Maladministration, hardship and EDR

1. Maladministration, hardship and EDR Integrated session on the application of responsible lending and related EDR processes

2. Thanks to… Financial Ombudsman Service Philip Field Consumer Action Law Centre Gerald Cohen

3. Case study 1 - Mr X • Mild intellectual disability • Unable to read and write • On DSP • Owns inherited real estate - $60,000 mortgage/ valued at $300,000 • Wanted to borrow $50k to repair house • Confident brokers negotiated loan with bankco for $100,000 • Secured against property • Purpose: refinance and future investment

4. Mr X….. • Interest marginally higher than original loan • Income declared as $2200 per month ( included $1000 pm for cleaning services rendered and $600 per fortnight dsp • He had only had the cleaning job for 2 months • Living expenses were $1300 pm ( bankco allowed $1050 per month) • He did not understand the loan / repayments were $160 per month –now $200 per month • Funds used to refinance, repair property, purchase car and other expenses

5. MR X… consider scenario1 • The new loan is a low doc loan. • Mr X took out the loan in January 2009. Discuss Mr X remedies against BankCo and the Broker.

6. Mr x …. consider Scenario 2 • Mr X took out the loan in February 2014. • The broker also took out a charge over the property to secure payment of the brokerage fees. What are Mr X’s remedies against the broker?

7. Mr x ….scenario 3 • Mr X also took out a loan of $1,999.00 from Extravagant Payday Lenders in September 2014. • His only income was the DSP. • The establishment fee is $600.00 • The loan term is 18 days.

8. Mr x… • What rights does Mr X have in relation to Extravagant Payday Lenders?

9. Mr x .. Payday lending .. • If Mr X took out the $1,999.00 loan from BankCo, Would it make a difference?

10. Mr X… more payday loans.. • Consider that Mr X took out 2 other payday loans in August 2014 Discuss the impacts

11. Consider the following…. • If Mr X took out the $1,999.00 loan from BankCo, Would it make a difference? Was Confident brokers an agent for BankCo or Mr X?

12. And this…… • The brokers contacted him to give him a “mortgage comparison offer”: What will EDR’s schemes look at to decide the issue? • If the interest rate on the new loan was lower than the original loan; Would it have an impact on Mr X’s rights and/or remedies?

13. Nccpa - irresponsible lending ..ch3 • credit assistance provider must, after making reasonable inquiries and taking reasonable steps to verify information, make a “preliminary assessment” if the consumer’s contract or changes to the consumer’s contract will be not “unsuitable”, and • credit provider must, after making reasonable inquiries and taking reasonable steps to verify information, make a “final assessment” about if consumer’s contract or changes to the consumer’s contract will be not “unsuitable”.

14. Suitability of the loan Will not be unsuitable if • it meets the consumer’s requirements and objectives, and • the consumer has the capacity to repay the loan without experiencing substantial hardship (s131 NCCPA). • Caters for Extra requirements for Small Amount Credit Contracts

15. NCCPA … continued • Credit provider must assess not more than 90 days prior to entry or increase (s 128 NCCPA) • Period is extended to 120 days where the credit is secured credit used to purchase residential property (s 26 NCCP Regulations) • In assessment lender required to make reasonable enquiries about the consumer’s: (i) requirements and objectives in relation to the credit contract (ii) financial situation(s130 NCCPA)

16. Unsuitability – compensation • Entry or increase credit limit under a credit contract prohibited if unsuitable (S 133 NCCPA) • Subsections 133(2) and (3) - (replicates relevant provisions of section 131)– provides guidance about when a credit contract will be unsuitable. • Failure to comply with above- possible claim compensation ( section 178 NCCPA)

17. Asic – rg 209 gives guidance on: inquiries FSP should make when assessing a consumer’s application for credit whatreasonable inquiries about a consumer’s requirements and objectives could include. These are: amount of credit needed or maximum amount sought the timeframe for which it’s required

18. Asicrg 209 the purpose and benefit sought whether the consumer • seeks particular product features or flexibility • understands the costs of these features and any additional risks. • FSP must take reasonable steps to verify the consumer's financial situation. • RG 209 prescribes conduct required by lender to meet its obligations under s130 NCCPA -

19. Asicrg 209 – financial situation • potential impact of entering into an unsuitable credit contract; • complexity of the credit contract • capacity of the consumer to understand the credit contract • whether the consumer is an existing customer of a credit provider or a new customer.

