commerce.wa.gov.au • TAS- www.justice.tas.gov.au • ACT- www.actpla.act.gov.au

• Council approved and stamped plan/specification • Insurances:

- Public Liability Insurance is required – for a minimum of $5 million and, - Appropriate building insurance based on the requirement for each state (listed below), which covers the loss or damage to materials and work during construction. The policy must include ‘Insurance Amount (equal to or not less than the Building Contract price)’, ‘Name of the owner’, ‘Name of the registered builder’ and ‘Australia wide or a region inclusive of the location of the property being constructed’ • Builders Contract of Works Insurance (VIC) • Home Warranty Insurance (NSW, QLD) • Builders Indemnity Insurance (SA) • Home Indemnity Insurance (WA) • Housing Indemnity Insurance (TAS) • Builders Warranty Insurance (NT)

Variations to a Building Contract Variations to building contracts can be considered on a case by case basis. Borrowers must advise IBAL of any variations prior to agreeing to terms and executing a contract variation with the builder. Funds to complete must be evidenced at the time of assessment of the variation (no savings plans) Caution: where LVR extends from below 90% at original approval, to above with the inclusion of the variation. Refer above for additional requirements in place for constructions loans above 90%LVR.

7.1.5 Construction only (i.e. the applicant already has the block of land on which the house is to be constructed). See Section 7.1.4 for requirements

http://www.fairtrading.nsw.gov.au/

http://www.buildingcommission.com.au/

http://www.cbs.sa.gov.au/wcm/

http://www.commerce.wa.gov.au/

http://www.justice.tas.gov.au/

http://www.actpla.act.gov.au/customer_information/industry

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7.1.6 An increase to an existing vacant land loan (i.e. where applicant has already purchased the vacant land with IBAL assistance, and now seeks construction finance to honour their commitment to commence construction within 12 months). See Section 7.1.4 for requirements

7.1.7 Where extensive renovations are proposed to the existing dwelling (an “on completion” valuation is required on the security property in order to comply with the LVR underwriting guideline). See Section 7.1.4 for requirements

7.1.8 Valuation The property is to be valued on the basis of: • “as is”; and • “On completion”. Value to be used in LVR calculation is the LESSER of “on completion” value or value of the land plus cost of construction. The value of any incentives of any kind offered by the builder or any other party is to be deducted from the valuation before calculating the LVR. Examples of such incentives are: • Cash back; • Free legal and stamp duty; • Free white goods; or • Free landscaping. Prior to the initial construction related drawdown the valuer must confirm that the executed copy of the building contract and council stamped plans/specifications, are in line with the quote/ non-binding building contract that was used in completing the original valuation report. For construction loans over 90% LVR, an additional progress inspection is required prior to the release of the third drawdown. The last Progress Payment valuation report must be read in full, including any adverse commentary being appropriately mitigated, by the Credit Assessor prior to being accepted and marked with ‘Read and Relied Upon’. It should also confirm the following: • The property has been completed in accordance with the original council approved plans and

conditions – attaching a copy of the council’s certificate of compliance or equivalent; or • if this is not available then comment on and provide copies of the following documents:

• An engineer’s certificate; • A survey report; and • Pest treatment report

• The initial valuation is still valid; and • Written evidence that the builder has signed over to the borrower all warranties for the electrical

items and any other items are to be attached to the report.

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7.1.9 Progress Payment Request Progress payments are to be released on joint application of the borrower and the licensed builder. To ensure that the borrower is fully aware of the progress payment request from the builder, it is required that the builder forward the payment request to the borrower for approval. The borrower is required to sign and date the payment request and forward the signed request to IBAL for processing. Progress inspection reports are only required if there is reason to doubt the progress of the construction and cost-to-complete. Prior to the first progress payment the following must be completed. • All relevant loan conditions and documentation must be certified by ING Solicitors/suitable DLA

Holder • The valuer must confirm that the executed copy of the building contract and council stamped

plans/specifications, are in line with the quote/ non-binding building contract that was used in completing the original valuation report

• A builder needs to complete a progress payment request which is to: • Be in writing on the letterhead of the builder; • Detail the builder’s bank account to be credited; • Provide a break-up of the amount claimed highlighting any price variations; and • Be signed and dated by the builder.

Before processing a progress payment request- • All drawdowns must confirm the construction is progressing in line with the Building Contract,

and additional funds of $x (not exceeding the scheduled drawdown amount contained in the building contract) are due for release to the builder.

• At all times, sufficient funds must be retained by IBAL to ensure completion under the Building Contract. Where an overrun is identified during the drawdown phase, the borrowers must contribute additional funds from other sources. Overruns must be paid immediately and prior to the release of any IBAL retained funds.

• Confirm we have been authorised by the borrower to process the progress payment request; • Confirm that the request is within guidelines and is in order (e.g. the loan is not in arrears; loan

covenants are complied with etc.); • Valuer has recommended payment of the request (final drawdown only); • Payment is for completed work only that is fixed to the building; and • Any variation is to be paid for by the borrower from his/her own funds. The building contract should include an industry standard progress payment schedule (typically 5 drawdowns; however consideration will be given where up to 6 are required). Below is a guide, of how the progress payments could be made at the different construction stages:

Stage of Construction Amount of Payment (% of Total Construction Cost)

Site works and slab poured or equivalent 20% Frame stage 20% Brickwork completed 20% Lock-up; internal linings completed 25% Practical completion 15%

Prior to the final progress payment, the following documentations are required: • Builder’s progress payment report is confirmed and signed by the borrower;

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• Council or Private Certifier, certificate of compliance/occupancy or equivalent attached to the final progress report for final drawdown (The requirement to issue this certificate varies from state to state);

• Engineer’s certificate (if applicable); • Survey report (if applicable); • Pest control certificate (if applicable); • Any other requirement(s) that may be set out by the valuer in his/her progress inspection

reports; • A copy of the insurance policy against fire and damages (cover note is not acceptable) and note

the following: • Insured for the amount as recommended in the valuer’s last valuation report; • It is for replacement and reinstatement of the dwelling built; • It has not expired; and • IBAL interest is noted on the policy. • Borrower has confirmed in writing the product to which they wish the Construction Loan to

convert. A loan file is to be transferred to IBAL Collections Department if and when any of the following occurs: • Borrower fails to make interest payments on the loan for 2 months or 60 days; • Borrower fails to have sufficient funds left to complete the construction; • The builder has become insolvent or “walked off” the site; • The construction has not commenced within 12 months from first drawdown/settlement of land

loan component; • Not able to complete the construction for any other reason (e.g. material variations in the plans).

8 FUNDS TO COMPLETE, GENUINE SAVINGS AND GIFTS

8.1 Funds to Complete For all property purchases it is mandatory to obtain verification of funds to complete the purchase, including costs. (e.g. Bank Statement, Letter from Solicitor, evidence of funds available in a line of credit, evidence of real estate sale price/existing debt). Borrowers who have saved a deposit are more likely to be prepared for their new loan and be able to better manage in difficult circumstances.

8.2 Genuine Savings In addition to the above Funds to Complete requirement, for LMI loans genuine savings are also required when the LVR is over 85%. Genuine savings of 5% (based on a percentage of the purchase price) is required to be verified over the last three months.

Genuine savings can include: • Funds held or accumulated regularly in savings/investment accounts or shares, for 3 months or

more and held in the borrower’s name(with Bank/Share statements to be provided as evidence) • Equity in an existing residential property (Ownership evidenced by a rates notice). • Borrowers who own other residential real estate unencumbered (which is to be confirmed at

time of application via copy of title deed) • May consider a gift / inheritance to make up the shortfall in savings, where savings have been

sacrificed by making accelerated loan repayments (e.g. Personal Loans) over the last 3 months. In these circumstances, the existing savings plus the value of excess repayments must be equal

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to or greater than the minimum savings required. (IBAL is required to retain satisfactory evidence of savings and excess repayment verification on the loan file).

For a borrower who has demonstrated their ability to accumulate the required genuine savings over a period of less than 3 months (which could include a bonus or commission payment), then evidence of rental payments over the last 3 month period can be used as a mitigant to accept funds held for less than 3 months (with a Letter from a Real Estate or Bank Account Statement provided as evidence). Genuine savings is not to include: • First Home Owners Grant • Gifts and inheritance unless the funds have been held in the customer’s account for at least

three months • Proposed savings plans or projected savings of any kind • Sale of assets (other than real estate) for example; motor vehicles • Personal loans • Builder’s rebate/incentive • Trade dollars • Funds held in company/business accounts • Any marketing "cash back" offer, even if they are a condition of the purchase contract.

8.3 Gifts Any gift that provides borrower(s) with their deposit (equity) must be supported by completion of the ING DIRECT Gift Policy Statutory Declaration (or equivalent) from the gift provider, stating that the monies are a non-refundable, non-repayable gift. NOTE: This form must be used as it contains the necessary Privacy Act requirements. Assessors must be comfortable with the genuineness of any gift and if doubt exists confirm with: • a copy of a Bank account statement (not Internet or ATM produced) in the name of either the gift

provider or the Applicant; clearly showing the amount of the gift; • a Solicitor’s letter confirming the funds are held in their trust account. If the gift is from overseas sources where it is difficult to obtain the Statutory Declaration, the borrower is to provide the Statutory Declaration along with the aforesaid evidence of the funds being held within an Australian Bank account in the name of the gift provider or the Applicant.

9 INCOME TYPES There are basically 3 broad income groups: • Pay-As-You-Go (PAYG) Income Earners ; • Small Business / Company (Self-employed); and • Investors where major income sources include, inter alia, rental incomes and incomes derived

from other investment activities. Consideration needs to be given to the percentage of base income versus variable income types used to satisfy the serviceability test. Primary focus should be on base income with care to be exercised when a significant percentage of variable income is required.

9.1 PAYG Income Earners-Minimum Employment Requirement NOTE: Full time employment is 38 hours per week (or Award / industry equivalent)

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• Minimum 3 months (12 months with LMI) with current employer ; or • Minimum 2 years in a similar role/industry utilising a similar skill set

Note: The above requirements apply to permanent full time employees, for employees on different terms, such as part-time refer to Section 10 Income Verification Probation Where borrower is still on probation, care should be exercised to establish history of employment/income to mitigate accepting the probation period. Possible mitigants to consider (but not limited to): • The borrower is in a similar role/industry and/or has accepted a promotion, • Increase in base income is considered reasonable, say up to 20% • 12 months good conduct on existing loans

9.2 Small Business/Company (Self-employed) Incomes This type of income is acceptable if the applicants are sole owners, partners or proprietors of small business, or there is a clear agreement regarding partnership income/distribution of profits. In the case of shared income, only the borrower’s share should be included. This may also include the net income of any company that is a family investment company and/or a trustee company for a family trust fund. A minimum of the last 2 financial years’ incomes (i.e. defined as 1 July to 30 June the following year) should be taken into account when assessing the loan serviceability of a self-employed applicant. The most recent year’s financials are to be no older than 19 months. If the applicant has a share of a large business / corporation where there may be significant issues of capital expenditure, working capital and more complex accounting, the business income should not be included for the purpose of calculating loan serviceability. Unless a specific case can be made, a borrower’s loan serviceability should be derived on the basis of remuneration received from the company, e.g. salary, director’s fees, dividends, etc. to identify recurring incomes or distributed incomes from the business/company to the owner. In assessing company net profit, attention must be given to the following points: • Net profit is income received in the normal course of business. • When the profit before tax figure is used, then the current company tax rate should apply to

derive the after-tax position. • There must be no double counting, e.g. net profit is derived after deduction of Director/Consulting

fees, salaries or other forms of remuneration paid to shareholders/partners/directors in the business.

• The net profit used for the assessment of loan serviceability should reflect a company’s true cashflow position, rather than purely an “accounting” profit in the context of accrual accounting.

Applications outside of the above criteria must be referred to appropriately authorised DLA Holders for sign-off.

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9.3 Other Incomes Proof of all other income, such as superannuation, pensions, annuities, income from property investments, income from share portfolios or income from other family investments must be substantiated at the time of application. For those applicants who will rely on this income to repay the loan once they retire, their asset and liability position should also be carefully assessed to determine how the debt will be cleared in the future – i.e. can the debt be cleared by: • Normal income cash flows, or • By sale of investment assets (e.g. shares/bonds/managed funds), or • By superannuation payout, or • Realisation of equity in other real estate investment. • DLA Holder needs to undertake a “reality check” to ensure the proposed return on investment

used for servicing is reasonable and sustainable given current market conditions and based on average returns over the last few years

9.3.1 Superannuation Income derived from a superannuation annuity may be assessed at 100% for the purposes of determining loan serviceability.

9.3.2 Other Investment Incomes Investment incomes (e.g. share portfolio and annuities other than superannuation) are assessed at 80%. • These additional requirements must also be met: • Evidence of investment income must be provided; • Must have similar income for the last 24 months; • Evidenced by the last 2 years’ tax returns; and • A common sense approach should be applied to this income to ensure that the returns are

accepted at a reasonable level, based on long term average (e.g. say 4%pa of current share portfolio).

9.4 Unacceptable Income Types The following income types are not allowed in calculation of loan serviceability: • Social Security Payments (e.g. unemployment benefits, new start, aged pension, carers

allowance); • Maintenance / Child Support that cannot be verified with the Child Support Agency or where

verified has less than 5 years to run. (Section 10) • Undeclared cash income not evidenced in tax returns (e.g. Boarder income and sub-letting; • Irregular income (e.g. odd jobs, income outside the types detailed in Section 10); • Drawings / directors loans are not acceptable as it is a reduction of capital and not income. • Income from any illegal pursuit. Please note the following in confirmation of incomes: • Applications where reliance is placed on incomes of guarantors or third-party borrowers must be

referred to appropriately authorised DLA Holder for consideration. • If sufficient documentation is not provided or if any doubt exists regarding the information

provided, contact the originator of the document to confirm details of income. • Please ensure that all Tax File Numbers are removed from copies taken and kept on file.

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• Tax agent or accountant prepared tax returns are acceptable. The return must show the following: • Tax agent reference number • Name and address of tax agent or accountant • Accountant or tax agent disclaimer.

10 INCOME VERIFICATION Incomes covered in this section Permanent Full Time Bonus/Commission Shift/Overtime Car Benefits Allowances Salary Sacrifice Salary Packaging Rental Income Self-Employed Permanent Part-time Second Job Contract Income Casual Employment Family Tax Benefit Child Maintenance Veterans Affairs/War Widows/Carers Pensions Overseas Income Where any doubt or question exists to the authenticity/validity of the verification documentation, employment verification via telephone is to be completed (refer Section 10.1). NOTE: Notwithstanding the following sections, where the borrower (s) is employed by family, or through a family owned or family controlled company, payslips must be supported by taxation returns and ATO assessment notices Income Type (% used for Servicing)

Verification Required

Permanent Full Time (100%)

• Where using base income only, verification using the latest 2 payslips (no older than 60 days)

OR • Three months bank statements showing a regular salary credit, with the name of the

employer OR

• Provide latest payslip, preferably with YTD figures (less than 1 month old); and • Provide last year’s tax return or assessment notice or group certificate. As a minimum payslips should show the borrower’s name, employer’s name and ABN.

Bonus/Commission (80%)

When expected to be a regular component of a borrower’s salary. • Regular monthly/quarterly basis, income to be evidenced for 12 months. • Annual/irregular payments, income to be evidenced over 2 years. Note: Bonus / Commission payments should be limited to no more than double an applicant’s base income and if a significant increase from one year to the next is evident, an explanation of the cause(s) should be obtained and retained on file.

Shift/Overtime (80%)

When expected to be a regular component of a borrower’s salary and if evidenced over 12 months (all types of industries).

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Car Benefits If the applicant’s employer is providing a fully maintained car (not part of packaged income) then a maximum of $3,500 per annum (post tax) can be included in loan serviceability calculations. This benefit must be evidenced by the Employment Contract or letter from employer.

Allowances-PAYG income (80%)

Allowances are acceptable however when utilising allowances for servicing purposes, care must be exercised to identify allowances that are associated with reimbursement of expenses (e.g. tool, uniform, entertainment), where generally these allowances would be 100% offset against an expense versus allowances to compensate for specialties of the occupation. (e.g. remote living allowance) Example: Military / Service Allowance is considered acceptable as this allowance compensates a member of the armed forces for the unique requirements that service life may impose on an individual and his or her family. Allowances must not exceed 25% of the applicant’s salary income.

