It has been more than a year since interest rates began rising in Australia. As a result of the increasing pressure on consumers to meet their loan repayment obligations, Australian Credit Licensees (referred to as credit issuers in this blog) are likely to see an increasing number of borrowers who are suffering from financial difficulties and should be prepared to deal with requests for hardship assistance.
This blog includes some common questions that might be interesting to credit issuers in dealing with requests for financial difficulty assistance.
Legal basis for financial difficulty assistance
Section 72(1) of the National Consumer Credit Code (“NCCC”) gives a consumer the right to request a hardship variation for a facility regulated by the NCCC which includes most personal home loans, credit cards, personal loans and investment property loans entered into after 1 July 2010.
A request for financial difficulty assistance may be oral or in writing. When a credit issuer receives such a request, it must genuinely consider that request and confirm with the customer whether it agrees to vary the credit contract.
Q&A 1 – When can a financial difficulty arise?
Financial difficulty occurs when a consumer is unexpectedly unable to meet their repayment obligations. This can be due to a number of causes such as accidents, death of a family member, reduction of work hours, or redundancy.
The Australian Financial Complaints Authority’s (“AFCA”) experience has shown that complaints in relation to financial difficulty often arise when either the complainant or the licensee fail to:
- Identify the financial difficulty and provide sufficient information to understand it;
- Propose a solution that is robust and relevant to the circumstances;
- Take appropriate action when the financial difficulty is not able to be overcome; and
- Ensure that any solution agreements reached bring finality to the issue.
Q&A 2 – What is a hardship variation?
A hardship variation is a change to the terms of the loan based on the presented financial hardship. If a loan is put in place on or after March 2013, a consumer can apply for a hardship variation whatever the value of the loan. If a loan is put in place before March 2013, there are limits called Hardship Threshold imposed on the value of the loan.
Q&A 3 – Does AFCA have the power to vary credit contracts?
Under AFCA’s Rules, it has the power to vary credit contracts but it will only do so in circumstances where a variation will see the repayment of the loan in a reasonable period.
Just a bit of background information about AFCA: AFCA is the independent external dispute resolution (“EDR”) scheme for the financial services sector. AFCA can consider complaints against credit issuers that are members of AFCA. All Australian Credit Licensees are required to be members of AFCA.
AFCA may decide that:
- a credit issuer must compensate a consumer for direct financial loss, indirect financial loss or non-financial loss; and
- a credit issuer is required to take, or refrain from taking, particular actions.
If a consumer accepts AFCA’s decision, the credit issuer is bound by that decision.
Q&A 4 – When will AFCA step in to decide on credit contract variation?
AFCA encourages the parties to negotiate for a realistic solution. When negotiations have failed to resolve the complaint, AFCA will use its ability to vary a credit contract as a last resort.
AFCA will only require a credit issuer to vary a credit contract if AFCA is satisfied that:
- the consumer is able to demonstrate an ability to repay the debt in full within a reasonable period if the contract is varied, even if this is over a period longer than the existing term; and
- a variation would be appropriate considering the consumer’s current financial position.
Q&A 5 – Should a credit issuer wait until consents are obtained from guarantors, caveators or second mortgagees to negotiate or grant the client a contract variation?
In AFCA’s view, a credit issuer should not insist on obtaining these consents as a condition to vary the credit contract and should not delay in assessment a hardship request just because there are guarantors, caveators or second mortgages involved in the contract. However, if there is a Deed of Priority in place with the second mortgage, it may be appropriate to obtain their prior consent if required by the Deed.
Q&A 6 – Can a credit issuer decline hardship assistance if the consumer is bankrupt?
If bankruptcy is the sole reason for a credit issuer to decline hardship assistance for a secured debt. The credit issuer should seek information about the consumer’s current financial circumstances and offer appropriate assistance based on an assessment of that information. The consumer should show that they would be able to repay the debt if a contract variation/hardship assistance was granted.
Q&A 7 – Is a credit issuer obliged to waive debt when there is a financial difficulty?
A credit issuer is under no obligation to waive debt or interest on the grounds of financial difficulty alone.
Q&A 8 – What if a consumer is unable to provide evidence to support the financial difficulty or otherwise demonstrate his/her financial circumstances?
If a consumer does not provide information requested by the credit issuer, such as medical certificates, bills, rental agreements etc, the credit issuer should still work to identify what options are available with the information it does have even if the information is limited.
If a credit issuer does not have all the necessary information and needs to make some assumptions, it should state what assumptions it has made.
If the credit issuer is unable to agree to a repayment arrangement based on the information available, it should provide the consumer with written reasons for its decision. The credit issuer should also identify what, if any, additional documentation it requires from the consumer in order to reconsider its decision.
Q&A 9 – What if the financial difficulty cannot be overcome by granting hardship assistance?
In circumstances where the financial difficulty cannot be overcome with hardship assistance, even in the longer term, and the only realistic solution is the sale of an asset such as a home or investment property, AFCA will encourage the parties to agree on a reasonable timeframe for the consumer to sell the asset voluntarily.
If you are in the business of providing loans regulated by NCCC or small business loans that falls under AFCA’s jurisdiction, we have included a few tips below to assist your management of hardship applications.
1. Review and ensure your Hardship Policy is up to date.
2. Put in place systems and processes to identify customers who may be experiencing financial difficulty. This can be done, for example, by having internal training, identifying high-risk accounts, and being willing to understand why accounts may be unpaid or paid late.
3. Do not make any requests for information so complex or large that is overwhelming for the consumer. AFCA indicated that excessive requests for information are often a barrier to providing hardship assistance and may prevent the early resolution of financial difficulty complaints.
4. Be flexible and offer tailored solutions to consumers where a standardised ‘one-size-fits-all’ approach may not meet a particular consumer need. For example, if a consumer has had their loan repayments deferred, a lender should ensure that how a consumer proposes to catch up on missed repayments is manageable and offer alternatives.
5. Ensure all communications with consumers are clear and provide consumers with sufficient information to make an informed decision about the assistance available.
6. Have ongoing communications with consumers throughout the period of assistance to ensure that any assistance offered remains appropriate and continues to meet their needs.
If you have any questions about your Hardship Policy, please reach out to us.