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41/1995 Release from Personal Covenants - ineligible spouse
National Office Instruction
amending General Orders (1993 edition)
Instruction No. 41
Date of Effect: 11 September 1995
RELEASE FROM PERSONAL COVENANTS
TRANSFERS TO INELIGIBLE SPOUSE
The purpose of this Instruction is to clarify the policy relating to the release of an eligible person from the personal covenants of a mortgage.
A number of cases discussed during the Subsidy Managers' Conference in May 1995 has highlighted the need to issue an instruction clarifying the current policy.
With the advent of portability, the question that has arisen in cases where the current loan is serviced by an ineligible ex-spouse is; 'does the eligible person have access to a portable loan entitlement?'
Transfers to the ineligible spouse were not a rarity, especially in the period following the promulgation of the Family Law Act 1975, and it was quite common for the property to be transferred subject to the existing Defence Service Homes (DSH) mortgage. This left the eligible person tied to the mortgage as a mortgagor notwithstanding the fact they were no longer a registered proprietor of the mortgaged land. This practice ceased with the 1990 amendment to section 22 which prohibits a transfer of any land which is subject to a subsidised advance to a person who is not an eligible person. Legislative changes which provided for portability did not permit the eligible person to access the continuing entitlement because the original loan was still current. Paragraph (b) of the definition of "further advance" in section 4 refers.
The link between the eligible person and the ongoing mortgage was, of course, the personal covenants contained in that mortgage. As a lending organisation, the general policy of the Defence Service Homes Corporation required that, in cases such as these, the outgoing mortgagor was not released from the obligations contained in the personal covenants. As part of a streamlining exercise, the Corporation issued an Instruction in 1987 (COI 1987/130) which reversed the policy, providing for a general release.
In considering whether the eligible person was entitled to a further loan in these cases, the consensus was that because they were still bound to a current mortgage by the personal covenants, they could not be assisted. However, the interplay of the general release from the personal covenants in March 1987 meant that the eligible person was severed from the mortgage before the critical date of 9 December 1987.
The difficulty for staff in processing those cases where there had been a matrimonial breakdown with the property being transferred to an ineligible spouse, centred on the question of whether the eligible person was still tied to the loan until 9 December 1987 and whether they could be released after that date and thereby be entitled to a further advance.
Policy to be applied
A new approach, which relies on the DSH legislation, State property law and the facts of each case, rather than the policy surrounding the personal covenant concept, is to be taken.
Prior to the amending legislation of 1988, the definition of "borrower" in section 4 of the Defence Service Homes Act read:
"Borrower" means a person who has received an advance or executed a mortgage or other security to the Corporation and, for the purposes of sections 30A, 31 and 36 includes -
(a) a transferee under section 35 of an estate or interest in the land or land and dwelling-house that was formerly the estate or interest of a borrower in relation to the land or land and dwelling-house; and
(b) the personal representative of a person who was, immediately before his death, a borrower in relation to the land or land and dwelling-house;
However, the Defence Service Homes Amendment Act 1988 (which came into force on 19 December 1988) changed the definition of "borrower" to
"borrower" means a person who is liable to pay the outstanding amount:
(a) of a subsidised advance in respect of which subsidy is payable; or
(b) secured by a specified portfolio asset (other than a contract of sale) which vests in the Bank under section 6B and in respect of which subsidy is payable;
Accordingly, a "borrower" is, until 19 December 1988, one who has received an advance or executed a mortgage. This means that this particular class of eligible people are tied to the DSH mortgage until 19 December 1988 by the definition of "borrower" rather than the personal covenants, thereby satisfying section 19 of the DSH Act. After 19 December 1988, the eligible person is released from the burden of the mortgage if:
(a) the property settlement contains a clause whereby the eligible person is indemnified against any demands made for principal or interest under the mortgage; or
(b) the relevant State property legislation contains a statutory indemnity for the benefit of the outgoing transferor against any demands made for principal or interest under the mortgage.
Either of these provisions (a) and (b) will exclude the eligible person from the current definition of "borrower", and allow them access to a portable loan entitlement. In those cases where a property settlement was not entered into and the relevant State legislation does not contain a statutory indemnity (this is the case in at least one State, namely Queensland), then, as a matter of last resort, reliance will need to be placed on formal release from the personal covenants.
However, it should be noted that there are instances of property settlements containing specific clauses which compel the eligible person to continue making the repayments required by the DSH mortgage. In such cases the statutory indemnity does not apply, and delegates will have to take notice of these types of clauses in their decision-making.
In considering this new approach, the relevance of the general release from the personal covenants promulgated in COI 1987/131 is questioned. This COI was issued on the basis of generally streamlining the administration of the mortgage management aspects of the DSH Act. The impact of the COI on portability, given subsequent legislative changes, could not be foretold. In view of this, the principles embodied in COI 1987/131 are no longer to be applied. This will place all of this particular class of client in the same position. If the mortgage commenced before the relevant Vesting Date in a State, then for the period from commencement to Vesting, you will be able to deem the eligible person transferor released from the personal covenants if required. Mortgages commencing after the Vesting Date are of Westpac origin and full responsibility for release lies with the Bank. Therefore, Westpac will need to be approached for a formal release; the mortgage having been given to the Bank.
In those cases where there is a property settlement between the parties, or there is a statutory indemnity in the State legislation, the date from which portability arises will be 19 December 1988 for term and liability unless the mortgage was discharged between 9 December 1987 and 19 December 1988. In those cases, the date from which portability arises will be the date of discharge. For those cases which cannot rely on a property settlement or a statutory indemnity, the operative date will be the date a release from the personal covenants is obtained.
The provisions of section 66 of Schedule 1 to the Veterans' Affairs (1995-96 Budget Measures) Legislation Amendment Bill 1995 will continue to be applied in accordance with the Secretary's Direction for administrative implementation. These provisions do not alter the effect of this change in policy. As a general guideline, an initial loan which was taken out before 9 May 1970 and on which subsidy ceased to be payable before 9 May 1995 is not capable of being the vehicle for a further advance because of the prescribed period exceeding 25 years.
Applications from the client group whose previous DSH subsidised loans have been transferred to their ex-spouses will now be processed with the prime focus on the facts of each case and the applicability of State property legislation rather than the previous concerns with the personal covenants in the mortgage.
In processing these applications, delegates will need to satisfy themselves regarding the appropriateness of the terms of any property settlement, and the relevance of State property legislation, within the framework of the beneficial DSH legislation.
Delegates should be guided by the following in determining the balance of term and the amount of sudsidised loan to be made available to transferor eligible persons:
(a) the amended rules governing the term of a further advance set out in section 66 of Schedule 1 to the Veterans' Affairs (1995-96 Budget Measures) Legislation Amendment Bill 1995 will apply;
(b) in cases where the transferred loan is discharged between 9 December 1987 and 19 December 1988, the operative date for balance of term and liability is the date of discharge;
(c) in cases where the transferred loan remains current or is discharged after 19 December 1988, the operative date for balance of term and liability is 19 December 1988;
(d) in cases where the transferred loan is not subject to a property settlement between the parties and the relevant State property legislation does not contain a statutory indemnity against demand made for principal and interest under the mortgage, the operative date for balance of term and liability will be the date of release from the personal covenants.
No changes are required to General Orders.
Effect on previously issued NOIs (formerly COIs)
The principles embodied in COI 1987/131 are no longer to be applied.
Atg General Manager
6 September 1995