New hardship laws reflect spirit of offering help

New hardship laws reflect spirit of offering help before defaults - but will lenders embrace it?

21 August 2012

Australians who put their hand up to say they are experiencing a period of financial hardship will now have an easier time requesting a change in their repayments, and lenders will have a moral and legal obligation to review the request before they issue a default or other proceedings.

A leading national credit repairer says changes to financial hardship legislation passed through Parliament yesterday will be welcomed for those seeking help during a time of hardship to defer and change payments prior to being blacklisted from credit for between 5 and 7 years due to defaults and other credit listings.

“There are many cases of genuine hardship – especially illness and temporary unemployment, which should not see consumers banned from obtaining credit for years to come – and many lenders are ready to work within these guidelines to come up with something best for all parties prior to starting the debt recovery process,” MyCRA Credit Rating Repairs CEO, Graham Doessel says.

The Consumer Credit Legislation Amendment (Enhancements) Bill 2012 was passed through Parliament yesterday and is now awaiting Royal Assent.[i]

From 1 March 2013, a debtor will have a statutory right to request a hardship variation where the debtor cannot meet their obligations under a credit contract regardless of the amount of credit that is provided under their contract.

There is no obligation on the Credit Provider to comply with this request, but they must have issued written notification of their refusal to comply with a hardship request prior to enforcement proceedings.

Financial Services Minister, Bill Shorten has described the amendments in a release to the media as “simplifying the procedures for borrowers to apply for a variation to their repayments on the grounds of financial hardship, as it is in the best interests of both parties to try and resolve these situations as quickly and simply as possible.”

But Mr Doessel says despite these new laws, some groups could be seen as wishing to deter lenders from taking this approach, and he says this could be contrary to the vibe of new Australian credit laws.

According to reports in Australian Broker last week, Australian Prudential Regulation Authority (APRA) made assertions in a letter to top bank executives that they should be wary of the risks involved in issuing mortgage repayment concessions.

Here is an excerpt from that story[ii]:

APRA said some banks were "wiping the slate clean" with borrowers, to avoid activating debt collection processes.

It said while 'hardship concessions' were sometimes necessary, it potentially disrupted the reporting process.

APRA claimed there were cases of banks not reporting overdue loans.

''While this practice may be reasonable from an operational perspective, it can obscure prudent internal and regulatory reporting of past-due and impaired loans,'' APRA said.

Mr Doessel argues that the apparent attitude of APRA – whether public or otherwise, seems contrary to the vibe of the new laws.

“These comments seem to advocate the watering down of consumer rights that will be provided for with the amendments to credit legislation,” Mr Doessel says.

He says his credit repair company does a significant amount of work with clients who have been disadvantaged due to lenders not offering financial hardship variations - issuing defaults when they should have offered assistance.

“We have had many instances where clients want to dispute the default on their credit report which was issued during a period of financial hardship, and the creditor has refused the hardship request.”

“We see more lenders than not eager to proceed with the process of debt recovery rather than complying with the client’s request for assistance – and comments such as those from APRA can only add to confusion over internal policy on hardship, which could see more consumers disadvantaged with bad credit for 5 years which should not be there,” he explains.

Official policy on hardship is varied, but Mr Doessel says the ‘spirit’ of both government and industry body positions on financial hardship variations is for lenders to reasonably consider the request before issuing enforcement against the borrower.

Recommendations put forward jointly by ASIC and the Victorian State Government around financial hardship as far back as 2009 in their report Helping home borrowers in financial hardship[iii] show some key recommendations for lenders around financial hardship, which included:

1. Lenders should provide information about financial hardship to all borrowers, not just those in default.

2. Lenders should ensure all staff are able to identify ‘financial hardship’ cases.

3. Lender policies relating to financial hardship must at a minimum reflect and ensure consistency with the legal rights and obligations available to borrowers.

4. Lenders should adopt policies that are flexible, allowing tailored responses to particular needs and circumstances and without bias towards short-term assistance

5. Borrowers would benefit from being provided with information about their rights to request relief or assistance on the grounds of financial hardship and the options available to them to dispute a decision.

Mr Doessel says lenders should respect financial hardship variation requests as a genuine alternative and prelude to the recording of default listings, and for good reason.

“Defaults will severely disadvantage the future of the consumer, long after the period of financial hardship is over. Defaults mean people can’t get a home, a car, a credit card and even a mobile phone plan while they have this on their credit record, so it is important for lenders to think about whether it is fair or necessary or whether a ‘plan b’ can be devised between both parties.”

“Any entity which encourages lenders to move away from this approach seems in contrast with the intent of new credit laws as I see them unfolding,” he says.

Tips for Applying for financial hardship

- If you have a change in your circumstances – like unemployment, illness, injury or other reasonable issue you should ask for a hardship variation.

- Put your request in writing and keep a copy as a record.

- You may need to use the actual words “hardship variation” for your lender to officially recognise the request, and to avoid confusion as to what you’re asking for.

- Check your loan agreement as to the terms you entered into around financial hardship. Those agreements post-1 July 2010 have a clause which requires the lender to respond to you within 21 days.

Money Help, a website run by the Victorian State Government offers more help on how to apply for hardship with creditors in the correct way.[iv]

They advise people to work out what they can afford to pay prior to requesting a hardship variation. They explain the benefits in applying for hardship can range from more affordable payments, to putting a stop on action towards defaulting your credit file.

Mr Doessel says Creditors are legally required to consider a person’s request for variation on payment arrangements, but are not obliged to agree to any hardship variation proposal put forward.

“If a lender either refuses or fails to respond to your hardship request, you can lodge a complaint with their independent dispute resolution scheme, such as the Ombudsman they are a member of,” he says.

ends

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