Hardship Protection

Sydney Morning Herald

Wednesday March 28, 2007

By Kelsey Munro

If a financial hiccup puts you at risk of losing your home, quick action could save the day.

If you are under financial pressure and worried that you may lose your home, there are a few things you can do to save the day. But you need to act quickly.

Moody's Investor Services reports mortgagee delinquencies (payments later than 30 days) hit a record high in December while mortgagee possessions are escalating in some suburbs. So what can you do?

Borrowers have a right in certain circumstances to negotiate hardship variations with their lender on a personal loan or mortgage. But even people who are eligible for hardship variations often don't know about them, and their credit providers aren't rushing to tell them.

Under clause 25.2 of the Banking Code of Practice, banks are bound to work with borrowers in difficulty and to inform them about the Credit Code's hardship options.

"With your agreement, we will try to help you overcome your financial difficulties with any credit facility you have with us," the clause reads. "We could, for example, work with you to develop a repayment plan. If, at the time, the hardship variation provisions of the Uniform Consumer Credit Code could apply to your circumstances, we will inform you about them."

This doesn't always happen.

"They don't tell people about this," says Katherine Lane, principal solicitor at the Consumer Credit Legal Centre in Sydney. "They're really poor on compliance with it. It's a disgrace - but the rest of the market [which does not offer even this protection] is a bigger disgrace."

The hardship variation provisions under the Credit Code allow borrowers to make arrangements to reduce their repayments during a reasonable, temporary difficulty.

To begin with, your loan must be beneath the threshold of $300,850 (this is indexed to the average house price, so is regularly adjusted). You also need to be able to show your hardship is temporary, and that you will still be able to pay the loan out in a reasonable time if the variation is granted.

You must act as soon as you're aware of a cash flow problem, before your lender takes you to court for default. If that happens, it's too late to apply for hardship variations or external dispute resolution.

"Basically it works like this," Lane says. "If you have a loan with anybody that's under the Consumer Credit Code, if you're ill, temporarily unemployed or have another good reason for falling behind in your payments, you can apply to have your repayments varied. There's three options: to extend the time to make a repayment, to get a moratorium - which is never recommended for mortgages because the compounding kills you - or to reduce the repayments and extend the term, which is the most common one."

If your loan is with a major bank and they refuse your hardship application, you have the right to have it reviewed for free by the Banking Ombudsman. "That's a big right," Lane says. "While you're at the Banking Ombudsman, the bank can't take any legal action. That means they can't take your home while they're doing the review."

Solicitor David Sweeney, who is representing a client in a mortgage dispute with a bank, says it often becomes a race to apply to the Banking Ombudsman before the bank starts legal action. This is because once a bank starts proceedings, the Ombudsman loses jurisdiction.

If your credit provider is not a bank, but is a member of the Credit Ombudsman's service, you can still get a review and a determination on a hardship variation.

However, it's not compulsory for non-bank lenders to join an external dispute resolution (EDR) scheme. So unlike banks, they aren't obliged to be understanding if you fall into difficulties. (You can call the Financial Ombudsman's Service on 1300 780 808 to find out if your lender is a member of an EDR scheme.)

"It's such a powerful tool," Lane says of ombudsman review. "It can sort out a situation when you're in temporary difficulty and can save your house."

Your final option, short of a costly and stressful legal action, is to take your hardship application to the Consumer Trade and Tenancy Tribunal, which can enforce it.

However, it's important to note that "it is a race to get a variation in place and enforce it through EDR or the Consumer Trader & Tenancy Tribunal before the lender takes the consumer to court for the default," Lane says.

She is critical of the current two-tier system which sees banks, building societies and credit unions held to higher standards than the rest of the lending market.

"My lament is, why do we have a two-tier system?" she says. "Why do we have half of the people exposed to lenders who aren't prepared to do the right thing on terms of repayment arrangements, don't tell them about the Consumer Credit Code and have no obligation to do so, and sell them up? Everyone should have to be in dispute resolution schemes and they should all be compelled to do the hardship provisions properly."

Many people consider refinancing when they may be better off approaching their lender to negotiate.

"Often refinancing borrowers go from a bank to someone who they've got less power to be able to negotiate with in relation to hardships later," Lane says. "Most of the time you're much better off negotiating with your lender and coming to an agreement than refinancing when you're in difficulty."

The best case scenario is to ensure you understand all the implications of a potential future cash flow interruption when you sign the loan.

"Loans go for 20 years or more, and it's silly for people to think nothing will go wrong, even for a few months, in all that time," Lane says.

She recommends you get advice the minute you anticipate difficulty meeting repayments: it might save your house.

HELP IS AT THE END OF THE LINE

Victorian residents can contact the Consumer Action Law Centre Victoria for free legal advice on credit disputes: 1300 881 020. NSW residents can phone the NSW CCLC's Credit and Debt hotline: 1800 808 488.

© 2007 Sydney Morning Herald

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