Salary Sacrifice Some occupations e.g. Clergy, Health, Charity workers can elect to have only a portion of their income “salary sacrificed” i.e. deducted before tax. The “deducted” payments can be allocated for mortgage payments, utility bills or the like. If a borrower presents with a portion of their income “salary sacrificed”, this portion can be inserted into the Family Tax Benefit box of the servicing calculator so as not to be included in the income to be taxed. Care must be taken to obtain confirmation of the amount, either from documentation already held (e.g. Payslip, etc.) or a letter from the employer. Many PAYG employees are also able to salary sacrifice amounts for superannuation – if a borrower says he can cease doing this to be able to meet servicing criteria, this must then be added to the taxable portion of their income.

Salary Packaging

Total package excluding the compulsory employer superannuation contributions can be used as the gross income. Unless clearly indicated on documentation already held (e.g. Voluntary Superannuation on Payslip etc.) all non-cash components of the package are subject to confirmation via letter from the employer that the borrower has the option to convert these items to cash.

Rental Income (65%)

Rental incomes are assessed at 65% of current gross or anticipated receipts. Acceptable evidence is:

• Current lease agreement, or • Rental statement, or • letter from licensed real estate agents, or • panel valuer’s estimates of the likely rental income.

When rent is derived from a share in an investment property then only the borrower’s share of rental income is allowed. Caution should be applied where rental guarantees are involved or when the rental income appears high when compared to the value of the property. We need to ensure the income is sustainable and not linked to a short term venture ( eg mining, display homes)

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Self-Employed (Variance in income) (Add-backs)

• Latest 2 years' business, company and personal tax returns • Latest 2 years' financial statements (including Profit & Loss Statement and Balance

Sheet) Most recent year’s financials are not to be older than 19 months. Credit assessors are urged to request a copy of the latest ATO assessment notice (or if not applicable, evidence of tax return lodgement) if there is suspicion of the integrity of the submitted tax returns. The purpose of requesting this additional documentation is to validate that, firstly, the return was lodged and assessed and, secondly, the assessed taxable income was akin to the declared amount in the corresponding tax return. IBAL reserves the right to request interim financials and/or Business Activity Statements if the need arises. An average of the last two years income will be the default position for use in serviceability calculation. A credit assessor will need to consider the following when making their credit assessment to determine whether the default position is appropriate given the circumstances presented by the borrower Where the variance between the last two years is ≤ 20% it is acceptable to consider the most recent year’s income figure in servicing if required. Where the income has decreased from the previous year without satisfactory explanation, it is appropriate to adopt the most recent year's income in your servicing assessment. Note: Where the business/company’s income has increased/decreased substantially over the last 2 financial years (i.e. variance of greater than 20%), an explanation of the cause(s) should be obtained and retained on file to support the treatment of income used in the serviceability calculation.. The following add-backs are permitted in loan serviceability calculation: • Incomes/Salaries (not already included in calculation of personal gross incomes); • Interest paid (as evidenced within the Profit and Loss Statement) can be used as an

add-back where the associated debt repayments are included in the applicants servicing position (ie Include repayment/commitment on debts and allow add-back of interest on the same debts);

• Superannuation contributions in excess of statutory level; • Depreciation (where underpinning the replacement cost of an “essential asset that

assists in the generation of business income”, an appropriate haircut may be considered on a case by case basis) ;

• Non-recurring expenses (explanation required from company accountant as to the nature of the expenses).

Note: When adding back “excess Superannuation”, “interest paid on debts no longer

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current” and other “non-recurring expenses”, these should be added back as “Taxable Income” for the company in the servicing spreadsheet. The following are examples of add-backs not permitted under these underwriting guidelines: • Rentals paid for leased assets that the company does not own; • Revaluation of assets; • Research and Development. For additional information refer Section 9.2

Permanent Part-time Incomes (100%)

As per Permanent Full Time income earners.

Second Job (100%) As per Permanent Full Time income earners, when their term with the current employer is 12 months or greater.

Contract Incomes (100%)

If they have worked in the same role/industry utilising a similar skill set for a minimum of 2 years, as per Permanent Full Time

Casual Employment (100%)

• Evidence of income as per PAYG (Base Income) • Caution should be exercised where casual income is the sole source of income LMI Loans- Minimum 12 months in current employment. Other Loans • Minimum 12 months in current employment; or • Minimum 2 years in the same role/industry utilising a similar skill set.

Family Tax Benefit (100%)

Where an applicant is receiving a FTB payment (paid via the Family Assistance Office or the Australian Tax Office) for a dependant child / children, this payment may be used as supplementary income for the purposes of mitigating marginal serviceability where the following conditions are met:

• The payment must be a FTB payment (Part A and Part B only) made by the Federal

Government. • Maximum age of the dependant child / children to be 13 years old. • Evidence of the payment must be provided through provision of the statements

issued by Family Assistance Office – fortnightly or annually. • FTB (Part A and Part B) should only be considered as supplementary income source to

the application, where the main stream of income is from any of the following: • PAYG • Self-Employed • Rental income • Investment income

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Child Maintenance Income (100%)

• Verification that the maintenance agreement is registered with the Child Support Agency

• Maximum age of maintained child to be 13 years old and evidence that agreement has at least 5 years to run. (to age 18).

• Evidence of consistent payments through the past six months bank statements. • Should be considered supplementary income and used to mitigate a marginal

servicing position Veterans Affairs/ War Widows/ Carers Pensions (100%)

Veterans Affairs/War Widows/Carers Pensions incomes are subject to:- • Satisfactory evidence from relevant Government Department. • These payments should only be considered as supplementary income source to the

application, where the main stream of income is from any of the following: • PAYG • Self-Employed • Rental income • Investment income

Other government payments such as unemployment (e.g. New Start) and sickness benefits are unacceptable for the purposes of determining serviceability.

Income generated overseas and paid in foreign currencies (80%)

• Most recent tax returns from country of residence together with evidence of employment and salary/income payments (Bank statements/pay slips/employment letter) to confirm income.

• Last 2 years tax returns to confirm Australian income (if applicable).

10.1 Phone Verification Where any doubt or question exists to the authenticity/validity of the verification documentation detailed in Section 10 the following actions should be completed:

a) Obtain the employer’s telephone number from an independent source. E.g. White/Yellow pages

b) Call the employer and speak to the appropriate representative, to confirm the applicant’s :- • Employment status (.i.e. full time, part time, casual etc.) • Length of employment • Occupation or role • If possible income details (.i.e. base, overtime etc.)

c) All material aspects of the discussion, including name and position of person providing confirmation are to be documented and retained with the loan application.

d) Credit assessors are then able to compare for consistency; the results of the telephone call and information/evidence provided within the application by the applicant.

e) Where an employer refuses to confirm any details or if inconsistencies exist assessors should • Seek an explanation and/or request additional evidence; or • Accept, noting mitigants/reasons. NB Although not a deviation, only a DLA Holder

with the level of some deviations can take this action.

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11 COMMITMENTS AND LIVING EXPENSES

11.1 Commitments

11.1.1 Existing Mortgage Loans Any pre-existing loan where the new applicant is a co-borrower can be factored into the servicing calculation based on 50% of the pre-existing loan when we obtain current evidence that the co-borrower can service the remaining 50% of repayments. For existing IBAL & MM loans this could include referring to the original assessment when there is no reason to doubt this position has changed. If the above cannot be satisfied the existing debts and repayments should be factored into the servicing assessment of the new loan at 100% (i.e. joint and severally).

11.1.2 Personal Loans and other Loans All personal loans and other regular loan commitments are to be included in the serviceability assessment as per their contracted repayment arrangements

11.1.3 Credit Card Repayment Credit Card expenses are to be assessed at 3% of the limit per month.

11.1.4 Consideration of Negative Gearing on Tax Where it is advised that the ownership of the investment property (either existing or to be purchased) is not in equal shares, the “Max Allowable Deductible Payments” field within the Servicing Calculator can be amended to reflect the actual % ownership. (i.e. the benefit apportioned according to ownership). Ownership will need to be confirmed as a condition of approval where the “Max Allowable Deductible Payments” is amended. Note: There is no requirement to explore or condition the ownership of an investment property where serviceability can be demonstrated using the default negative gearing methodology contained in MAPS and the Servicing Calculator; which apportions the negative gearing benefit equally between all borrowers (i.e. equal split).

11.1.5 Margin Loans A margin loan commitment can be excluded from the serviceability test where investment income derived from shares supporting the margin loan is not included in the servicing test. Where any investment income derived from shares supporting the margin loan is required for servicing purposes and/or a credit assessor has concerns over the impact the margin loan may have on the borrowers financial position or ability to service their commitments, the following treatment can be adopted; • an interest only repayment on the full Margin Loan limit calculated at the IBAL assessment rate

to be included as a commitment and • include investment income confirmed in line with the current underwriting guidelines (Refer

Section 9.3.2 Other Investment Incomes) • negative gearing benefits can be attributed to the Margin Loan limit, where required.

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11.1.6 Vendor Finance Occasionally vendors will assist purchasers (our Borrower) by offering a portion of the purchase price under Vendor Finance arrangement. This means that not only does the purchaser have an obligation to IBAL, but also to the vendor. These arrangements are not normally reflected in the Contract of Sale, and so will not be readily identifiable unless we seek evidence of funds to complete (refer Section 8.1). The arrangement is usually secured by either the lodgement of a Caveat or second mortgage on title. IBAL is not generally accepting of these arrangements as it weakens the equity/savings position, it may limit the Borrower’s ability to repay our loan, and also our ability to realise our security property if the need arises. Unless the arrangement is of a formal nature, with regular repayments which can be included and meet our servicing requirements, and we have a Deed of Priority in place, applications where Vendor Finance is involved are outside guidelines.

11.2 Expenses As a guide, total commitments should include expense items such as the following: • All existing debt repayments including credit cards and any interest free purchases (in joint or

individual names); • Hire purchase/lease repayments • Rent or board that will still be payable after loan approval • Maintenance payments, irrespective of whether a court order exists • HECS debts • Taxation liabilities- Care should exercised when dealing with applicants with significant taxation

liabilities. • Living expenses

11.2.1 Living Expenses Customer living expenses are calculated using the higher of Customer Declared Living expenses or ING DIRECT’s Living Expense Benchmark. The benchmark is subject to annual review or on an ad-hoc basis as the need arises. ING DIRECT’s Living Expense Benchmark do not include current Rental Expenses.

11.2.2 Living Rent Free Where applicants declare they are to live “rent free” in an unrelated property to that being purchased/refinanced, care should be taken when assessing affordability and judgement will need to be exercised in these circumstances. An allowance for rent or board being paid may be included in loan serviceability assessments where rental income is required to service the loan and one of the following circumstances can be identified: • The applicants have been living/renting independently for a period of time, prior to purchasing

the proposed property • The applicants have indicated that they are now/will be residing with parents rent-free • Applicants have indicated living rent free to be an indefinite arrangement

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• Where the rent free arrangement does not make sense or would not appear sustainable In these circumstances you should include a rent/board allowance when assessing loan serviceability. The following allowance can be used as a guide: 1. Sole applicant - $910 per month ($210.00 per week). 2. Two applicants - $1,040 per month ($240.00 per week). 3. Two applicants and dependant children - $1,690 per month ($390.00 per week). Please note the above guide is only an estimation and does not factor in issues such as differences in geographical locations and economic factors. It is not the intention of this underwriting guideline to disadvantage the “first time purchaser” where the transaction makes sense, that is: • A young person purchasing an investment property for the first time, who presently resides at

home with parents and equity contribution towards the purchase, is evident and verified. • A young couple presently residing at home with parents, wishing to purchase a property for the

first time, where the equity contribution is evident and verified.

12 SERVICEABILITY An applicant must demonstrate that he/she can service the loan or that the business/incorporated borrower (if applicable) is a viable entity with an ongoing ability to service the loan commitments. If there is material doubt about the loan servicing capability (interest and principal repayment) of the applicant(s) CO & MM staff must not lend based only on the security LVR coverage for a loan. (i.e. LVR does not mitigate deficiencies in serving.) Loan serviceability calculations are based on post-tax income, and to pass loan serviceability assessment, borrowers must meet the net income surplus test. .

Post Tax Income – Total Commitments* (including Living Expenses) = Net Surplus

Minimum Net Surplus requirement currently stands at $1

* Calculated using a buffer of 2.0% or floor assessment rate of 8%, on all Mortgage debt commitments- including IBAL/MM/External Mortgages (Refer Section 12.1 and the ING Loan Serviceability Assessment Model for details).

12.1 Loan Commitments This section is applicable for:

• mortgage loans being applied for; • all existing IBAL & MM mortgage loans; • other (non-IBAL) existing mortgage loans.

All the applicant’s mortgage loans must be included in the servicing calculation and assessed on a Principal & Interest basis, over a maximum of 30 years, at the IBAL Assessment Rate. Consideration

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should be given to the impact of any interest only period granted during a loan term and the customers’ ability to repay the principal over the remaining loan term. The IBAL Assessment Rate is the higher of the Mortgage Simplifier Rate (Broker), Reference Rate (MM), plus a buffer (currently 2.0%) for future interest rate increases, OR the floor assessment rate (currently 8%).

12.2 Exceptions As per the Retail Credit Sub-Policy, exceptions to the net serviceability test can only be considered by Risk Management.

13 CREDIT CHECK REPORTS Credit check reports are one of the items used to assess the credit worthiness of the applicants. It is therefore important to obtain a report on all applicants including cross referenced files. For small businesses, a report will be obtained on the applying company, related companies and all guarantors/directors. A signed Privacy Consent Form must be held in the file prior to requesting a credit check report on an applicant/guarantor. Credit check reports (not older than 1 month from the date of loan assessment) must be provided to the DLA Holder for all applicants and guarantors (whether they are individuals or companies). Where the borrower is self-employed, a satisfactory credit check report will be required for the borrower, any guarantors (if applicable) and all private companies or firms with which that person is associated (e.g. Company Director/Business proprietor). Where the borrower is a director of a public company (listed on ASX), it is not necessary to obtain a company Veda report. Where we are aware that an applicant has changed their name (marriage, professional/ stage name, etc.), then a credit check report must be obtained under all the applicant's names. Veda credit bureau report – a listing of all loan and credit enquiries, defaults, legal judgements and credit disputes for individuals, small businesses and companies operating in Australia. Information includes company structure, directorships, and major shareholdings. The report includes links to the Australian Securities and Investment Commission (ASIC), Business Name Extracts, Telstra Electronic White Pages and Investigative Reports. The information on this report is maintained for up to 7 years after the lodgement date. Any adverse credit listing in the report will render the application outside these Underwriting Guidelines. Should an assessor believe an application is worthy of consideration as a deviation, then a full explanation regarding all listings and the status at the time of application will be required. For the purpose of these guidelines adverse credit is generally defined as: • Any arrears on loan statements for refinance (either current arrears or any time in the previous 6

months); • Any evidence of unexplained missed payments (additional/default interest, late payment fees,

and odd payment amounts when instalments are made by periodical payments) ;

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• Where there is evidence that the customer has been in hardship in the previous 12 months (Care to be taken to ensure borrowers are financially stable)

• Undischarged or recently discharged (less than 24 months) Bankrupts. ; • Default listings on credit check report (either borrowers or guarantors); • Unpaid debt listings on credit check report, or paid within the last six (6) months (note – these

must be treated on a case by case basis); • Any court judgements, actions, writ or summon; • Current winding up petitions; • Clearouts; • Liquidator appointed; • Receiver or Manager appointed; • Part X (ten) or scheme of arrangement; Only an IBAL DLA Holder with full deviation authority can sign off an application with an adverse credit listing. Suitable mitigants by way of additional information /explanation are to be recorded. If the report reflects Judgement, Bankruptcy or Liquidation, then this is generally not acceptable. Full explanation supported by documentary evidence for review and approval by an IBAL DLA Holder with full deviation authority will be required. NOTE: All borrowers must have a minimum of 24 months clear record since being discharged from Bankruptcy or Part X Arrangement. Where adverse credit is evident 12 months loan statement for any existing loans, may be beneficial. Equally, a large number of recent credit enquiries (i.e. more than 6 separate finance enquiries within 12 months. Note: Enquiries to a variety of lenders, for a similar amount, may be treated as one enquiry) should be treated with caution as this might indicate that the applicant is an active ‘credit seeker’. Please note the following: • If no satisfactory explanation is provided, the loan will be declined. • Care should be taken when defaults have been cleared just prior to lodging the application

because this could have been done just to advance the application. • Applicants seeking a loan with an LVR in excess of 80% where their credit check report reveals

any aspects of adverse credit, will be considered on a case by case basis. A credit check cannot be waived. Ban Period At an individual’s request a Ban Period can be placed on a person’s credit check report due to concerns regarding fraud. Instead of receiving a credit check report, a message indicating a ban is in place will be received. No loan assessment can occur until the ban period ends and a complete credit check report is received.

