Australia: Your Financial Ombudsman Services toolkit – listing defaults, hardship applications

Listing a default with credit reporting agencies

Product: Motor vehicle loan

Result: In favour of FSP

Decision: Case number 472689, 18 August 2017

Facts

The borrower entered into a motor vehicle loan with the financial service provider (FSP) in October 2014. The account fell into arrears and the FSP listed a default with a credit reporting agency on 13 March 2016 for $414. The listing was subsequently updated by the FSP to show the account had been bought up to date in May 2016.

The default occurred due to the borrower's direct debits being dishonoured. The borrower alleged that he had contacted the FSP to update his details in April 2015 and then again in November 2015 before travelling overseas but no information was provided to show the borrower had contacted the FSP to update them. The FSP submitted that it had not received any update.

The FSP submitted that in addressing the arrears on the account it had:

  • sent dishonour letters to the borrower in December 2015 and January 2016;
  • issued the required section 6Q notice under the Privacy Act 1988 (Cth) (Privacy Act) on 21 January 2016 stating the amount of $1,672 was at least 60 days overdue and had to be paid in full by 24 February 2016;
  • spoke to the borrower in February 2016; and
  • after receiving a payment of $1,300, issued a notice under section 21D of the Privacy Act stating that it intended to disclose the default to a credit reporting body and gave the borrower 14 days to pay the outstanding amount of $414.73.

The borrower claimed that he had not received any of the formal notices from the FSP. He acknowledged that the address the FSP had issued the notices to was his current address but that he had arranged for the post office to redirect his mail while overseas.

The borrower applied to FOS for the removal of the listing and reimbursement of costs and interest totally $854.31.

Decision

The decision was in favour of the FSP.

Under the national credit code, default information can only be collected about an individual by a credit reporting agency if the amount listed is overdue for 60 days or more and the individual has been sent notices issued under sections 6Q and 21D of the Privacy Act.

The FSP was entitled to list the default. It had not received a request from the borrower to update the direct debit details. The relevant Privacy Act notices had been validly issued and the borrower had failed to comply with the notices.

Further, FOS considered that the FSP had made reasonable steps to recover the outstanding amount by:

  • issuing the section 6Q and 21D notices;
  • issuing dishonour letters to the borrower's personal email address in December 2015 and January 2016; and
  • speaking to the borrower about the arrears in February 2016.

In the process of addressing the default, the FSP had applied a number of charges to the loan account including administration fees, interest charges, late charges, dishonour fees and collection expenses.

FOS determined that the charges were applied in accordance with the standard terms and conditions of the loan contract and the FSP was not required to reimburse any costs or interest.

Takeaway message

A default can only be listed with a credit reporting agency if:

  • the amount is overdue for 60 days or more;
  • a notice under section 6Q of the Privacy Act has been issued requesting payment and warning the borrower that if the amount is overdue for 60 days or more it may be reported;
  • a notice under section 21D of the Privacy Act has been issued disclosing the FSP's intent to report the default after 14 days from the date of the notice; and
  • it is listed within three months of the section 21D notice.

The notices must be sent to the last known address of the borrower but there is no requirement for the FSP to confirm receipt.

Although not in issue in this case, FSPs should ensure they have adequate systems in place for recording contact from borrowers including attempts to update address and direct debit details.

Hardship application – superannuation

Product: Home loan

Result: In favour of FSP

Decision: Case number 479122, 18 July 2017

Facts

The applicant and his partner (the co-borrower) separated and the applicant moved out of the secured property.

There had been no payments to the home loan since 9 November 2016, which was a partial payment made by the co-borrower. As at 26 June 2017, the outstanding arrears was $13,193.73.

The applicant wished to keep the secured property but was unemployed and unable to provide information to demonstrate how he intended to service the home loan. The applicant also could not indicate when he may be in a position to maintain the minimum monthly payments (MMP) and did not provide a statement of financial position at any time.

On two occasions, the FSP had provided a letter to the applicant for early release of superannuation. On the first occasion, the applicant withdrew his request to the superannuation fund. On the second occasion, the application was sent to the Department of Human Services but no funds were received. (The status of the request was unclear when FOS heard the dispute.)

The applicant then sought to change the loan to interest only repayments but the FSP rejected the request on the basis that the applicant's current loan product did not provide that option and the borrowers would have to re-finance first.

Up to the date the applicant lodged the dispute with FOS, the FSP was working with the applicant and had suggested alternatives as hardship assistance including allowing a period to allow the applicant and co-borrower to sell the property.

The applicant applied to FOS requesting the FSP provide documentation to apply for the early release of superannuation to clear the arrears.

FOS considered:

  • whether the FSP had met its financial difficulty obligations to the applicant;
  • whether it should compel the FSP to support the early release of the applicant's superannuation; and
  • whether it should exercise its power to vary the contract.

Decision

The decision was in favour of the FSP on all three issues.

FOS considered that an FSP should try and assist its customers overcome financial hardship and give genuine consideration to a request for assistance where a customer is in financial difficulty. But also, a customer should be willing to work with their FSP and to propose a realistic repayment plan that will result in the repayment of the loan within a reasonable timeframe.

After considering the interactions between the applicant and the FSP, FOS found that the FSP had met its financial difficulty obligations. The FSP had:

  • worked with the applicant in October 2014 and again from October 2016 to assist him in overcoming his financial difficulty;
  • offered hardship assistance in the past, including moratoriums on repayments followed by capitalisation of arrears;
  • provided assistance to allow the applicant to access the early release of superannuation including providing the relevant letter to the superannuation fund (although the applicant had not received a release); and
  • continued to work with the applicant to the date of the FOS dispute by offering hardship assistance of a time frame to obtain an unconditional sale of the secured property and interest only repayments during that time.

FOS did not support the early release of superannuation to clear the arrears because this would only be a temporary fix – ultimately, the applicant did not provide any evidence to support an ability to make MMPs in the near future or long term.

It was also for these reasons that FOS refused to exercise its power to vary the loan contract. FOS said that it would only vary the loan contract if it were satisfied that it would assist the applicant overcome his financial difficulty.

FOS determined that the FSP should allow the applicant three months to achieve an unconditional contract of sale for the secured property, and up to 60 extra days for settlement if he does so.

The applicant needed to obtain the co-borrowers consent to sell the property and if such consent was not obtained, FOS determined that the FSP was entitled to recommence recovery action for the full outstanding debt on the home loan.

Takeaway message

FSPs must ensure they deal reasonably and appropriately with hardship applications.

What is reasonable will depend on the circumstances of the case.

When considering a hardship application an FSP should consider potential alternatives for assistance even if they are not suggested or requested by the borrower.

It is important that the FSP keep good records of all communications with the borrower as well as having file notes of the matters considered in relation to the hardship application and reasons for the FSP's decision.

© Cooper Grace Ward Lawyers

Cooper Grace Ward is a leading Australian law firm based in Brisbane.

This publication is for information only and is not legal advice. You should obtain advice that is specific to your circumstances and not rely on this publication as legal advice. If there are any issues you would like us to advise you on arising from this publication, please contact Cooper Grace Ward Lawyers.

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