1. Hardship Issues Kay Boey Consumer Credit Legal Service (WA) Inc September 2011 This presentation is for information only. You must seek legal advice in relation to any particular circumstances. This presentation is for information only. You must seek legal advice in relation to any particular circumstances.

2. Hardship Variations Hardship variation provisions of the NCC are contained in sections 72-74. A debtor who is unable reasonably, because of illness, unemployment or other reasonable cause, to meet the debtor’s obligations under a credit contact and who reasonably expects to be able to discharge the debtor’s obligations if the terms of the contract were changed may apply to the creditor for such a change.

3. So what does that mean? Under the NCC a debtor can apply for a hardship variation on the grounds of unemployment, illness or other reasonable cause; AND Under the NCC a debtor can apply for a hardship variation on the grounds of unemployment, illness or other reasonable cause; AND if they reasonably expect to be able to discharge their obligations under the contract if the contract were changed. if they reasonably expect to be able to discharge their obligations under the contract if the contract were changed.

4. Obligation at law to consider A creditor is only obligated by law to consider a variation if: From 1 July 2010 – amount borrowed is less than $500,000 From 1 July 2010 – amount borrowed is less than $500,000 Before 1 July 2010 – amount borrowed is less than floating threshold Before 1 July 2010 – amount borrowed is less than floating threshold Perpetual Trustees Victoria Ltd v Monas [2010] NSWSC 1156 – threshold in force at time contract was entered into Perpetual Trustees Victoria Ltd v Monas [2010] NSWSC 1156 – threshold in force at time contract was entered into

5. Example of the hardship threshold Date Hardship threshold $ 9 September 2008 – 8 October 2008 $332,750 9 August 2008 – 8 September 2008 $368,390 10 June 2009 - 7 July 2009 $340,780 http://www.moneysmart.gov.au/managing-my-money/managing- debts/trouble-with-debt/hardship-threshold#12jan2011

6. Reasonable Cause a short period in jail (McNally v ANZ (2001) ASC 155-047); a short period in jail (McNally v ANZ (2001) ASC 155-047); leaving employment for valid personal circumstances (Ward-Miller v Perpetual Trustees (2001) ASC 115-046); leaving employment for valid personal circumstances (Ward-Miller v Perpetual Trustees (2001) ASC 115-046); financial commitments toward other family members and the family home (Garner v Capital Finance Australia [2003] VCAT 1171); and financial commitments toward other family members and the family home (Garner v Capital Finance Australia [2003] VCAT 1171); and a general deterioration in the debtor’s financial circumstances (Jones v ANZ [2004] NSWCTTT 381). a general deterioration in the debtor’s financial circumstances (Jones v ANZ [2004] NSWCTTT 381).

7. Changes Section 72(2): A debtor can apply to: Section 72(2): A debtor can apply to: reduce repayments and extend the term reduce repayments and extend the term postpone repayment (with no extension) postpone repayment (with no extension) postpone repayments and extend the term postpone repayments and extend the term

8. A few things to remember… A creditor is not obligated by law to grant a hardship variation. A creditor is not obligated by law to grant a hardship variation. Creditor must respond to the application within 21 days – s 73 of NCC Creditor must respond to the application within 21 days – s 73 of NCC The response must state whether or not they agree to the change. The response must state whether or not they agree to the change.

9. There is no positive obligation at law to offer a hardship variation before commencing enforcement proceedings, however some industry Codes of Conduct require members to suggest hardship applications (s25.2 Code of Banking Practice, s24 Mutual Banking Code of Practice).

10. Section 25.2 of Code of Banking Practice With your agreement, we will try to help you overcome your financial difficulties with any credit facility you have with us. 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 (now NCC) could apply to your circumstances, we will inform you about them. With your agreement, we will try to help you overcome your financial difficulties with any credit facility you have with us. 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 (now NCC) could apply to your circumstances, we will inform you about them.