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14 SECURITY

14.1 Acceptable Security

14.1.1 First Mortgages It is mandatory that IBAL holds a first registered mortgage as prime security in support of any residential loan application. The property must be an acceptable security type and within the specified LVR guidelines. Any property not meeting specified criteria will need to be approved by an appropriate authority level. A second mortgage is only permitted as collateral (top-up) security with the exception of Defence Service Homes, where a second mortgage is acceptable as a prime security. (See Section 14.1.12 – Second Mortgages) NOTE: For Units and Apartments, preferred living area is 60 m2, in some situations car spaces or garages attached to a unit/apartment may be on a different title to the actual residence. In these cases a Mortgage over the additional title should also be taken.

14.1.2 Normal Residential Dwelling Residential dwellings are defined as land and buildings which are free standing; attached/ semi-detached or strata/community-titled/company title, unit, SEPP 5 zoned dwellings also known as "Over 55's" or “Seniors Living” dwellings commonly found in a specific community environment (but not to be confused with a Retirement Village), and are used exclusively for the purpose of private housing and can be either leased or owner occupied. All major facilities must be connected (e.g. road access, power, phone, water etc.) with a certificate of occupancy (or its equivalent) issued for each security property. Residential dwellings include purpose built residential units located in developments which might be zoned commercial/business due to commercial units/shops included in the same development. A maximum of 2 completed dwellings on the one title is acceptable security, includes duplex, battle axe and granny flat.

14.1.3 Residential Acreage or Rural Residential Zoning (includes hobby farms) A property which is zoned residential, rural residential or any similar zoning (but not commercial, industrial, mixed etc.) and is usually situated in fringe city or town locations. The use of the property must be solely for the purpose of private residential occupation, including private residential occupation by tenant. The property should have road access and basic utilities (e.g. power, water, sewerage etc.) connected. It must not be used for:

o Commercial purpose or generation of incomes from farm produce o Short term ‘speculative’ investment or development purposes

Note: If the property generates minor levels of income from hobby farm type activities; the property can still be accepted for deals with strong mitigants and when this income is not used in servicing and any income potential is excluded from the valuation process. Refer Section 16 for applicable LVR’s.

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14.1.4 Inner City Apartments Apartments and units located in Central Business Districts (CBD) or at the fringe of CBD areas, tend to have an increased chance of the containing the following:

• Guaranteed rental returns • Sold fully furnished • Have an increased risk of oversupply • Tendency for newer stock with little resale history

Valuations should disregard the value of rental guarantees, furniture or any other incentives that have been included in the purchase. Some locations have been classified as Exception Postcodes (Refer Section 15) and are only acceptable at a reduced LVR (Refer Section 16). It should be noted that some properties have an operating lease or management agreement governing the use, occupation, management and sale, and cannot be accepted as securities.

14.1.5 Off-the-Plan Purchase This includes property up for sale at the initial stage of planning, under construction or an existing building undergoing major refurbishment, and includes any proposed strata lot in an unregistered unit strata plan. The application has to be submitted with a stamped Contract of Sale and, if credit criteria are met, will be given an indicative approval subject to satisfactory “As if Complete” valuation. The LVR applicable will be dependent on the Security (type of security, size of the property etc.). Updated financials may be required for re-assessment of any approval where completion/settlement does not occur within the timeframe allowable under the approval i.e. greater than 3 months Note: See also special requirements under “Acceptable Purpose” Section 4.1. Off-The-Plan Contracts which last at least 12 months Where the value of the property has increased during the construction period IBAL will consider lending against a maximum 100% of the purchase price, noting the loan should not exceed standard security LVR parameters based on the current valuation. Validity of Valuations Valuations should be conducted at practical completion of such projects and settlements must take place no later than 3 months from valuations. Note: Valuers are required to include comparable sales outside the subject properties – should not principally rely on sales within the subject properties.

14.1.6 Favourable Purchases A favourable purchase arises in circumstances where IBAL is asked to provide finance against a security property that is being “purchased” at a price below its perceived market value.

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These proposals most commonly arise in family situations where a parent or a close relative is selling a family property to a child or close relative in order to assist entry into the property market. Less frequently, this may also arise as a result of a business relationship where, for example, a developer may sell a property to a business associate at a reduced price.

14.1.6.1 Requirements For IBAL to consider providing finance in the case of a favourable purchase, the following conditions must be satisfied: • Borrowers are required to provide a Statutory Declaration from the vendor stating that the

equity in the property is being gifted and is not subject to being repaid at any time in the future. See also Section 8.3 “Gifts”, for details of required evidence.

• IBAL will lend against the valuation. • All usual underwriting guideline requirements must be met (e.g. pass serviceability requirements,

clear credit bureau etc.). • Valuation is required in all cases. The valuer is to be advised of the nature of the transaction and

the proposed purchase price, and specifically that it is a favourable purchase. • The asset and liability position of the applicant is to be appropriate with the age and personal

circumstances of the applicant. • Where the relationship between the borrower and vendor is of a personal nature and LMI is

required, the applicant is to provide evidence of genuine savings as per LMI underwriting requirements.

• In the case of a business relationship, the applicant is to provide at least 10% cash contribution to the purchase.

• Debt consolidation is to be considered in terms of existing underwriting guidelines.

14.1.7 Security Property with Living Areas < 60m2 Our preferred living area* for units (includes bachelor units, bed-sitter, studio, 1 bedroom apartments) is at least 60 m2. Properties with smaller living areas can be accepted when they meet the following requirements and are approved by Risk Management with a supporting valuation. Properties with Living Areas 50 m2 <60 m2 • Maximum LVR 80% for established dwellings* • Maximum LVR 70% for new units Properties with living areas less than 50 m2 are not preferred. *Definitions Living Area The strata ownership only applies to the space within the internal walls; all external walls are considered common property and not owned by the borrower. All balconies, parking, porches, courtyard etc. must be excluded from the total living area calculation, it must be identified separately.

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Established Dwellings As a general rule of thumb an established dwelling is a property that was constructed at least 5 years ago; which can be confirmed from the valuation. Dwellings less than 5years old are considered new dwellings for the purposes of this instruction.

14.1.8 Leasehold Property (Crown Lease) This is only applicable to property located in the ACT or other known leasehold properties. Lease term remaining must exceed term of the loan by at least 5 years, no matter what the requested loan structure is. The LVR applicable will be dependent on the Security LVR (type of security, size of the unit etc.) in Section 16.

14.1.9 Residential Vacant Land Security Vacant residential land is unacceptable as stand-alone security except where it is to be provided as “top-up” security (maximum LVR 50%). In these circumstances it is subject to the following guidelines:-

• Vacant land must be zoned residential • The vacant land must have sealed road access and connected utilities (i.e. power, water

phone & sewerage) • No commercial vacant land will be accepted as security • The land must not be used to derive farm income – it must be solely for private residential

purposes • Valuation is mandatory and must confirm that the land is a suitable building block and meets

the requirements for residential construction as advised by the relevant local authority • Registered first mortgage security only

14.1.10 Stratum Title Each owner has a certificate of title and is absolute owner of a freehold flat. A service company (in which each flat titleholder has shares) has the title to the common property and administers, manages and maintains the property in which each owner’s flat is registered. Each flat titleholder is free to dispose of their freehold as they wish, but has a responsibility to the service company in which they have shares". We would require:

• Our interests to be noted, and secured accordingly • Where applicable, the value of same is included in our valuation

14.1.11 Deed of Charge IBAL’s preferred security is freehold property however cash collateral is accepted in short term scenario’s such as: • An existing borrower is to substitute security property, but the current security property is to be

released prior to the new security being perfected. IBAL will hold settlement proceeds as the security for the loan (at a maximum LVR of 100%) until the new security property is settled.

• The cash is to be lodged in a suitable IBAL deposit account (to be “Stopped”), with the necessary security documents (including Deed of Charge and Setoff) prepared by ING Panel Solicitors.

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14.1.12 Second Mortgages (This section does not apply to borrowing’s that are supported by a second or subsequent mortgage taken after an existing IBAL first mortgage as part of the cross collateralisation of an existing borrower’s debts). Second mortgages are not permissible as prime security for a loan with the exception of Defence Service Homes (Section 14.1.12.1 ) In addition, no concurrent request for a second mortgage will be allowed. i.e. where a borrower’s requirements exceed our Policy (e.g. Refinance) we would not be a part of a proposal where the remainder of the loans to be refinanced are left to another lender who requires a second mortgage behind IBAL. Refer also Section 11.1.6 Vendor Finance. IBAL will only accept second mortgages (where the first mortgage is to another lender) as collateral/top up security. The total amount available for borrowing is restricted by product postcode and other security restrictions. The calculation of the amount available for borrowing is to include one year’s simple interest on the other lender’s (first mortgage) debt as shown below. Viz:- Value of security $625,000 Total borrowing required: $500,000 1 Other lender’s debt (1st mortgage) $125,000 Add one year’s interest (7.24%) $ 9,050 2

Total amount to be applied $134,050 Available for IBAL loan $365,950 Total borrowing available $500,000 1 Assessed at 80% LVR – note postcode, product and other product and security restrictions may apply. 2 Utilise Mortgage Simplifier Rate for Broker/Direct or Reference Rate for MM The following considerations must be taken into account when contemplating a second mortgage as security: 1. Second mortgage securities often lead to delays in settlement and borrowers should be made

aware that any such delays can be outside IBAL control; 2. Second mortgages should be registered on title to protect against subsequent charges being

registered and ranking in priority; and 3. Buildings Insurance should denote the interest of both mortgagees.

14.1.12.1 Government Loan Schemes for eligible Australian Defence Force members & ex-members

IBAL will allow a second mortgage as prime security where the first mortgagee is that appointed under the Defence Service Homes scheme. Information on the scheme can be found on the following Government website (www.dsh.gov.au)

http://www.dsh.gov.au/

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In the case of this Government scheme, one year’s interest on the first mortgage is not required to be taken into account. All residential loan DLA holders can approve this type of loan under their DLA authority. A Deed of Priority is required in all cases.

14.1.13 Unencumbered Property (Surrender of title deed for verification 72 hours prior to settlement) Applicants providing security over unencumbered properties on a standalone basis are required to provide their latest available rates notice. In addition, these applicants are required to surrender the title deeds prior to settlement. IBAL panel solicitors are required to attend Land and Planning Information in NSW (or the like Government Department in other states/territories) to have the deed/s verified as to authenticity.

14.1.13.1 Queensland only The Department of Natural Resources in Qld have a paperless title system, meaning that the majority of properties in Qld do not have a Certificate of title issued unless specifically requested. Currently, the process for completion of documentation includes: • IBAL solicitors to lodge a settlement notice, preventing any other transaction (other than our

mortgage) for a period of two months (acts like a caveat). • Documentation issued, accompanied by a Witnessing Certificate that needs to be executed by

certain qualified people e.g. a Solicitor, Justice of the Peace. The witness has to identify the parties involved.

On the day of settlement, a title search is undertaken to ensure our dealing is the only one present – if not, then our funds are withdrawn. Generally we will not know if the transaction is “paperless” or not at the time of approval, hence our process at time of approval remains as per Section 14.1.13. Action in relation to verification will therefore be necessarily decided upon by our Solicitors at documentation stage, depending upon whether or not the transaction is “paperless”.

14.1.14 Guarantees A guarantee is a contractual promise given by a third party that makes the person liable in the event of default by the debtor. When reviewing the use of a guarantee the following should be taken into consideration as appropriate: Contents of a Guarantee- The guarantee must incorporate the following provisions: • Guarantee obligation - an obligation on the guarantor to pay the money owing on demand if not

paid by the debtor. • Indemnity - if for any reason the debt is not recoverable against the debtor or the guarantor, the

guarantor must indemnify the financier for any loss. • Extent of guarantee - the guarantee should state that the liability of the guarantor would not be

affected by:

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• Any variations of the transaction or the documents between financier and debtor; • Failure by the financier to enforce any security held by the debtor or any other person; • The release of any security held by the financier for the guaranteed money; • The insolvency of any party to the transaction; • An increase in the amount guaranteed (in such instances the written consent of the

guarantor to the increase must be obtained); • The money or any part of it not being recoverable from the debtor or any co-guarantor; • A clause prohibiting the guarantor from exercising any right of set-off, or any right of

subrogation, or claiming the benefit of any security held by IBAL, or proving in liquidation or bankruptcy of the debtor before IBAL has been paid; and

• A clause under which the guarantor must pay all costs in relation to enforcement of the guarantee and requiring interest to be paid if the guaranteed money is not paid when due.

Guarantees for less than the Full Amount of the Debt Where there is a request for a limited guarantee, that is a transaction supported by a guarantee for an amount less than the total debt of the borrower, this does not comply with underwriting guidelines except for Family Support situations (Section 3.5.5). Joint and Several Guarantees In a situation where an application is presented with multiple guarantors, each guarantee must be provided on a joint and several basis. If they are only provided on a several basis, this is considered to be outside underwriting guidelines. Guarantees from Companies Considerations when guarantees are taken from companies include: • Guarantees are to be obtained from owners or directors; • Directors’ conflicts – are any directors of the company under a conflict of interest in relation to

the execution of the guarantee? If so, do the Articles or Constitution allow the company to enter into a transaction where a director has an interest and permit this director to vote?

• ‘Uncommercial’ transaction - will the giving of the guarantee constitute an ‘uncommercial’ transaction under the Corporations Law?; and

• Trustee company - is the company a trustee? If so, does the trust deed allow the trustee to give guarantees and indemnities?

Where the borrowers are the shareholders and directors of the company, as a general rule, we do not require a guarantee from the company when there is little scope of recovering guaranteed debts from retained profits, as they are drawn as directors’ salaries or paid out as dividends. On the other hand, if it can be demonstrated that considerable reliance is placed on retained profits, then a guarantee from the company should be taken. General requirements • All people providing security who are not borrowers must be guarantors. • Income details and Assets & Liabilities should be provided by all guarantors. • Generally, where the guarantor is an individual, the guarantee must be signed personally by the

individual and not by a power of attorney. Refer Section 3.5.8.3 • A Credit Advantage report must be conducted on all individual and company guarantors. • If there are multiple guarantors, each guarantee must be provided on a joint and several basis. • A minor (a person under the age of 18) is unacceptable as a guarantor or third-party security

provider.

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• All guarantors must be Australian residents.

14.1.15 Information about obtaining legal and financial advice The advice can be given by a solicitor, accountant or financial adviser. There is no significant degree of difficulty obtaining advice from one of these sources, although often lawyers may refuse to give financial advice. This, of course, is inconvenient to guarantors who need to seek out someone separate to give financial advice. As financial advice is rarely requested, this is not a big problem in practice. The following table analyses the situation in relation to legal advice, which as noted above generally will apply only in relation to guarantors.

PLACE STATUS NSW, ACT and VIC Law Society of New South Wales has prescribed a standard form.

Generally no problem obtaining. QLD, NT and TAS No prescribed form for legal advice. Generally no problem obtaining. SA The Law Society of South Australia recommends that practitioners do

not provide legal advice certificates. It is a rather extraordinary concept that a law society should advise lawyers that they should not give legal advice, but nonetheless this is what has happened. Generally, panel lawyers will have borrowers sign a Statutory Declaration stating that they have obtained legal advice, and there are lawyers who will provide legal advice.

WA The Law Society of Western Australia has prepared a standard legal advice certificate. Some lawyers refuse to give advice.

Legal Advice Legal advice should be recommended wherever a guarantor is considered vulnerable and/or at risk of significant loss should the borrower default. Where the guarantor has a history of guarantees or is considered financially strong and aware, the relative risk is reduced (Similarly where the guarantor is a profession such as accountant, solicitor, finance, etc.) Waiving Independent Legal Advice can be considered • If the guarantor is a company or trust owned by all the borrowers, legal advice can be waived. • Where the guarantor is considered financial astute and aware of obligations and/or obtaining a

benefit from the transaction. Examples of where parties not sufficiently the same • Borrower A, guarantor X Pty Limited, the shareholders and directors of which are A and B. A

requirement for advice is to be considered for B because B is not a borrower. • Borrower X Pty Limited (with A the sole director and shareholder) and A & B guarantor. A

requirement for advice is to be considered for B because B is not benefiting through the company.