20. RG 209- must consider the consumer’s: • amount and source of income, including the length and nature of their employment • fixed expenses: rent, repayments to other loans/debts, child support, insurance • variable expenses • existing debts that are to be repaid from the loan • credit history • age and number of dependants • assets • reasonably foreseeable changes, geographical factors, e.g. remoteness (which may increase expenses)

21. Assessment enquiries ASIC scaleable baseline enquiries that loan was not unsuitable FOS requires evidence : payg income – pay slips self employed income - tax returns and bank statements

22. FOS considers Enquiry should be scaled to the type of consumer and the product • the potential impact on the client of entering into an unsuitable loan • the complexity of the loan arrangements • the ability of the client to understand the loan arrangements. • Use of generic data to inquire about expenditure

23. FOS view - generic data generic data often fails to take into account particular needs e.g.: • additional medical and pharmaceutical expenses • voluntary commitments such as school fees • additional transport costs due to remote location There is a need to Assess each case on its merit

24. Unjust contracts • Sections 76 and 77 contain the NCC's version of statutory unconscionable conduct. • allows a court to grant relief to debtors from the consequences of entering into "unjust transactions".

25. S 76 NCC Definition of unjust wider than that of unconscionable conduct at common law e.g. Maisano v Car and Home Finance Pty Ltd [2005] VCAT 1755

26. S 76 NCC substantive unjustness (terms of the document itself are unconscionable) procedural unjustness (the conduct of the parties at or prior to the time the transaction entry was unconscionable)

27. Unjust transactions… When considering if transaction is unjust, a court must have regard to: the public interest all the circumstances of the case • Two competing public interests of consumer protection and upholding bargains • Unfairness and poor decision making do not necessarily amount to injustice Desirable for contracts to be honoured (Giannopoulos v Rapid funds pty ltd and anor [2013] sadc 9 ( per Cole J at 130)

28. Case study 2 – Mr D Old loan • Loan contract for $48, 458.31 – september 2010 • Consumer credit insurance • Short fall insurance

29. Mr D NEW LOAN • loan contract for $41, 461.11 - november 2011 – to REFINANCE THE OLD LOAN • Shortfall insurance • No consumer credit insurance

30. Mr D • Had Disclosed to fsp that he was seeking to refinance due to financial difficulty • Said that he could not afford the loan • Loan was provided regardless

31. When mr d came to the financial counsellor… • Mr D had been pursued by the FSP • Threatened with repossession of the vehicle • Had received written and verbal communication regarding the debt • Mr D had spent some money on the vehicle, replaced the exhaust and carried out significant maintenance

32. Further information… • Mr D had a recent accident with the vehicle • The vehicle was off the road • Mr D had lost his job because he could not get to work without the car

33. The financial counsellor was unclear about … • Whether there was adequate assessment of capacity to pay (Old contract) • Whether Mr D had understanding of his rights under either contract ( old or new) • Whether the FSP engaged in a discussion about financial hardship • Whether Mr D had been given any information about his rights in relation to repossession of the vehicle • Clarification by the FSP of what Mr D’s responsibilities would be to the FSP ( Ref: FOS_case_274381)

34. Questions for discussion … • What is the financial counselling approach in relation to the old and new contract? • What is the implication of the insurance under either contract? • How do you determine whether Mr D was adequately assessed for capacity to pay, under both Old and New contracts?

