Can any statement of an inability to pay comprise a hardship notice under the new law?
The amendments to the National Credit Code which commenced on 1 March 2013 provide two things:
- new procedures for handling hardship applications; and
- a new trigger for hardship applications.
The amendments only apply to credit contracts entered into on or after 1 March 2013. Lenders can use the new procedures for both ‘old’ and ‘new’ contracts. Lenders may want to use the ‘old’ trigger for old contracts, to avoid a flood of hardship applications, but use the new procedures for both ‘old’ and ‘new’ contracts.
Lenders will need to develop a policy (which will be acceptable to ASIC, EDRs, and the courts) to determine when a hardship notice is given for new contracts.
How does the ‘trigger’ differ?
The old section 72, which applies to credit contracts entered into prior to 1 March 2013, enables a debtor who is unable reasonably, because of illness, unemployment or other reasonable cause, to specifically apply to the lender for specific variations to the contract. Often borrowers had to specifically request hardship relief before lenders would consider varying the contract. Hardship relief was restricted to credit contracts of $500,000 or less.
The new section 72, which applies to credit contracts entered into on or after 1 March 2013, enables debtors who considers that they are or will be unable to meet his or her obligations under a credit contract, to give the credit provider notice (a hardship notice), orally or in writing, of the debtor’s inability to meet the obligations. The new hardship provisions apply to all credit contracts, regardless of the amount. You will see that all the debtors have to do to trigger a hardship claim is to indicate that they are unable to meet their obligations.
Why was hardship amended?
According to the explanatory memorandum to the ‘Enhancement’ Act, amendments to hardship have three primary aims:
- to extend the availability of hardship relief to all credit contracts, regardlessof amount;
- to introduce flexibility around the types of changes which could berequested; and
- to make it easier for debtors to make a hardship application.
One of the ways in which the new provision aims to make it easier for debtors is to permit debtors to give a hardship notice orally.
What constitutes a ‘hardship notice’ under the new regime?
The biggest difficulty for many lenders will be to determine when an oral hardship notice has been given under the new rules. As this only applies to credit contracts entered on or after 1 March 2013, the impact will take some time to flow through to ‘live’ applications.
For example, does a debtor give a hardship notice if they call the lender upon receipt of a default notice, to say that they are unable to pay their arrears? Or is something more required?
On its Moneysmart website, ASIC encourages debtors to contact their lender to:
“Explain why you are having difficulties making payments, how long you think your financial problems will continue and how much you can afford to repay.”
As well as suggesting that a debtor could request to extend the term of the credit contract or postpone repayments, ASIC suggests that there may be “other ways to make your loan repayments more affordable.”
The focus is on a debtor reaching an agreement with the lender to vary the terms of the credit contract in a way which will enable them to continue to meet their obligations under the credit contract.
If the nature of the debtor’s situation is that they will not be able to meet their obligations even if the contract is varied, hardship relief will not be appropriate. This is because postponing the debtor’s obligations in these circumstances will be detrimental to the debtor’s financial position by virtue of the accrual of interest.
Having considered the intention of the amendments and ASIC’s commentary, we provide the following guidance.
- Not every conversation with debtors in default will constitute a hardship notice.Conversations about late payments (eg – “We had some difficulty but it will allbe in order within one month”) should not, because the debtors have notstated that they are unable to meet their obligations; indeed the contrary is thecase.
- Conversations in which debtors say that they will be unable to meet theirobligations for the medium term should be treated as a hardship notice.
- Conversations in which debtors say that they are unable to make anypayments under the credit contract, for reasons which the debtors will not beable to resolve in the short to medium term (ie. less than 6 months), shouldnot be treated as a hardship notice, as to do so is pointless and will only workto the detriment of the debtors. This position is not free from doubt.
The position should be clarified by regulations so that the regime works well for lenders and borrowers. The MFAA has suggested amendments to the regulations here and Gadens has written to ASIC seeking guidance as to specific possible trigger situations during the enforcement process.
Obtaining supporting information
Most, if not all, oral hardship notices will require supporting information. In responding to an oral hardship application, the lender should write to the debtor to:
- set out the lender’s understanding of the grounds on which the application has been made;
- confirm any request for the debtor to supply the information required to assess the application (in accordance with the lender’s entitlement under the Act to do so); and
- inform the debtor that if the information is not supplied, hardship may be refused.
It may be possible, based on the information that the borrower gives in the initial phone call, to reach a decision on the spot to decline hardship. In such cases, the credit provider will proceed to immediately issue a decision notice without requesting any information.
In some situations where hardship relief is not appropriate, the lender may consider agreeing to a temporary postponement of enforcement action on compassionate grounds.
What should you do now?
It is important that credit providers have a clear and well-documented policy in place to deal with hardship notices. Existing policies and procedures need amendment to deal with the change in the law.