Examples where advice can be waived, the parties are common

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• A and B borrower, X Pty Limited guarantor of which A and B are all the directors and shareholders. Advice could not be waived if there was an additional shareholder and director C who was not a borrower as there would then not be sufficient commonality.

• Borrower X Pty Limited (sole director and shareholder A), guarantor A. Financial Advice Where the borrower or guarantor is elderly and/or in receipt of superannuation/annuities or government benefits (e.g. pension, family allowance), it is recommended they obtain independent financial advice to ensure the transaction does not adversely impact their entitlements (i.e. increased assets or income and the potential impact on means/asset testing).

14.2 Unacceptable Security The following security types are not acceptable under this Underwriting Guideline Manual: • Boarding house, hostel, student accommodation or university apartment • Brothel • Commercial, industrial property or similarly zoned property (Can be considered under Priority

Commercial Mortgages) • Income producing rural property (unless hobby farm) • Nursing or retirement home • Property > 10ha (approx. 25 acres)/Broadacre (Note: Properties in excess of 10ha are more likely

to take longer to sell, to be used to produce income from farm produce and to be subjected to the Farm Debt Mediation Act).

• Property occupied by life or protected tenant • Purpose built premises, restrictive or unusual usage property • Serviced or managed apartments (including dual keyed) • Motel conversion • Time share agreements • Management rights (including units attached to management rights of the complex). • Property that has adverse environmental issues from past/current uses (e.g. underground

storage tanks, chemical processes etc.) • Residential property with commercial use, where significant refurbishment may be required to

return the property to a standard residential dwelling • Commercial property with residential use • Moiety Title (SA)- Typically covering maisonettes or attached cottages, means that the person

owns a share of the whole of the land and leases a defined portion of the land for himself or herself from the other owner or owners

• Properties requiring mortgagee execution of an Encumbrance and Deed of Consent document. • Purple Title (WA)- They exist where the whole property i.e. land and buildings, are owned jointly

by every owner and for a mortgage to be lodged all owners must agree and execute the mortgage documentation

• Vacant Land - stand-alone (See Section 14.1.9) • Properties registered under the Federal Governments National Rental Affordability Scheme

(NRAS). • Display Homes If a panel valuer has negative comments or considers the security is located in a limited market, then the property is not a desirable security, and would require strong mitigants to proceed (e.g. Strong servicing with low LVR).

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Any non-residential properties or properties situated in non-residential zoned locations (e.g. commercial, industrial etc.) are not acceptable securities for retail loans. The following security types are generally not accepted; however, they may be considered on a case by case basis, albeit at reduced Security LVR, depending on the strength of individual loan proposals. Applications involving these security types require appropriate authorised DLA Holders sign off. • Flood affected property:

Properties located in a 1% AEP – Annual Expedient Probability (previously 1:100 year flood zone) will be considered on a case by case basis, subject to Buildings insurance being obtained. Properties located within 2% and 5% AEP (previously 1:50 and 1:20 flood zones respectively) will not be considered. NOTE: Whenever information is provided with an application or valuation that indicates a property is located within a flood zone, evidence is to be sought from the Broker/Introducer/Borrower to confirm the property is acceptable in terms of this requirement.

• National trust or historic property • Heritage listed • Property that is poorly maintained or in need of significant repair • Property situated in unfavourable area with a limited life expectancy, poor resale prospect

and/or values • Residential property with commercial use, where minimal refurbishment is required to return the

property to a standard residential dwelling

14.3 Concentration Limit Under these guidelines a maximum of 5 security properties/securities can be accepted from one Obligor. Priority Commercial Mortgage guidelines can accept more than 5 securities and can also accept small residential unit blocks in suburban/metropolitan locations. Concentration limit is a form of control mechanism for the management of identified areas of risk exposures. IBAL monitors the concentration risk of collaterals monthly. For high density development or areas of new subdivision/ development, IBAL’s preferred exposure is limited to • 25% in any one apartment/home unit development; or • 10% in any new cluster development/ staged land release/ subdivision Where a credit assessor is aware of multiple applications in either scenario, particularly from the one source/ broker (e.g. via a marketing seminar), details should be submitted to RM for review.

15 POSTCODE CATEGORIES IBAL will consider lending for residential products in any Australian postcode. The INGD postcode listing contains Primary Postcodes with a sub section for both Exception and Non Lend Postcodes. The Secondary Postcodes represent all remaining postcodes.

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The Primary Postcodes are further classified as either Category 1, 2 and 3. These categories are used to rank various regional areas and will be used to identify any restrictions for loans with LMI approved under DUA. The exception postcode listing covers postcodes where lending restrictions are imposed on units/apartments within that postcode for a particular reason e.g. inner city/core or fringe CBD apartments, areas where oversupply exists, areas affected by disasters etc. For this reason they should undergo greater scrutiny at assessment and with a heightened level of review on the valuation. Non Lend postcodes are locations where IBAL Risk Management have identified areas of concern over the location and may wish to prevent any increased exposure to the location. Any new or increased loans secured by properties in a Non Lend Postcode should be referred to IBAL Risk Management for review. Exception and Non Lend postcodes will be determined by IBAL Risk Management and will be reviewed from time to time, with variations to be notified accordingly. The Postcode Location list is located on the ING Direct Intranet (Frankie) for IBAL users. MM users can access the list on the MMF Portal web site at mmf.ingdirect.com.au/hub/logon.aspx. Whilst IBAL lends across all postcodes care must be taken when assessing the suitability of a security property, particularly in secondary postcode and/or where it does not meet the minimum valuation requirements. Authorised DLA holders must outline specific mitigants where they approve loans outside preferred lending locations.

16 MAXIMUM LVR BY SECURITY LVR represents the loan amount as a percentage of the valuation amount. For a purchase the lower of the purchase price or valuation should be used. Below is a summary of acceptable securities and their respective LVR. Single Property LVR

Sydney / Melbourne (Metropolitan area Category 1 Postcodes only) - 80% < = $3.0m - 70% > $3.0m

Brisbane / Perth (Metropolitan area Category 1 Postcodes only) - 80% < = $2.5m - 70% > $2.5m All Other Areas - 80% <= $2.0m - 70% > $2.0m

https://mmf.ingdirect.com.au/hub/logon.aspx

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Security Type Maximum LVR

Without LMI With LMI (including

capitalised premium) Houses (freestanding)

80% 95%-Owner Occupied

90%- Investment Villas/Duplexes/Townhouses (including warehouse conversions)

80% 95%-Owner Occupied

90%- Investment Units/ Apartments • Living Area > 60 m2 80% 95%-Owner Occupied

90%- Investment • Established dwelling with a living area of < 60 m2* 80% N/A

• New dwelling with a living area of < 60 m2* 70% N/A

• Company Title 80% N/A High Risk Postcodes# 80% 90%

Vacant Land with commitment to construct. Only Primary Category and Exception Postcodes- Suspended from sale 1/11/15 80% 90% Vacant Land with immediate construction- Suspended for new business from 1/11/15 (Will still be considered for existing customers when the vacant land was funded with a condition to construct within 12 months)

Category 1 Postcodes Category 2, 3 and Exception Postcodes Secondary Postcodes

80% 80% N/A

90% 90% N/A

Vacant Land (as top up security) 50% N/A Rural Residential Acreage

Less than 2.2 ha (Approx. 5.4 acres) 2.2 ha (Approx. 5.4 acres) to less than 5 ha (Approx.12.35 acres) 5ha (Approx. 12.35 acres) to less than 10 ha (Approx. 24.7 acres)

80%

80% 70%

95%-Owner Occupied 90%- Investment

90% 90%

Deed of Charge and Setoff over cash deposit 100% N/A (No deviations are permitted for the following notes) • Maximum LVR of 80% for increases. • Maximum LVR of 80% for Interest only repayments • LVRs above 80% are only available when purchasing the security property or simple owner occupied home

improvements detailed in Section 18.7) * For Units/Apartments > 40 m2 and less than 60 m2 (e.g. bachelor/bedsitter/ studio/1 bedroom), the

properties must be of good quality located in a desirable and high demand capital city metropolitan locations.

# “High Risk Postcodes” have been identified as a greater risk of being more vulnerable to changes in economic outlook and/or property market conditions. Locations will be regularly monitored by Risk Management and identified via system decisioning tools. Securities in these locations will be limited to a maximum LVR of 90% (including any capitalised LMI premium), however, for worthwhile applicants, the mortgage insurer may consider applicants above 90% on a case by case basis.

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17 VALUATIONS

17.1 Overview An acceptable valuation is required in all cases to confirm the Banks security position. Types of Valuations Acceptable valuations include: Contract of Sale – should be signed and dated by the vendor Rates notice – confirming the land value only AVM – Automated Valuation Model which uses one or more mathematical techniques to provide an estimate of value of a specified property at a specified date (inclusive of a confidence score) EVR – an abridged valuation prepared by a valuer. The valuer can complete an EVR without physically inspecting the property; by using local knowledge and statistical data. The EVR incorporates a valuer’s local expertise and provides Property and Market Risk Ratings and direct sales comparison analysis including ‘like properties’ in addition to ‘properties sold’. The valuer may need to speak with the owner or real estate agent to qualify some matters such as number of bedrooms and state of repair. The security is to be located within selected metropolitan category 1 postcodes Short form valuations – similar to EVRs, however involves the valuer undertaking a physical inspection of the property and usually will provide a more reliable assessment of the property value Full valuations – similar to the short form valuation report however more detailed in both the analysis of supporting information and the level of detail that is obtained in the report. Usually required for unique and high end properties where direct comparisons are fewer and additional investigation is usually required. Full valuations required in all cases where the single property value is greater than $5.0m. Determining the type of Valuation Required The type of valuation required is fundamentally driven by the associated risk of each application/borrower and is determined by considering a number of different factors

• LVR • Loan amount • Security amount • Security location • Purpose of the loan • The source document available to support the owners estimate

For security properties located in secondary postcode areas (refer Section 15), acceptance of these properties is subject to three comparable sales being available within the previous 6 months (authorised IBAL DLA holders may approve valuations outside this requirement if suitable mitigants exist). Mortgage Manager Business Short form or Full valuations required in all cases.

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Broker and Direct Business Refer to the below table (Section 17.1.1 and Section 17.1.2) to determine what type of valuation is required. Where the application falls outside the parameters contained within the table a short form or full valuation will be required unless approved by an authorised DLA Holder with the appropriate deviation authority, supported by the acceptable mitigants, e.g. a very low LVR.

17.1.1 Purchases (NB-This guideline does not apply to the Mortgage Manager Business) Dependant on the purchase price and LVR a Contract of Sale or EVR can be used as an acceptable Valuation (as per the below table). Eligibility criteria Primary postcodes only (i.e. Cat 1, Cat 2 and Cat 3 only) Maximum of 2 interlinked security properties per loan Sign-off by authorised LS staff (refer to LS DLA) is mandatory Excludes Off the plan purchases Brand new properties or properties under construction (including vacant land) Property purchased direct from a builder/developer Must not be a “favourable” or “not at arm’s length” purchase Interstate investors .i.e. where the purchasers are located in a different state to the location of the security property. Units with a living area less than 60 m2

Accept Contract of Sale (Maximum LVR 80%) Request EVR (Where applicable postcode)

House Value Unit Value Maximum Security Value Maximum LVR NSW $900,000 $700,000 $1,000,000 80%

VIC $750,000 $600,000 $750,000 80%

WA/NT/ACT $600,000 $450,000 $750,000 80%

QLD/SA $550,000 $400,000 $750,000 80%

TAS $300,000 $200,000 $750,000 80% All Cat 3 Postcodes $300,000 $200,000 $0 0%

Short form or Full valuations required in all other cases where the proposal/scenario is not covered by the above

17.1.2 Valuations for Existing Business and Refinance (including Top Ups) (NB- This guideline does not apply to the Mortgage Manager Business)

Eligibility criteria If new security to IBAL, must be located in a Primary postcode (i.e. Cat 1, Cat 2 and Cat 3 only) Maximum of 2 interlocked security properties per loan Sign-off by authorised CO staff (refer to CO DLA) is mandatory Any AVM must have an acceptable “Confidence Level”; a warning will appear on the AVM when it is below our requirements

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Excludes Off the plan purchases Brand new properties or properties under construction Property purchased direct from a builder/developer Must not be a “favourable” or “not at arm’s length” purchase Renovations/additions where an on completion value is required

VALUATION MATRIX Maximum Security Value

NSW $1.1m VIC $900,000

WA/NT/ACT $800,000 QLD/SA $700,000

TAS/CAT 3 $500,000

LVR Source document (what do we have)

Age of source document (months)

Valuation Type Required

0- 65%

Owners estimate N/A Request AVM Rates notice (land value) Less than 12 months old Accept Rates notice

COS Less than 6 months old Accept COS

Valuation/AVM/EVR 0-36 months Accept existing valuation

Over 36 months Request AVM

65-70%

Owners estimate/AVM N/A Request EVR Rates notice (land value) Less than 12 months old Accept Rates notice


Valuation/EVR 0-24 months Accept existing valuation

Over 24 months Request EVR

70-80%

Owners estimate/AVM N/A Request EVR Rates notice (land value) Less than 12 months old Accept Rates notice


Valuation/EVR 0-12 months Accept existing valuation

Over 12 months Request EVR

80-90%

Owners estimate N/A Request Short Form Rates notice (land value) Less than 12 months old Request Short Form

COS Less than 6 months old Request Short Form

Valuation/AVM/EVR 0-24 months Request Short Form

Over 24 months Request Short Form

Owners estimate N/A Request Short Form

Rates notice (land value) Less than 12 months old Request Short Form > 90% COS Less than 6 months old Request Short Form

Valuation/AVM/EVR

0-24 months Request Short Form Over 24 months Request Short Form

Notes: The LVR is to be reworked based on the new valuation once obtained. Where the LVR has changed ensure the appropriate valuation is still held or reorder as required.

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Short form or Full valuations required in all other cases where the proposal/scenario is not covered by the above

17.2 Valuers’ Standing Instructions The Valuer when performing a Valuation will only accept Valuation instructions from IBAL (including those initiated by brokers) or the Mortgage Managers where those instructions are in accordance with the API Residential Valuation & Security Assessment Supporting Memorandum (or such other equivalent professional standards and guidelines as detailed by IBAL) and the Valuation Minimum Standards.

The Valuer will only accept Instructions to perform a Valuation from IBAL or the Mortgage Managers when the Valuer has local knowledge and competence in the geographical area of the property being valued. The purpose of each valuation is to determine the current market value and the suitability of the property for mortgage security purpose. The valuation is made on a fee simple in possession and unencumbered basis (unless otherwise stated) subject to any existing or agreed tenancies. Valuations are ordered via VMS or Valex to ensure requests are outsourced on a random basis to appropriate Valuers to avoid adverse selection or collaboration. Any other matters not mentioned below that may affect the value, leasing or sale of the property, or affect its value to IBAL as security, must be brought to the attention of IBAL. The valuation report must be signed and dated by the valuer who undertook the inspection / valuation. This valuer must be authorised by IBAL and must be a registered valuer. The valuer acknowledges that it will be responsible for ensuring all agreed standards are maintained by its employees, agents and subcontractors conducting valuations on behalf of the principal. It also acknowledges that its professional indemnity extends to all activities performed by its employees, agents and subcontractors. The valuer acknowledges that the valuation report will be relied upon in deciding to approve a loan facility for which the valuation was sought. For the Mortgage Manager business, guidance must be sought from RM with regards to instructions to valuers to appraise any security (either owner’s estimated market value or purchase price) of more than A$1.5million.

17.3 Valuers All valuers are to be accredited by IBAL. Requests for valuation will be forwarded to a panel of accredited valuers. Upon a valuer’s inspection and assessment of a particular property, a formal report will be sent back to the requestor.

All documentation prepared by or on behalf of the Valuer in the course of providing the Services must:

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(a) be prepared by valuers that are:

(i) current financial members of the Australian Property Institute (API) or other recognised valuation industry body as detailed or notified by IBAL;

(ii) registered or licensed in the state or territory in which the relevant property is located and be one of the following classifications of API members (or such equivalent classifications in any other recognised valuation industry body, as detailed or notified by IBAL) and hold Certified Practicing Valuer (CPV) status:

• Technical Associate (TAAPI) • Associate (AAPI) • Fellow (FAPI) • Life Fellow (LFAPI)

(iii) where the property is located in a state or territory in which a valuer is required by law to be licensed, the valuation must be by a licensed valuer.