35. Questions cont… • Outline an approach you would expect to see that responds to Mr D’s hardship situation. • What response would you expect to see from the FSP in relation to Mr D’s financial difficulty – (i) under the Old contract and (ii) under the new contract • Is there a case for misleading and deceptive conduct? • Is there a case for breach in relation to hardship? • Is there a case for maladministration?

36. Questions cont…. • What criteria in the FOS TOR does this client meet to determine whether a complaint can be lodged? • On what basis would Mr D (financial counsellor) lodge a dispute with FOS? • Does the fact that the car is off the road due to an accident and the fact that Mr D spent money on car repairs have any bearing on the case / complaint or its outcome? • What outcome would you expect following a complaint to FOS?

37. Case study 3 – Joan • Joan is $6,000 in arrears with her home loan • FSP accepted reduced payments for 3 months- then refused further assistance • Joan did not know what to do and did nothing • Joan now has a writ of possession in the supreme court • Joan is due to inherit $20,000 in the next couple of months

38. Questions for discussion • What needs to be established for the debtor to be able to apply for hardship? • What questions does the financial counsellor need to ask about when the contract was obtained and why? • NCCPA definition of ‘substantial hardship’

39. Questions cont… What are the implications for a contract entered into prior to 1 July 2010 in relation to: • financial limits • time limited moratoriums • prerequisites for hardship • sections of the NCC that you should use in advocacy

40. Questions cont….. If the contract had been entered into between 1 July 2010 and 28 February 2013, what are the implications for • Financial limits • Time limited moratoriums • Obligations of the debtor if there is a hardship variation • Sections of the NCC you should use in advocacy

41. Questions cont…. • Outline the first step in appropriate advocacy • What is different if the contract had been entered into after March 2013? Since March 2013 what do you need to be aware of in relation to - Provision of additional information - Critical information for the creditor - When you can lodge a complaint to EDR

42. Advocacy options….. • Discuss the Codes that can be used to advocate for hardship when NCC may not be appropriate • What is the client entitled to do if the creditor rejects the hardship request under s74 NCC? • What approach would you take with EDR- outline the core of the complaint • Describe the outcome would you expect for the client

43. Hardship in banking • Substantial hardship is not defined in the NCCPA • Guidance can be obtained through ASIC Regulatory Guide 209 - Responsible Lending Conduct • a rebuttable presumption of substantial hardship- if the individual can only meet their financial obligations by selling their home

44. Hardship – step 1 • Write a letter to the creditor • Specify the cause of hardship ( illness, unemployment or other reasonable cause) • How the debtor would like the problem resolved • How the debtor is able to comply with the contract if is it varied

45. Hardship – step 2 Contracts after 1 July 2013 only • supply further information to the lender within 21 days ( if requested) • Cause of the hardship • How the debtor would like the contract to be varied • Why the debtor believes that they will be able to comply with the contract if varied as proposed

46. Hardship - step 3 Complain to EDR: • immediately if it is urgent (e.g. the debtor is served with a default notice, or if legal action or repossession is threatened) • immediately if the lender rejects the request • after 21 days if the lender does not provide a response in writing

47. Hardship step 2 - alternative • Apply to a court for an order that the contract be varied but only if: • the borrower has written to the lender seeking the variation; • the lender has rejected the request (s 74 NCC) and • you have been through EDR.

48. NCC • S72 to 74 , NCC - allow a debtor who is facing financial hardship to apply to a credit provider [and ultimately to a court or dispute resolution scheme] • for a variation to the terms of a credit contract to alleviate that hardship

49. Hardship availability depends on.. • the date of entry into the contract • the reason for the hardship application • the amount of credit provided under the contract.

50. To succeed in a hardship application: Adebtor must show that they can be reasonably expected to be able to discharge their obligations under the contract as altered by the application (Barker v GE Mortgage Solutions Ltd [2013] QCA 137)