11. A few things to consider… A creditor may be reluctant to grant a hardship variation if: A creditor may be reluctant to grant a hardship variation if: the hardship variation is simply going to delay enforcement; and the hardship variation is simply going to delay enforcement; and there is no real prospect of meeting contractual obligations under the varied contract. there is no real prospect of meeting contractual obligations under the varied contract.

12. Even if the creditor is not obligated to consider a hardship variation under the NCC, a debtor could try applying for a hardship variation anyway. Even if the creditor is not obligated to consider a hardship variation under the NCC, a debtor could try applying for a hardship variation anyway.

13. Refusal to grant a hardship variation If the creditor refuses an application for a hardship variation (or fails to respond), the borrower can complain to the lender’s EDR scheme. Both schemes now have the power to determine the substance of a hardship variation under the NCC (substitute the decision of the EDR scheme for the lender’s decision)

14. Financial Ombudsman Service (FOS) Phone number: 1300 780 808 Phone number: 1300 780 808 Website address: www.fos.org.au Website address: www.fos.org.au FOS have power to vary the terms of a credit contract in cases of financial hardship FOS have power to vary the terms of a credit contract in cases of financial hardship Debt collection activity must be put on hold and legal proceedings must not be instigated once a dispute has been lodged Debt collection activity must be put on hold and legal proceedings must not be instigated once a dispute has been lodged If dispute lodged after legal proceedings have been instigated, creditor must no take any further steps save to the minimum extent necessary. If dispute lodged after legal proceedings have been instigated, creditor must no take any further steps save to the minimum extent necessary.

15. Social security, hardship variations and FOS FOS has released their position in relation to debt collection and social security recipients. Their position is contained in their publication of ‘The Circular, Issue 2 April 2010 – Debt Collection and social security recipients’.

16. Credit Ombudsman Service (COSL) Phone number: 1800 138 422 Phone number: 1800 138 422 Website: www.cosl.com.au Website: www.cosl.com.auwww.cosl.com.au Can direct the creditor to vary the terms of the contract even if the credit limit exceeds the hardship threshold. Can direct the creditor to vary the terms of the contract even if the credit limit exceeds the hardship threshold. Rules on legal proceedings similar to FOS. Rules on legal proceedings similar to FOS. Stance on allowing additional time to refinance or sell. Stance on allowing additional time to refinance or sell.

17. Other Variations COSL Apart from the NCC, COSL also suggests it is open to the lender to: Apart from the NCC, COSL also suggests it is open to the lender to: Allow the borrower time to sell the property or refinance; Allow the borrower time to sell the property or refinance; Reverse default fees, default interest and enforcement costs; Reverse default fees, default interest and enforcement costs; Waive part of the arrears of principal. Waive part of the arrears of principal.

18. Additional time to sell or refinance COSL will consider whether a creditor should allow time to sell or refinance if there is a reasonable prospect of this COSL will consider whether a creditor should allow time to sell or refinance if there is a reasonable prospect of this COSL will consider whether borrower has equity in property. COSL will consider whether borrower has equity in property.

19. Court order for variation of credit contract Section 74 of the NCC allows a debtor to apply to a court to vary the credit contract as set out in s 72. Section 74 of the NCC allows a debtor to apply to a court to vary the credit contract as set out in s 72. Creditor must be obligated by law to consider variation. Creditor must be obligated by law to consider variation. Court = Federal Magistrates Court (FMC) Court = Federal Magistrates Court (FMC) At present, no information about any debtors applying to FMC for a variation At present, no information about any debtors applying to FMC for a variation

20. Mortgage Health Month September 2011 The aim of Mortgage Health Month is to encourage consumers who are or at risk of being in mortgage stress to take early action when they spot the signs of financial difficulty. The aim of Mortgage Health Month is to encourage consumers who are or at risk of being in mortgage stress to take early action when they spot the signs of financial difficulty. ASIC have released new fact sheets on their MoneySmart website ASIC have released new fact sheets on their MoneySmart website ASIC also have a mortgage stress brochure. For copies contact ASIC’s Infoline on 1300 300 630. ASIC also have a mortgage stress brochure. For copies contact ASIC’s Infoline on 1300 300 630.

23. Any questions?

24. Case Studies