(iv) where the property is located in a state or territory in which a valuer is not required by law to be licensed, the valuation must be by a valuer who is a member of the API.

(v) where valuation reports signed by GAPI (Graduate), TAAPI (Technical) and PAAPI (Provisional Associate) API members with less than 2 years full time post graduate valuation experience are only acceptable when countersigned by a valuer holding one of the above classifications (or equivalents).

(vi) residential property valuations will not be undertaken by a SAPI (Student) member of the API (or equivalent).

(b) be checked and approved for accuracy and compliance with this agreement by an authorised officer of the Valuer having regard to the requirements specified in this agreement and any instructions from IBAL, the Mortgagee or the Mortgage Managers.” Note: LVR represents the loan amount as a percentage of the valuation amount. For a purchase the lower of the purchase price or valuation must be used.

17.3.1 Contents of Valuation All valuations must be prepared in a fixed format agreed in advance with the RM Department (i.e. API Property Pro-forma Report).

17.3.2 Land Description The description must include the following: • registered proprietor; • full address and title reference of the property, with comments on the size, shape and

dimensions of the land concerned; • physical characteristics of the land should also be reported;

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• identify and report on title encumbrances such as easements, covenants, rights of carriageway and (where applicable) their effect on value of the property. Registered interest on the title must be noted;

• comments on adequacy of drainage, if susceptible to high flood risk or land slip, etc.; • any details as per the planning approvals or outstanding orders on the property.

17.3.3 Location Description The description must include the following: • Comments on location of the property, its appropriateness for the proposed use etc.; • Description of age and quality of surrounding properties and the status of the locality; • Comments on the zoning of the property, and whether existing or potential usage complies with

zoning. • Description of the property’s proximity to local facilities, amenities and services. • Comments on any general trends within the surrounding area such as traffic flows, transport

availability, population trends etc.

17.3.4 Property Improvements Description The description must include the following: • Description of the improvements such as size (gross area and net lettable floor dimension),

shape of the buildings, the architectural style, quality of finish, floor plan, age, condition and the general state of repair etc.;

• Comments on any additional improvements that have been carried out, note the age, quality of work and if there is any obvious non-compliance to local Council regulations. Otherwise note if there is any deterioration etc.;

• Comments on the suitability of the existing or proposed usage, i.e. is the property specialised in nature etc.;

• Comments on the adequacy of services connected or available to the property; • Comments on potential impacts by pest, rail, road, air, high voltage power lines etc.; • Comments on any special features that the property may have which could inhibit any

alternative use, or alternatively restrict its appeal to any subsequent purchaser; • Comments on any adverse features of the property and its value impact; • Comments on the layout of the building; and vehicular access etc.; • Make all necessary enquiries from statutory bodies to establish the existence of any outstanding

orders in relation to fire; and • Comments on whether there are any value rental guarantees or ‘perks’ (such as furniture

packages etc.) provided by vendor. If so, exclude these factors; the valuation should be on vacant possession basis only.

17.3.5 Marketability • Comments on market absorption, supply and demand trends (willing buyer/seller), competitive

situation, and their impact upon the property are critical to its valuation; • Analysis (detailed if necessary) of the current and future market trends and supplementary

market study (if appropriate); and • Advice on the length of time required to either sell or let the property. • Where a Valuer indicates two tier marketing techniques are being used to sell the property, it

would be expected that the Market risk rating is either a “4” or a “5” (Section 17.3.6).

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17.3.6 Sign-off and Acceptance of a Valuation Any deals that are processed through MAPS will also have the results of the valuation entered into MAPS. The mandatory fields in MAPS include: • Type of Property (Resi/Comm) • Property Type (e.g. House, Unit, Rural, etc) • Estimated Value • Market Value • Site Area • Living Area • Zoning • Heritage Issues • Environmental Issues • Risk Analysis

Once data has been entered and submitted, MAPS will flag any negative aspects contained in the above mandatory fields through deal reasons for review, sign-off and acceptance by an appropriately authorised CO DLA Holder. Note: MAPS will flag any valuations in excess of $2.0m for review and sign off by an authorised DLA Holder. Deals that have no deal reasons and have an LVR not above 80%, are accepted by MAPS and do not require manual sign-off and acceptance. All other valuations (including valuations processed outside of MAPS i.e. MM) for proposed security must be read by an appropriately authorised CO and MM DLA Holder to determine the level of associated risk and if acceptable, signed-off as being “Read and Relied Upon” for formal acceptance of the report and security. The entire valuation will need to be read to fully consider/understand and if require mitigate the security’s risk. Some of the details contained in the valuation will include

• Property’s address and title details, which should be compared with evidence/details already held for the loan application.

• Risk Ratings for the following: • Location & Neighbourhood • Land • Environmental Issues • Improvements • Reduced Market Direction • Market Volatility • Local Economy Impact • Market Segment Conditions

• Any recent sale of the property • Level of Market Activity and recent direction • If two tier marketing exists • A number of comparable sales which should be “like for like” i.e. if valuing a 2 bedroom house

the comparable must be for similar properties located in the immediate suburb or surrounding areas. In principle the comparables should include both inferior and superior properties to support the security’s value.

• Valuer’s commentary that highlights derogatory/negative aspects that would affect marketability/saleability of the security.

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All the information listed above together with other information provided in the value’s comments and throughout the report should be used to determine the acceptability of the property.

For New Business applications only (i.e. not increases/variations): • Valuations up to 90 days old can be accepted at time of assessment. • Valuations up to 6 months old can be accepted at time of settlement. (Common sense to prevail

as some flexibility may be required on rare occasions) Note: All valuations must be referred to an appropriately authorised DLA holder when:-

• There is not a minimum of three comparable sales within six months of the date of valuation • It contains one or more level 4 ratings or one or more level 5 ratings • An appropriately authorised DLA holder can either mitigate the issues and accept the

valuation, decline the deal, modify the LVR to reflect the increased risk or refer to LMI for approval where applicable.

Valuations in support of these securities need to be critically assessed with particular emphasis on the physical condition of the collateral, the saleability of the security and very importantly, the overall strength of the proposal. (E.g. prior credit history and capacity to repay) Authorised DLA holders must outline specific mitigants where they approve loans outside these underwriting guidelines.

17.3.6.1 Environmental Risk Issues One type of risk often overlooked in credit analysis is environmental risk. However, for some applicants this can be the most significant risk of all that IBAL will face. Environmental risk is defined as the risk: • of diminution in the value of an applicant’s debt servicing capacity arising from a contravention

of environmental protection laws or legally enforceable codes and standards relating to an industry;

• that IBAL may incur direct liability under environmental law as a consequence of its relationship with a “polluter” customer;

• that IBAL may be restricted in its capacity to enforce its security because of prospective environmental liability; and

• that IBAL may have its security interest postponed under an environmental order.

17.3.6.2 Activities on the Property Research is required to: • Check what activities are being or have been conducted on the property. • Check what was or is used in the conduct of those activities. • Check what records were or are kept of such activities including method of delivery of

contaminants to or from the property. • Ascertain whether required licences in order to operate the business are in place and whether

conditions are being complied with • If uncertain, obtain Certificate of Compliance from relevant government/local council authority

and state condition (if any) on letter of offer.

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17.3.6.3 Substances Ascertain whether: • Any of the structures on the property contain asbestos, PCB’s, CFC’s, halons or any other toxic,

hazardous or polluting substances. • There are any toxic, hazardous or flammable substances stored on the property, if so: • How are/were such substances stored? • Are/were there any licences for the storage of such substances? • What records are there concerning substances stored on the property? There has been any prosecution or other legal action, or whether any prosecution or legal action is pending for breach of any licences or the escape of any substances from containers, etc. Is there evidence of spillage or leakage of these substances? This is particularly important for substances stored in underground storage tanks because of the potential for contamination of the soil, neighbouring properties and underground water contamination.

17.3.6.4 Waste Ascertain: • What waste is or was discharged in the course, or as a consequence, of activities on the

property? • What are or were the discharge points for any such waste? • Whether such discharges were permitted; • Whether there has been any prosecution or legal action or whether any is pending against the

owner concerning: • Breach of any consent, licence, authority, permit or agreement; • An offence against any pollution legislation; or • Any pollution by the owner; and • Whether any waste is generated or disposed of on the property.

17.3.6.5 Noise Ascertain whether the activity on the property involves emission of noise and if so: • Is the owner obliged to maintain and operate noise control equipment? • Have any licences, pollution control approvals, noise control notices, noise abatement orders or

noise abatement directions been given to the mortgagor? • Has there been or is there pending any prosecution or other legal action concerning, noise or the

breach of any licence, approval, notice, order or direction?

17.3.6.6 Restrictions on Approval If there is any previous or current evidence or reasonable concern of contamination and/or non-compliance with any of the above issues (17.3.6.1 to 17.3.6.5), the security does not comply with underwriting guidelines.

17.3.7 Valuation Appeals- (Short Form / Full Valuations) IBAL underwriting guidelines prohibit the disputing of a valuation before a full application is received or purely on the basis that the valuer was not coming up with a valuation figure to the expectation of an introducer/originator. However, in certain circumstances it is permissible to appeal a valuation report.

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17.3.7.1 Valuation Appeals Process • All appeals are to be presented to the Valuation Team ([email protected]) who

will then review the position and refer to valuers in need. • Only variances greater than 10% from purchase price or customer’s estimated market value will

be investigated under this process. Where the variation is less than 10% the valuation team will further investigate the valuation only under exceptional circumstances. These will be assessed on a case by case basis.

• If Borrowers/Brokers or Business Development Managers request that we review a valuation report, the Valuation Team requires the following information (in writing at all times):

• Full details of additional sales evidence (minimum 3 sales), which includes: Date sold (Must be a confirmed sale and no more than 6 months old) Address Amount sold Size and details of dwelling/land Details of selling agent along with phone numbers.

• Unless the above information is provided the valuation appeal cannot be progressed further as there is insufficient information to present to the valuer.

17.3.7.2 Expected Turnaround Times for Valuation Appeals Valuers are required to formally review all comparable sales provided and in some instances re-visit properties to ensure comparability. A 2 day turnaround time has been set from the date the Valuation Team requests the valuer to review additional sales information.

17.4 General Insurance Applicants are required to have all security properties insured. An original of a replacement insurance policy (or certificate of currency) is to be obtained (insuring the property against fire, storm, and tempest risks) in the owner’s name and denoting IBAL interest as mortgagee for the full insurable value of the property. The insurance policy must be underwritten by an insurance company authorised and regulated by the Australian Prudential Regulation Authority (APRA). Refer to www.apra.gov.au for a full list “Insurers Authorised to Conduct New or Renewal Insurance Business in Australia” • If a Valuation Report is available, the insurable value stated in the report should be used; or • If no Valuation Report is available, as a general rule of thumb, the insurable value should be

approximately 60% of purchase price.

17.5 Variations between Purchase Price and Valuation A significant variation between the Valuation and the Purchase Price (e.g. as a result of two tier marketing, or related party purchases) sign-off by authorised CO & MM staff (refer to CO & MM DLA) is mandatory. If the formal valuation amount is less than the purchase price of the subject property by 10% or more, the borrower needs to be promptly informed of the situation once identified and given the

http://www.apra.gov.au/gi/pages/new-or-renewal.aspx

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option to either proceed or withdraw the loan application and given the opportunity to seek independent advice before accepting IBAL loan offer. Variations of this nature could be the result of “two tier marketing”, which is the practise of having two prices or tiers in a real estate market, one for locals who know the market values in the area, and one price for other buyers, often from interstate or overseas, who are not aware of local market prices. Where a Valuation indicates two tier marketing techniques may be in use, additional care is to be taken to ensure the current market value is used in calculating the applicable LVR. Sign off by the appropriate CO or MM DLA holder is required. Clause to be inserted in the loan approval and as a special condition in the letter of offer. “You acknowledge that the property at [address] has been valued at significantly less than the purchase price which we understand is $xxx,xxx. This valuation is for our internal use, and you are not entitled to rely on it. In the light of this information, we strongly recommend that you make independent enquiries as to the value of the property. It is common for valuers to value slightly below purchase price, and of course, the assessment by our valuer may have been unusually conservative or based on incomplete information. This underlines the importance of you making your own enquiries. By proceeding to drawdown the loan, you acknowledge you are aware of this issue and wish to borrow the loan despite this fact.”

17.6 Second Opinion Valuation • Not permitted - under no circumstances should a valuation request be withdrawn from a valuer

purely on the basis that the valuer was not coming up with a valuation figure to the expectation of an introducer/originator.

• In the event where an introducer or mortgage manager seeks a second valuation for legitimate reasons, details on comparable sales should be provided to IBAL which will then be passed on to panel valuers for their comments. If the valuer feels that there is no ground in varying the original valuation, the application needs to be referred to a team leader for further assessment.

18 VARIATIONS

18.1 Full Discharges The release of ING DIRECT security can be approved by an authorised DLA Holder when sufficient funds are received to clear all loans secured by that security.

18.2 Partial Release Partial discharges can be approved provided the residual debt is within the approving DLA Holder’s limit. Servicing Serviceability is not required where LVR remains the same or decreases and is within product parameters. NB: Assessment of servicing should be considered where: Full sale proceeds are not being obtained Property being released is deriving rental return

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Doubt exists as to the validity of the transaction (E.g. non arm’s length sales, sales not involving a Real Estate Agent)

Where arrears history is evident (greater than 1 payment in arrears (greater than 30 days) in the last 6 months) or where there is evidence that the customer has been in hardship in the previous 12 months (Care to be taken to ensure borrowers are financially stable)

Valuations Non LMI Loans Re-valuation on remaining security is required where LVR increases and is outside product parameters or; We are not obtaining full net sale proceeds or Doubt exists as to the validity of the transaction (E.g. non arm’s length sales, sales not

involving a Real Estate Agent)

LMI Loans Valuation required on remaining security and LVR must remain within product parameters.

18.3 Switches An authorised DLA Holder can approve product switches and extension of interest only repayments without a full assessment (i.e. updated assets, liabilities, income and expenses not required), provided loans meet the account conduct requirements detailed below. In all cases there is to be no change to any other aspect of the loan. E.g. increased loan amount, loan term, etc. Note: Maximum 80% LVR for interest only repayments. Maximum 5 years interest only period for the life of all owner occupied loans Account Conduct Requirements • All accounts operated by the applicants must have been conducted in a satisfactory manner,

with no greater than 1 payment in arrears (greater than 30 days) evident in the last 6 months and no evidence that the customer has been in hardship in the previous 12 months (Care to be taken to ensure borrowers are financially stable).

When the account conduct requirements are not met, an IBAL or ING MMF DLA Holder with full deviation authority can still consider/approve the application subject to completing an assessment and after noting appropriate mitigants.

18.4 REP Loans While this product has been removed from sale, variations and/or increases for existing accounts can still be approved under these guidelines (subject to current LVR restrictions). Increases to existing Owner Occupied REP loans can only be considered for home improvements where there is no reliance on the on completion valuation and satisfactory evidence of the purpose of funds are held on file In addition to the normal requirements of a variation, (e.g. increase), applications involving existing REP Loans must also satisfy the following requirements:

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• The maximum loan amount for REP is $600,000 plus any capitalised fee • REP loans must be on a principal and interest basis and capped at 90% (including capitalised fee) • Debt consolidation and cash out (equity release) is not allowed • Maximum LVR is 90% for substitutions including any capitalised fee. • No evidence of adverse credit, as defined under Section 13 (If account conduct test not met, an

IBAL DLA Holder with full deviation can still consider/approve the application subject to completing an assessment and after noting appropriate mitigants)

• REP Loans should satisfy both the Retail Credit Risk Sub-Policy and these underwriting guidelines. Any exceptions/ deviation must be approved by IBAL Risk Management.

• No third party security, except where debtors are spouse /de-facto (only) and the mortgagor is one of the debtors.

• No second mortgages permitted. • Any cross collateralisation of any existing securities held by IBAL is not permitted with any new

approval under this policy. • Bank Guarantees are not available under this policy.

Acceptable Security • Postcode Categories 1, 2 and Exception • Rural Residential acreage up to 2.2ha • Units/Apartments that are a minimum of 60 m2 • Valuations with a Risk Rating of 4 or 5 can be considered on a case by case basis where it is due

to a general issue common to the area (e.g. mine subsidence, bushfire prone area). Should the high rating relate specifically to the actual security property, this must be accepted by IBAL Risk Management

• Security substitution is allowed subject to the new security being comparable quality with regard to sale ability, location and condition.

Any coinciding increase in amount or LVR will need to be considered as above and appropriate fee (new or top up) to be charged.

18.5 Substitution of Security Full assessment is not required if No increase in LVR (normal valuation requirements to apply) No significant change in locality No change of employer for applicant No change in sources of income that were used in last approval .i.e. change or removal of

investment property income New security meets normal policy

A Full Assessment is to be considered where new security property is not in a primary postcode.

18.6 Consents Appropriately authorised DLA Holders can approve consents to second mortgages to other lenders and plans of sub-division or strata title of the Bank’s security for loans/exposures.

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18.6.1 Consent to a Second Mortgage Consent by IBAL to a second mortgage by another financier/lender is permissible subject to obtaining the same approval as is required for an amended transaction. Considerations in consenting to a second mortgage are:

• Should be in an open form without restriction to IBAL first mortgage • Impact of second mortgage on existing facility • If requested to restrict IBAL first mortgage, care should be taken to ensure that the value of

the security will not be eroded • Retain priority for a minimum of principal and interest and interest outstanding at any time

plus any recovery costs (should include legal fees, disbursements and costs that may be incurred in the sale of any security)

• Refer to panel solicitors for the preparation of the priority agreement

18.6.2 Other Consents Consents to sub-divisions, strata plans, etc. must have been signed off by the Bank’s lawyers as being in order for registration. Due consideration needs to be given to obtaining a new valuation(s), in particular for sub-divisions and new strata plans, to ensure that after the transaction is complete the bank’s security is not eroded and ensure it remains within normal underwriting guidelines

18.7 Increases This underwriting guideline is to apply in circumstances where an existing customer requests an increase or new facility to any existing facility (including REP loans) . Increases to existing lo doc loans can only be considered on a full financial disclosed basis (ie new financial and servicing assessment required) The following conditions must be satisfied: General • A signed application form must be received from all borrowers/guarantors. • The new loan amount must continue to meet IBAL serviceability requirements (Section 12). • Income/employment details are to be verified by either sighting

• One payslip for base income (less than one month old); three months bank statements showing a regular salary credit, with the name of the employer;

• independently confirmed via telephone verification with employer (refer to the requirements of points a-c in Section 10.1;

• if the above income is not sufficient or cannot be substantiated, refer to Section 10 Income Verification

• Security property remains within maximum Security LVR. • Maximum LVR (including any capitalised LMI premium) to apply to increases are as follows with

no deviations permitted • Maximum 90% for simple home improvements (Owner Occupied) where an “as is” valuation

is relied upon • 80% against owner occupied or investment securities for equity release, cash out, refinance

and debt consolidation.

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• For loan increase of more than $50,000, a new title search is to be performed and is to reveal no subsequent interests noted on the title.

Valuations Refer to Section 17.1.2 Account Conduct All accounts operated by the applicants must have been conducted in a satisfactory manner, with no greater than 1 payment in arrears (i.e. 30 days) evident in the last 6 months and there is no evidence that the customer has been in hardship in the previous 12 months (Care to be taken to ensure borrowers are financially stable) When the above account conduct requirements are not met, an IBAL DLA Holder with full deviation authority can still consider/approve the application after noting appropriate mitigants. Credit Checks (Veda Advantage) A Credit Check Report is mandatory

18.7.1 Non Structural Improvements An application to complete "non-structural" improvements (e.g. Kitchen / Bathroom upgrades etc.) where there is to be a reliance on an "on completion" valuation can be considered on the existing standard product under the following guidelines: • Maximum $50k • Single drawdown (but possibly multiple cheques) • Upfront valuation with specific quotes/contract/tender to be provided and commented on by

Valuer in the Valuation Report. • On settlement Bank Cheques are to be made payable in accordance with the specific

quotes/contracts/tenders used in completing the valuation report and provided to the borrower who is then responsible for control of payment to contractor on completion of works.

Should borrower want separate drawdowns to accommodate various works being undertaken then separate increase requests may need to be considered. For Owner occupied loans with a maximum LVR of up to 90% and reliance is on a current valuation prior to the proposed non structural improvements (as is value), supporting evidence (e.g invoice or quotes) must be provided to confirm that funds will be used for property improvements.

18.8 Increase in Conjunction with Other Variations Any request which includes an increase and other variation must satisfy the above eligibility criteria in conjunction with the requirements associated with the other variation (e.g. a substation and increase request must satisfy both the requirements of the substitution and the increase)

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19 LEGISLATION

19.1 National Credit Code

19.1.1 Introduction The National Credit Code (the NCC) applies from 1 July 2010. The object of the NCC is to regulate the provision of consumer credit throughout Australia. Substantial civil penalties may be imposed if breaches of certain provisions of the legislation occur. In addition, criminal penalties may apply and loan contracts, mortgages and guarantees may be varied or set aside by court order. The NCC: • Is found in Schedule 1 of the National Consumer Credit Protection Act 2009 (Cth), and regulates

the relationship between parties to consumer credit transactions. • Provides for upfront disclosure of relevant information in documents. • Regulates the ongoing conduct of the loan through to discharge (including interest and default

interest charging; content and timing requirements for statements of account; notice requirements for variations of interest, fees/charges, terms and conditions, default notices and procedures).

• Requires plain language loan contracts and securities. • Provides avenues of protection and legal redress for borrowers and security providers. • Regulates other matters such as conduct of credit providers (including their employees and

agents), advertising and linked credit provider relationships.

19.1.2 Regulated and Unregulated Loans Regarding IBAL products, the NCC regulates: • Credit provided to individuals or strata corporations where credit is to be used wholly or

predominantly: • for personal, domestic or household purposes; or • to purchase, renovate or improve residential property for investment purposes; or • to refinance credit that has been provided wholly or predominantly to purchase, renovate or

improve residential property for investment purposes • (together "NCC Purposes").

If credit is to a company, other than a strata corporation, then the credit is not regulated by the NCC. Credit Wholly or Predominantly for Non-NCC Purposes • If credit applied for by an individual or strata corporation is wholly or predominantly for non-NCC

purposes, then the applicant must indicate this by completing the declaration on the application form.

• When the applicant completes the declaration further inquiries must be made to verify whether the declaration is accurate in accordance with IBAL procedures in relation to non-NCC Purpose Declarations. The declaration cannot be relied on if IBAL (including its employees or agents) knew or had reason to believe, in the circumstances, that the declaration was not correct, or would have known or had reason to believe it was not correct if reasonable inquiries had been made. It also cannot be relied upon if the debtor is able to establish to the contrary in any proceedings ultimately initiated in relation to the loan.

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• A declaration is not required if the applicant is not an individual or strata corporation as the loan will be unregulated.

Credit Wholly or Predominantly for NCC Purposes • Credit to Applicants (i.e. individuals or strata corporations) that is wholly or predominantly for

NCC purposes will be regulated by the NCC. ‘Predominantly’ means greater than 50% of all the purposes to which the borrower intends to use the credit as at the date the credit contract is entered into.

Determining the Purpose of Credit As set out above, credit is regulated under the NCC if it is provided wholly or predominantly for either:

• personal, domestic or household purposes; or • to purchase, renovate or improve residential property for investment purposes or to refinance a

loan given for these purposes.

Personal, domestic or household purposes Even though the NCC does not define what constitutes personal, domestic or household use, it is self-explanatory and generally there should be no difficulty in deciding whether or not a loan is wholly or predominantly for personal, domestic or household purposes. For example, using credit: • To purchase a car for personal use or funds for a holiday would be wholly for personal, domestic

or household purposes. • To purchase a vehicle for business use would be wholly for investment or business purposes. Purchase, renovate or improve residential property for investment purposes A copy of the full definition of residential property in the NCC is located in Section 19.2. Residential property includes (but is not limited to) any land on which a dwelling is affixed or on which it is intended that a dwelling will be affixed predominantly for residential purposes. If the loan being considered is in respect of land on which there is currently a residential dwelling or it is intended that there be a residential dwelling, that loan must be documented as a regulated loan. Split purpose dwellings (i.e. where the dwelling is used partly for commercial purposes and partly for residential purposes) will also be regulated unless the aspects of the dwelling to be used for residential purposes are a small proportion of the dwelling. If land contains more than one dwelling, if any of those dwellings is to be used predominantly for residential purposes it must be documented as a regulated loan. Where there is any doubt guidance should be obtained from Legal and Compliance. Loans given for more than one purpose

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The difficulty arises when credit is provided or intended to be provided for different purposes. It is then necessary to consider what the predominant purpose is for the credit application. There are two basic methods by which the purpose may be tested: - • The Money Test, and • The Asset Test. If a loan satisfies the wholly or predominantly for personal, domestic or household criteria of either one of these tests, then the loan is regulated by the NCC. In some circumstances both tests must be applied to determine whether a loan is regulated or not. Money Test This test looks at the purpose for which most of the credit is intended to be used. If more than one half of the credit is intended to be used for personal, domestic or household purposes, and then the loan is regulated by the NCC. If more than half of the credit is to be used for business or investment purposes (excluding investment in residential property), then the loan is unregulated. The Money Test is used when more than one asset or service is to be acquired with the credit. If the total value of the assets or services to be acquired exclusively for NCC Purposes (ie. personal, domestic or household purposes or for investment in residential property or refinance of such a loan) exceeds one half of the credit, then the loan is regulated. If the total value of the assets or services to be acquired exclusively for non-NCC purposes (i.e. business or investment purposes excluding investment in residential investment property) exceeds one half of the total credit, then the loan is unregulated. For example, for a loan of $500,000 were $300,000 is to be used to purchase shares and $200,000 is to be used to purchase an investment property, 60% of the loan is for investment purposes (which is a non-NCC Purpose) and 40% is for purchase of a residential property for investment purposes (which is a NCC Purpose). In that case, the loan is predominantly for non-NCC Purposes and will not be regulated. For investment property deals, it is important to distinguish between the purchase of a single property that has both residential and commercial aspects and purchase of multiple properties. For a single property deal, the question is whether the property is a residential property, and the assessment set out in the residential investment property section above must be applied. For a multiple property deal, each property is assessed separately. If some are residential properties and some are commercial properties, then the value test can be applied based upon the value of all residential property to be purchased from loan proceeds, as compared to all commercial property. If there is no predominant purpose (i.e. when exactly half the loan will be used for both purposes - viz. personal and investment/business (excluding investment in residential property)), the underwriting guidelines state that the NCC will apply. Asset Test

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This test looks at the purpose for which the assets or services to be acquired with the credit are to be most used. If the assets or services are to be used mostly for NCC Purposes, then the loan is regulated by the NCC. If the assets or services are to be used mostly for non-NCC Purposes then the loan is unregulated. The Asset Test is used when one or more assets or services are acquired and one or more of them is used for either business or investment purposes. For each asset or service to be acquired, determine whether it is to be most used for business /investment purposes (excluding investment in residential investment property) or personal domestic or household purposes. Once this is determined, make an overall assessment to determine whether as a whole they are to be used mostly for non-NCC purposes, or NCC purposes. For example: In a loan used to buy a car the applicant will use the car partly for business and partly for personal use. The applicant believes the car will mostly be used for personal use. The loan would be regulated. If the applicant is unsure as to predominant use or does not wish to give the non-NCC Purpose declaration, the loan would be regulated. Note: In some situations both the Money Test and Asset Test will need to be applied to determine the predominant purpose.

19.1.3 National Credit Code (NCC) This document is intended for reference purposes only. Although every effort has been made to make this document accurate as at the date of issue, some discrepancies may exist between this document and certain policies and procedures.

19.1.3.1 Introduction The NCC came into effect on 1 July 2010. The NCC affects many of the interactions between IBAL and its customers. It is important that every employee and agent of IBAL (including introducers) knows how the NCC affects the policies, procedures and processes of IBAL. Ongoing compliance with the NCC is mandatory.

19.1.3.2 What is the NCC? The NCC is legislation that regulates credit provided to personal customers (and strata corporations) that is intended wholly or predominantly for personal, domestic or household use, or for the purchase, renovation or improvement of residential property for investment purposes or to refinance credit that has been provided wholly or predominantly to purchase, renovate or improve residential property for investment purposes. The NCC does not extend to loans that are provided predominantly for business and/or investment purposes, except in relation to investment in residential property.

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19.1.3.3 Relationship of the Code of Conduct The Introducer Code of Conduct outlines the key principles that govern the ethical standards and professional behaviour expected by IBAL. Each of these principles is consistent with the NCC, however the expectation that introducers will “Comply with the law and observe and abide by any duties and obligations imposed by a legislature” is particularly relevant.

19.1.3.4 When does the NCC Apply? Application of the NCC depends on the type of borrower and the purpose of the loan. The NCC applies to credit which is provided to personal customers (natural persons or strata corporations) and which is intended wholly or predominantly for personal, domestic or household use, or for the purchase, renovation or improvement of residential property for investment purposes or to refinance credit that has been provided wholly or predominantly to purchase, renovate or improve residential property for investment purposes (NCC Purposes).

19.1.3.5 Predominant purpose The predominant purpose of a loan will be the purpose for which more than 50% of the funds, or goods or services purchased with those funds, are used. When there is no predominance in the purpose of a loan (that is, when exactly half the loan will be used for personal purposes and half for business or investment, excluding investment in residential property), the underwriting guideline is that the NCC will apply. The predominant purpose of a loan is determined at the time of application when the credit contract is actually signed, even though it may change some time in the future. Examples of predominant purpose: A self-employed couple applies for a Personal Loan of $20,000 to buy a car. The car will sometimes be used in connection with their business, but will primarily be used as their family car. The credit provided by the loan will therefore be predominantly for personal purposes, so the NCC will apply. This is a regulated loan. A customer has applied for an Investment Property Loan of $70,000 to assist with the purchase of an investment villa on the Yarra River, which will be rented out (maybe staying in it for 4 weeks in a year). The credit provided will be predominantly for investment in residential property, so the NCC will apply. This is also a regulated loan. A customer has applied for an Investment Loan of $70,000 to purchase shares. The credit provided will be predominantly for investment purposes, so the NCC will not apply. This is a non-regulated loan. See also the discussion in Section 19.1.2 above.

19.1.3.6 Accurate assessment Accurate assessment of whether the NCC will apply to a loan is vital. This initial assessment will determine the type of documentation that needs to be prepared, and how the loan is treated after drawdown. Incorrect assessment will lead IBAL to act in contravention of the NCC. Responsibility for accurate assessment of the loan purpose rests with the introducer. If in any doubt whatsoever, matter should be discussed with IBAL.

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19.1.3.7 Assume the NCC applies The legislation presumes that the NCC applies to a loan if that is claimed in any proceedings unless IBAL has been able to establish that it does not. One way for IBAL to assist its position in this regard is to take a declaration from the customer saying that the loan will be used wholly or predominantly for non-NCC Purposes. This Purpose Declaration is included with IBAL application form when the loan funds are to be used predominantly for non-NCC Purposes. However, staff must also make adequate inquiries to verify the purpose for which the loan is being used. The Declaration cannot be relied upon by IBAL if, at the time the Declaration was taken, it (through its representatives) knew, or had reason to believe, or would have known or had reason to believe if it had made reasonable inquiries about the purpose of the loan, that the credit was in fact to be applied wholly or predominantly for a NCC Purpose. It will also be ineffective if the debtor is able to establish that the loan was used for non-NCC Purposes in any proceedings ultimately initiated with respect to the loan.

19.1.3.8 Personal Customers The NCC regulates credit provided to personal customers when used wholly or predominantly for NCC Purposes. “Personal customers” means individuals. The definition also includes: • Individuals “trading as … (a business name)”, and • Individuals “as trustee for … (a family trust)”.

19.1.3.9 Strata corporations The NCC regulates credit provided to strata corporations when used wholly or predominantly for NCC Purposes. Although advances to strata corporations are rare, IBAL will need to treat a strata corporation borrower in the same way as a personal borrower. A loan to an incorporated strata body will be the only time a company borrowing is regulated by the NCC.

19.1.3.10 When Does the NCC Not Apply? Certain types of facilities are specifically excluded from NCC regulation. Those relevant to introducers are: • Non-Personal - any facility where the debtor is not an individual (or strata corporation). • Business/Investment - any credit provided wholly for investment and/or predominantly for

business purposes, excluding investment in residential property as described above. A Purpose Declaration will be required to be executed by the customer for these loans and certain steps must be taken to verify the purpose for which the loan is being given (see IBAL Procedures in relation to non-NCC Purpose Declarations for details on the steps to be taken).

19.1.4 Disclosure The main emphasis of the NCC is on providing customers with full and accurate disclosure of all particulars relevant to the credit contract.

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At the application stage, each credit provider must give customers similar information so they can make a fair comparison of credit providers and products, and thus be able to make fully informed decisions when obtaining a loan. The NCC also requires that IBAL provide other information relevant to the customers after they sign their contract and during the term of the loan.

19.1.4.1 Advertising The intention of the NCC is to protect customers from being misled by any credit-related advertising material. In order to achieve this, the NCC regulates any advertisement that states or implies that credit is available. It is IBAL underwriting guideline that any advertisement or publication that states or implies that consumer credit is available must comply with the requirements of the NCC. The use of any non-standard advertising or marketing material is prohibited. All marketing materials published with IBAL logo and/or name must to be reviewed and signed off by the Legal Department. This also applies where material has been issued for introducer information only. When this occurs, it will be clearly stated that the information must not, under any circumstances, be issued to a customer.

19.1.4.2 Compliance with NCC Requirements IBAL and those acting as its introducers need to comply with the NCC just as they comply with any other law of the land. There are severe penalties for breaches of NCC requirements. Legal action in relation to breaches of key NCC requirements may be initiated by any party to a credit contract (including IBAL) or by ASIC. The NCC imposes severe penalties for any breaches. The credit contract must contain: • The amount of credit advanced; • The annual percentage interest rate charged; • The method of interest calculation; • The total amount of interest which is payable; • Any fees and charges payable; • Information regarding changes which affect interest, credit fees and charges; • Information regarding any default interest rate; and • Information regarding any credit-related insurance. (This is not an exhaustive list of the matters that must be included under the NCC) The credit contract must not impose: • A fee or charge prohibited by the NCC; or • An interest charge, fee or (other) charge exceeding the limitations set down by the NCC. A statement of account must contain the opening and closing balances, fees and charges debited to the account, payments to and from the account, details of the amount(s) of interest charged and the annual percentage rate(s) applied to the account during the statement period (this is not an exhaustive list of the matters that must be included).

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Compliance with these key requirements has to be incorporated into policies, procedures and systems wherever possible and form part of quality or hindsight review.

19.1.5 Account Servicing

19.1.6 Nomination Forms One aim of the NCC is to ensure that all debtors are kept fully informed about their loan account. Thus, IBAL must provide each debtor with a copy of all notices and documents required by the NCC throughout the life of their credit contract. However, when joint debtors reside at the same address, the NCC allows that they may elect to receive only one copy of notices and documents. A Nomination of One Party to Receive Notices (Nomination Form) is a formal document in which multiple debtors residing at the same address formally nominate one of them to receive notices and documents on behalf of them all. Nomination Form should be completed by multiple debtors: • Who reside at the same address • Who only wish to receive a single copy of notices and documents If a Nomination Form has not been completed, IBAL must send a copy of all correspondence to each debtor individually. Guarantors will generally not be offered the opportunity to complete a Nomination Form. However, if guarantors living at the same address specifically ask to be sent only one copy of notices and documents, IBAL will provide them with a Nomination Form for completion.

19.1.7 Statements and Account Information The NCC requires IBAL to periodically provide debtors with a statement of transactions on their loan account. The NCC also requires that statements contain certain items of information, including opening and closing balances, payments to and from the account, full particulars of any interest, fees or charges debited to the account. The account statement narratives should comply with provisions of the NCC. Additionally, the NCC gives customers the right to request information about their loan account from IBAL. The NCC specifies how quickly and in what manner IBAL must respond to these requests. The NCC specifies the maximum period for a statement of account.

19.1.8 Fees and Charges The aim of the NCC is that lenders will disclose full details of any fees and charges related to a customer’s credit contracts. IBAL is required to disclose the following information in relation to fees and charges which are currently payable or which may become payable in the future: • Name of the fee. • Amount of the fee or the method of calculation. • When the fee is payable. • Total amount of fees and charges (to the extent that the figure is ascertainable).

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• Fees and charges must be detailed and listed separately on statements. However, if the same fee is charged a number of times on one day, the amounts may be combined and shown as a lump sum.

• A statement of the credit fees and charges that are, or may become payable.

19.1.8.1 Commission The intent of the NCC is that lenders will disclose full details of any commissions paid in relation to a customer’s credit contracts. If a commission is to be paid by IBAL for the introduction of credit business, the credit contract (terms and conditions letter) must disclose: • A statement of this fact; • Who the commission is to be paid by; • Who the commission is to be paid to; and • The amount of the commission (if ascertainable). IBAL procedures provide for commission paid to brokers to be detailed in the terms and conditions letter. Details of commission payable must also be disclosed at the time of application prior to the customer signing the Borrower’s Authority and Disclosure Acknowledgement. The NCC also requires any commission paid in connection with credit related insurance to be disclosed in the credit contract.

19.1.9 Sales Force Requirements The NCC has implications for introducers in relation to how they interact with applicants. The NCC requires that complete and accurate information be given to an applicant during the sales process. The following information must be made known to an applicant:

19.1.9.1 Interest Rates The intent of the NCC is that debtors are fully aware of interest charges and that they receive adequate notice of any changes that affect the cost of their borrowing.

19.1.9.2 Interest Restrictions The NCC requires that interest be calculated using the actual daily balance of loan accounts. IBAL must not: • Use other methods such as calculating interest based on the account balance at the beginning

or end of a month; • Impose a minimum interest charge in cases where only very low amounts of interest have been

accrued; or • Provide credit requiring interest to be payable in advance.

19.1.9.3 Quoting interest rates The NCC aims to make it easier for consumers to judge the cost of credit by requiring that any advertising (which refers to the amount of any repayment) provide the annual percentage rate. Do not quote interest rates in any other way (e.g., an “effective” or “true” rate). An ad must also contain the relevant comparison rate if it contains an annual percentage rate.

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19.1.9.4 Default interest rates A credit contract may provide for a default rate of interest, but the higher rate must be imposed only: • in the event of a payment default; • in respect to the amount in default • While the default continues. While the NCC does not specify a limit on default rates, contracts charging very high rates may be found unreasonable by a court. If the court finds a default rate unreasonable, it can take action by reducing the default rate.

19.1.9.5 Requirements for interest rate changes If the interest rate is to change for an entire product group, IBAL should publish a notice in the newspaper before the change takes effect and send a notice to debtors with their next regular account statement. If IBAL changes the way it calculates or applies interest or changes an interest free period, written notice will be provided to each debtor at least 20 days before the change takes effect.

19.1.9.6 Application to the court A court can declare interest rate changes invalid, or can reduce them if it believes they are unconscionable.

19.1.10 Changes to Fees, Charges and Repayments The intent of the NCC is that IBAL must give debtors adequate notice before making any changes that affect the cost of their borrowing.

19.1.10.1 Requirements for changes to fees or charges If fees or charges are to change for an entire product group, IBAL will publish a notice in the newspaper 20 days before the change takes effect and send a notice to debtors with their next regular account statement. If IBAL changes the way it calculates or applies fees or charges, written notice will be provided to each debtor at least 20 days before the change takes effect. 20 days notice is also required if a new fee or charge is to be introduced. If the change reduces the debtor’s obligations, notice need only be given before or when the next statement of accounts is sent to the debtor after the change takes effect.

19.1.10.2 Requirements for changes to repayment amount Each debtor will be notified in writing of any changes to repayments at least 20 days before the change takes effect. This includes changes to amount, frequency, due date and method of calculation. If the change reduces the obligations of the debtor, notice need only be given with their next account statement after the change takes effect.

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19.1.11 Avoiding False and Misleading Representation The NCC protects consumers from false or misleading representations. The NCC requirements are: • Provide accurate advice in relation to the products and services that IBAL is able to offer. • Do not make any false or misleading statements about any of IBAL products, services or credit

contracts. • Do not attempt to sell IBAL consumer loan products unless you have a good understanding of

the product features and benefits.

19.1.11.1 Selling Restrictions The intent of the NCC is that the customer must never be pressured in any way to enter into a credit contract. The NCC requirements are: • Do not apply undue pressure, force or coercion in attempting to get a person to apply for or

enter into a credit contract. • Do not act in any manner that a customer may consider as harassment. IBAL has an obligation under the NCC not to pressure people into taking the following actions: • Applying for credit or entering into a related transaction (e.g. guarantee); • Providing security for a credit contract; • Purchasing goods or services under a linked credit arrangement; and • IBAL is not permitted to stipulate which insurance company people should use for consumer

credit insurance.

19.1.11.2 Calling at Homes by Arrangement Only The intent of the NCC is for applicants to be in control of the credit application process. The NCC stipulates that an employee or agent of IBAL must not call at a person’s residence without prior arrangement for the purpose of offering credit. A court might also consider cold calling at other locations, such as a person’s place of work, as harassment.

19.1.12 Credit Related Insurance The intent of the NCC is that debtors and guarantors have freedom to choose their insurance arrangements and should not be penalised in any way should they elect not to take up any insurance offered by the credit provider. Certain types of insurance are known in the NCC as “credit related insurance contracts”. This includes home buildings insurance when the policy is related to a mortgaged property that is security for a regulated credit contract. The NCC allows IBAL to require that security property be covered by home building insurance but is unable to require the debtor or guarantor to take out home building insurance with a particular insurer. It is also very important that the introducer complies with this instruction in respect to credit related insurance.

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When financing credit related insurance as part of a regulated loan, the credit contract must disclose:

• The name of insurer; • The amount of the insurance premium; • The type of insurance; • The period covered by the insurance; and • Details of any commission to be paid by the insurer.

19.1.13 Reduced Equity Fee Product/Lenders Mortgage Insurance Although not referred to in the NCC as “credit related insurance”, the NCC allows IBAL to require reduced equity fee/lenders mortgage insurance. IBAL underwriting guideline is that reduced equity product/lenders mortgage insurance will be required in certain circumstances. See Section 6.

19.1.14 Unjust Transactions The NCC protects consumers against unjust transactions. A debtor, mortgagor or guarantor may apply to a court to “re-open” a transaction (such as a credit contract, mortgage or guarantee) which they consider unjust. The court will consider all relevant circumstances to determine whether or not a credit contract, mortgage or guarantee is unjust, including: • Whether the lender knew, or could have known by reasonable inquiry of the debtor at the time,

that the debtor could not pay on its terms or not without substantial hardship; • The relative bargaining power of the parties; • Whether the terms or conduct of the lender is justified; • Whether the contract or document was easily understandable; and • What measures IBAL took to ensure that the debtor and guarantor understood the transaction. When re-opening a transaction, the court may make orders such as: • Relieving the debtor and guarantor of the obligation to pay any amount it considers

unreasonable; • Setting aside any agreements in whole or in part; • Ordering IBAL to discharge the mortgage; or • Reducing or cancelling an interest rate, establishment fee or prepayment charge it considers

unreasonable.

19.1.15 Loan Documentation Many of the requirements of the NCC affect loan documentation. All procedures for the processing of credit contracts, mortgages and guarantees should ensure compliance with the NCC.

19.1.16 Pre-NCC contracts covered The NCC applies to: • any credit contracts regulated by the NCC entered into after the commencement of the NCC (the

NCC commenced on 1 July 2010); • any contracts or instruments entered into prior to commencement that were in force

immediately before commencement and to which the old Consumer Credit Code of a referring State or Territory applied immediately before commencement.

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As a result, all Consumer Credit Code regulated loans in force immediately before 1 July 2010 are regulated by the NCC. This is limited to loans that were provided wholly or predominantly for personal, domestic or household purposes, as the old Consumer Credit Codes did not regulate investment in residential property. Loans entered into prior to 1 July 2010 wholly or predominantly for the purchase, renovation or improvement of residential property for investment purposes or to refinance credit that has been provided wholly or predominantly to purchase, renovate or improve residential property for investment purposes were not regulated under the old Consumer Credit Codes. Those loans will not be regulated under the NCC unless they are refinanced or varied by agreement between IBAL and the customer. However, any refinance or variation by agreement must be re-documented using regulated loan documentation.

19.1.17 Credit Contracts The NCC aims to provide the consumer with full and timely disclosure of all information relevant to their credit contract. The letter of offer signed by IBAL is a loan offer to the applicant. When the applicant accepts this loan offer, it becomes part of the credit contract (along with the terms and conditions booklet and fee schedule). A credit contract is (do not alter or make any addition) a written document: • Signed by both IBAL and the debtor; or • Signed by IBAL and accepted by the debtor through accessing credit (such as through using a

credit card). A person cannot authorise IBAL, or any person associated with IBAL, to enter a credit contract on their behalf. Introducers must not take any action that may be construed as entering a credit contract on behalf of a debtor, even if that person purports to authorise it.

19.1.17.1 Changes to Credit Contracts The intent of the NCC is that IBAL must give debtors adequate notice of any changes being made to their credit contract.

19.1.17.2 Requirements for Changes to Credit Contracts If all parties involved propose an increase in the amount of the credit contract, IBAL must: • give the debtor a written notice containing the information prescribed under section 83 of the

National Consumer Credit Protection Regulations 2010; • if the parties agree, give the debtor written notice setting out full particulars of the change no

later than 30 days after the date of agreement. This requirement does not apply to a change that defers or reduces the obligations of a debtor for a period not exceeding 90 days. If IBAL wishes to unilaterally change the terms of a credit contract (other than those changes covered in sections 16.7.5, 16.8.1 and 16.8.2 above), IBAL must provide written notice setting out the full particulars of the change to debtors at least 20 days before the change takes effect. If the change reduces the obligations of the debtor or extends the time for payment, IBAL needs to advise the debtor of the detail before or when the first statement is issued after the change takes effect.

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19.1.17.3 Requirements for Fixed Rate Contracts IBAL cannot unilaterally change the method of calculation for any early termination or prepayment fee or the fee itself so as to increase the amount of any such fee or charge.

19.1.18 Regulated Mortgages The intent of the NCC is that mortgagors should be fully aware of their obligations. Mortgages are covered by the NCC if: • Secure obligations under a regulated credit contract or guarantee; and • The mortgagor is an individual or strata corporation. Mortgages are not covered by the NCC if: • Secure only obligations under a business and/or investment loan (excluding investment in

residential property); • Mortgages by companies (except strata corporations) even though the credit secured may be a

regulated contract or guarantee; or • Mortgages over livestock, primary produce, perishable goods and foodstuffs, even though the

credit secured may be a regulated contract or guarantee.

19.1.19 Prohibited Mortgages The NCC prohibits third party mortgages. This means that each mortgagor must be either a debtor under the credit contract or a guarantor under a related guarantee. Third party security must therefore be by way of a guarantee supported by a mortgage given by the guarantor. A mortgage cannot be created over: • Remuneration or other employment benefits; • Benefits under a superannuation scheme; and • A cheque, bill of exchange or promissory note issued or endorsed by the debtor or any

guarantor. Additionally, under the NCC a mortgage cannot be created over goods that are essential household property unless: • the mortgagee supplied the goods to the mortgagor as part of a business carried on by the

mortgagee of supplying goods and the mortgagor has not, as a previous owner of the goods, sold them to the mortgagee for the purposes of the supply; or

• the mortgagee is a linked credit provider of the person who supplied the goods to the mortgagor. Essential household property means household property as prescribed under regulations made under subparagraph 116(2)(b)(i) of the Bankruptcy Act 1966 and includes property prescribed under regulations (none have been made as at 24 March 2010). Finally, a mortgage cannot be created over goods that are property used by the mortgagor in earning income by personal exertion if the goods do not have a total value greater than the relevant limit prescribed under the Bankruptcy Regulations 1966. Requirements for changes to mortgages:

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If IBAL wishes to unilaterally change the terms of a mortgage, IBAL must provide written notice setting out the full particulars of the change to mortgagors at least 20 days before the changes take effect. If all parties involved agree to a change in the terms of a mortgage, IBAL must provide written notice to all parties confirming full particulars of the change, after the agreement has been made and within 30 days.

19.1.20 Regulated Guarantees The intent of the NCC is that guarantors be fully aware of their obligations and that guarantees are regulated only if they relate to regulated credit contracts. As such, IBAL policy is that any non-regulated facility should be secured by a separate guarantee, even if the names of all the parties are the same as those involved in a regulated facility. Guarantees are covered by the NCC if: • They secure obligations under a regulated credit contract ; and • Guarantor is an individual or strata corporation. Guarantees not covered by the NCC include: • Guarantees that secure obligations under credit contracts given for business purposes and/or

investment purposes not related to residential property; or • Those given by companies.

19.1.20.1 Limit of guarantees The form of IBAL regulated guarantee secures only the regulated credit contract(s) it relates to. It does not extend to any unrelated credit contract(s) or to other liabilities the debtor may have. The NCC provides guarantors with the ability to limit their liability in relation to a continuing credit contract such as Smart Home Loan/Smart Saver Equity Loan to liabilities related to credit previously provided to the debtor by giving notice to IBAL. The guarantee is limited to the amount of the contract(s) plus reasonable enforcement expenses, or to any lesser amount agreed to by IBAL and the guarantor. IBAL and the guarantor may agree to an amount that is less than the amount of the contract, assuming that adequate security is available. When the liabilities of the debtor increase, the liabilities of the guarantor do not automatically increase.

19.1.20.2 Requirements for Changes to Guarantees If IBAL wishes to unilaterally change the terms of a guarantee, IBAL must provide written notice setting out the full particulars of the change to the guarantors at least 20 days before the change takes effect. If all parties involved agree to a change in the terms of the guarantee, IBAL must provide written notice to all parties confirming full particulars of the change, after the agreement has been made and within 30 days.

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19.1.21 External Fees and Charges A fee or charge paid by a debtor for an amount payable or to reimburse an amount paid by the lender to another person cannot exceed the amount the lender paid to that third party. For example: • Lenders mortgage insurance; • Search fees; • Stamp duty; and • Valuation fees, etc.

If IBAL collects a fee or charge in advance and the actual cost is less than the amount collected, the difference will be refunded to the debtor.

19.1.22 Managing Hardship, Disputed and Defaulted Accounts The NCC affects IBAL interaction with customers when handling disputes and hardship cases or attempting to collect repayments due to default. The NCC requires IBAL to follow strict guidelines when giving a default notice to customers.

19.1.22.1 Hardship Accounts The aim of the NCC is that debtors who are experiencing genuine difficulty can apply to IBAL to amend their contracts. IBAL will consider the circumstances of each individual case. The NCC requires IBAL to consider ‘hardship’ applications for credit contracts up to a threshold. The threshold is currently $500,000. After receiving an application, IBAL has 21 days to respond to the applicant in writing, outlining:

whether or not IBAL agrees to the change; if it does not agree:

the name of the external dispute resolution scheme of which IBAL is a member (the Financial Ombudsman Service);

the debtor's rights under that scheme; and the reasons IBAL does not agree to the change.

If IBAL declines the application, the debtor may apply to a court to change the terms of the contract. The court may order IBAL to change the credit contract. IBAL may then apply to the court to vary or revoke such a court ordered charge. The debtor may only apply to a court under the NCC if their credit contract is for an amount of no more than the threshold.

19.1.22.2 Disputed Accounts The NCC provides a formal way to resolve disputes between IBAL and a customer for regulated credit contracts. If a debtor disputes in writing a particular liability entered against the debtor under a credit contract, IBAL must provide a written explanation of how the liability occurred. A debtor must give notice of a dispute to IBAL on or before the date the account becomes due if under a continuing credit contract (such as a Credit Card) or otherwise within 30 days of receiving the statement of account which shows the disputed amount.

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IBAL will not begin enforcement proceedings relating to a disputed liability until 30 days after a written explanation of the liability has been given to the customer. If the customer is not satisfied with IBAL explanation, the customer may apply to a court for resolution of the dispute.

19.1.22.3 Defaults When a debtor is in default, IBAL must forward to the debtor(s) and guarantor(s) a default notice and allow the debtor a period of at least 30 days from the date of the default notice to remedy the default. This default notice will not usually be sent unless the default concerns multiple payments and the debtor has already been sent one or more letters requesting clearance of the arrears or excess. The default notice must contain a prominent heading at its top stating that it is a default notice and specify: • the default; and • the action necessary to remedy the default; and • a period for remedying the default (which must be at least 30 days); and • the date after which enforcement proceedings in relation to the default, and, if relevant,

repossession of mortgaged property may begin if the default has not been remedied; and • that repossession and sale of mortgaged property may not extinguish the debtor’s liability; and • that a subsequent default of the same kind that occurs during the period specified for remedying

the original default may be the subject of enforcement proceedings without further notice if it is not remedied within the period; and

• that, under the Privacy Act 1988, the debt may be included in a credit reporting agency’s credit information file about the debtor if: • the debt remains overdue for 60 days or more; and • the credit provider has taken steps to recover all or part of the debt; and

• the information set out in Form 12 to the National Consumer Credit Regulations 2010; and • explanation for acceleration clauses that may exist, including stating the amount required to pay

out the accelerated contract. Default notices must be given to all parties regardless of whether a ‘nomination of one Party to Receive Notices’ form has been completed. No default notice is required if the: • Bank reasonably believes that it was induced by fraud on the part of the debtor or mortgagor to

enter the credit contract or mortgage; • Bank has made reasonable attempts to locate the debtor or mortgagor without success; • Court gave authority to IBAL to proceed with enforcement without a default notice; or • Bank reasonably believes that the debtor or mortgagor has disposed, or intends to dispose, of

the mortgage property without IBAL consent or that urgent action is necessary to protect the mortgaged property.

If Default is rectified: • The contract or mortgage is re-instated; • No further legal actions are to be undertaken; and • No acceleration (catch up) repayments apply.

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19.1.23 Enforcement Proceedings The intent of the NCC is to provide all parties to the credit contract and related security with certain rights during enforcement proceedings. Enforcement proceedings begin when IBAL goes to a court for assistance in the collections process. This will usually be when IBAL lodges a statement of claim. IBAL will not begin enforcement proceedings against a debtor or mortgagor unless the debtor is in default under the credit contract or mortgage and required notices have been sent to the debtor. IBAL will forward to each debtor and any guarantor a default notice. The intention of the NCC is that IBAL should not profit or be compensated for loss through collection of unreasonable enforcement expenses. Only reasonable expenses incurred will be recovered and no more. Note: Do not make any informal arrangements with a debtor or guarantor regarding postponement of enforcement proceedings. The NCC has certain requirements that IBAL must observe when enforcing a NCC regulated contract or mortgage. These requirements provide the debtor, guarantor and mortgagor with the opportunity to remedy a default situation within a reasonable timeframe. The requirements of the NCC are in addition to any other laws relating to the enforcement of mortgages. The NCC does not prevent IBAL from giving notice under another law at the same time.

19.1.23.1 Postponement The intent of the NCC is to allow debtors and guarantors the opportunity to request to negotiate a postponement of enforcement proceeding. Where a credit contract is for an amount less than or equal to the hardship threshold ($500,000), a debtor or guarantor who has been given a default notice may request IBAL to negotiate to postpone enforcement proceedings. If applying for a postponement, the debtor must advise IBAL before the period stated in the default notice has expired. If a debtor, mortgagor or guarantor requests a negotiation for the postponement of enforcement proceedings, IBAL must give written notice within 21 days after receiving the request that:

• states whether or not IBAL agrees to negotiate; and • if IBAL does not agree, stating:

• the name of the external dispute resolution scheme of which IBAL is a member (the Financial Ombudsman Service);

• the debtor's rights under that scheme; and • the reasons IBAL does not agree to negotiate.

If IBAL agrees to postpone enforcement proceedings, a notice will be sent to each debtor, mortgagor and guarantor detailing the conditions of the postponement and the consequences if the conditions are not complied with. Notices must be given to all parties, regardless of whether a ‘Nomination of One Party to Receive Notices’ has been completed.

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A postponement makes any previous default notices void, but only while the conditions of the postponement are adhered to by the debtor and guarantor. Note: Do not make any informal arrangements with a debtor/guarantor regarding postponement of enforcement proceedings. Any arrangements agreed must be formally documented. If the debtor, mortgagor or guarantor is unable to negotiate a postponement of enforcement proceedings with IBAL, they may apply to a court for a postponement. The court may order or refuse postponement or may stay enforcement until it reaches a decision. IBAL may apply to the court for variation of any court order to stay enforcement proceedings.

19.1.24 Definition of Residential Property Definition of "residential property" Residential property means: (a) land on which a dwelling is or will be affixed predominantly for residential purposes; or (b) a lease of land on which a dwelling is or will be affixed predominantly for residential purposes, being a lease that:

(i) is a Crown lease (within the meaning of the Income Tax Assessment Act 1997); and (ii) gives the lessee reasonable security of tenure; or

(c) a licence in relation to land on which a dwelling is or will be affixed predominantly for residential purposes, being a licence that:

(i) is granted by the Commonwealth, a State or a Territory; and (ii) gives the licensee reasonable security of tenure; or

(d) a share that: (i) is in a company that is the legal owner of the land on which a dwelling is or will be affixed predominantly for residential purposes; and (ii) gives the person who legally owns the share a right to occupy the dwelling; or

(e) a right to occupy a dwelling in an aged care facility or retirement village; (f) an equity of redemption in relation to land on which a dwelling is or will be affixed predominantly for residential purposes. 19.2 Anti Money Laundering and Counter-Terrorism Financing (AMLCTF) ACT 2006 Australia has implemented laws to improve Australia’s existing anti-money laundering and counter-terrorism financing system. These laws meet higher international standards to protect Australian businesses from being used for money laundering and terrorism financing. The Act makes it harder for criminals to use the profits of crime and terrorists to receive money to carry out terrorist acts. The legislation is aimed at preventing criminally derived funds from being washed through the banking system and at reducing the risk of IBAL being used to finance terrorist activities. The AML/CTF laws are a major step towards:

• enabling Australia’s financial sector to maintain international business relationships; • preventing and detecting money laundering and terrorism financing by meeting the needs of

law enforcement agencies for targeted information about possible criminal activity; and

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• bringing Australia into line with international standards, including standards set by the Financial Action Task Force (FATF).

The AML/CTF Act covers the financial sector, gambling sector, bullion dealers and other professionals or businesses (‘reporting entities’) that provide particular ‘designated services’. The AML/CTF Act imposes a number of obligations on reporting entities when they provide designated services, including:

• customer identification and verification of identity; • record-keeping; • establishing and maintaining an AML/CTF program; • ongoing customer due diligence; and • reporting (suspicious matters, threshold transactions and international funds transfer

instructions). The requirements The purpose of the AML/CTF Act is the regulation of financial transactions to help detect and prevent money laundering and terrorism financing. The AML/CTF legislative package (AML/CTF Act, Rules and Austrac guidelines) places obligations on providers of financial services which are at risk of exposure to money laundering or terrorism financing. The cornerstone of the AML/CTF regime is that businesses know their customers. The regime requires reporting entities such as IBAL to carry out customer identification and verification of that identification. This means carrying out customer ‘due diligence’ which also requires us to monitor customer transactions on an ongoing basis. Effect on IBAL The AML/CTF Act imposes obligations on businesses offering ‘designated services’ that could be exploited to launder money or to finance terrorism. The AML/CTF Act obligations apply whenever we provide a ‘designated service’, such as:

• opening an account; • accepting money on deposit; • making a loan; • issuing a debit card; and • sending and receiving instructions on electronic funds transfers.

Obligations that impact IBAL include:

• the collection and verification of identification documents for all new customers; • requirements to monitor customer transactions to identify, mitigate and manage the risk that the provision of the designated service may involve or facilitate money laundering or terrorism financing; • the supply of originator information in domestic and international funds transfer instructions; • the expansion of existing ‘suspicious transaction’ reporting obligations to ‘suspicious matter’ reporting (not all designated services under the AML/CTF Act involve transactions); • reporting on international funds transfer instructions; • reporting on transactions which exceed thresholds set in the AML/CTF Act or Rules; and

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• detailed record keeping obligations. There are a number of benefits for IBAL due to the introduction of the AML/CTF Act:

• higher level of awareness and understanding of money laundering risks and trends by all staff;

• analysis of the money laundering and terrorism financing risks IBAL reasonably faces with the aim of reducing risk;

• reduced risk of legal issues or reputation damage related to allowing money launderers or terrorists to bank with IBAL. It also reduces risk of financial loss to the business through fraudulent activity;

• reduced risk of financial loss though fraudulent applications and falsified identification; • improved efficiency in account opening process by reducing the need to handle paper to successfully open accounts;

• better understanding of who our customers are.

Should a credit assessor come across a suspicious matter it should be reported to the Financial Crimes Team or the AML Compliance Officer immediately. For example, a loan application is submitted with falsified documents relating to the identity of the client. As we are unable to verify the identity of the customer it should be referred to the Financial Crimes Team to investigate the matter and lodge a suspicious matter report. This should be done regardless if the application has been approved or not.

19.3 Verification of Identity (VOI) A number of states have imposed stronger identification requirements for anyone dealing with property. Some states will require a face to face (F2F) verification of the mortgagor, collection of prescribed customer identification documents, and lodgement of a declaration by the mortgagee (or its agent). In those states the requirements may apply to any mortgage of property located in that particular state or a person signing on behalf of a mortgagor (e.g. Director of a company) regardless of where the mortgagor lives. Where required, verification of the mortgagor (or person signing on behalf of the mortgagor) would ideally occur immediately prior to or at the signing of the mortgage. ING DIRECT will continue with its existing process of completing the verification of identity at loan application stage. If a borrower does not undertake a F2F with either an ING DIRECT employee, MM employer, the broker or at Australia Post, ING will not accept the loan application. These identification requirements generally apply to the following documents lodged for registration:

Document Type Party Required to be Identified in Accordance with this Practice

Transfer of Land Seller/Transferor Mortgage Mortgagor

Request for Duplicate Certificate of Title

Registered Proprietor and Applicant

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Replacement Duplicate Certificate of Title

Registered Proprietor and Applicant

Transmission Executor/Administrator, Applicant Survivorship Survivor, Applicant Power of Attorney Donor

Further information is contained in the procedure portal for IBAL and the Documents & Procedures Manual for MMs.

19.4 Privacy Act The Privacy Act 1988 is designed, insofar as it relates to lending, to control the collection, storage and use of credit information about applicants. To ensure compliance with the Privacy Act, all lending authorities must: Obtain a Credit Information Authority as this will enable IBAL to obtain a credit check report from each person who is a party to the loan (including guarantors); and If information provided by an applicant includes their Tax File Number (TFN), the TFN must be removed or masked immediately upon receipt.

19.5 Code of Banking Practice The Code of Banking Practice sets standards of disclosure and conduct that IBAL and other member banks of the Australian Bankers’ Association have agreed to observe when dealing with their customers. The Code of Banking Practice is intended to: • Describe standards of good practice and service; • Promote disclosure of information relevant and useful to applicant(s); • Promote informed and effective relationships between IBAL and applicant(s); and • Require banks to have procedures for resolutions of disputes between banks and customers. The Code of Banking Practice applies to individuals where a loan is wholly and exclusively for private and domestic use. These requirements are additional to those contained in the NCC that applies to loans made predominantly for personal, domestic or household purposes and for the refinance, purchase, renovation or improvement of residential property for investment purposes. The major terms of the Code of Banking Practice are: IBAL must ensure that the customer has the capacity to repay the loan, taking into account a number of factors: • The applicant(s)’ income and expenditure; • The purpose of the banking service; • Credit scoring (if applicable); and • The applicant(s)’ assets and liabilities. IBAL must also:

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• Disclose to applicant(s) all fees, charges and costs; • Keep applicant(s)’ information confidential; • Recommend that guarantor(s) obtains independent legal and financial advice; and • Not engage in deceptive or misleading behaviour.

19.6 Trade Practices Act The Trade Practices Act is a Commonwealth Act that regulates anti-competitive behaviour of companies, providing protection to both company and private consumers. The main provisions of the Trade Practices Act are: • Contracts, arrangements or understandings in restraint of trade or commerce; • Monopolisation; • Exclusive Dealing; • Resale Price Maintenance; • Price Discrimination; • Mergers; and • Consumer Protection. For information purposes only: As of April 2010, there are two amendments in Parliament:

1. The Trade Practices Amendment (Australian Consumer Law) Bill (no. 1) 2009 which has been passed and is awaiting assent; and

2. The Trade Practices Amendment (Australian Consumer Law) Bill (no.2) 2010, which has been introduced to the Lower House of Parliament.

Bill No. 1 may commence as early as July 2010, and Bill No.2 by January 2011. Once firm dates are set, Policy will be adjusted accordingly.