Dealing with customers in financial difficulty

The Banking and Financial Services Ombudsman has set out the guidelines he follows when customers write to his office to complain that a credit provider has refused to agree to a proposed repayment plan for a debt that the customer is unable to repay because of general financial difficulties.

The guidelines apply where there is no maladministration or other breach in relation to the original lending but there has been a subsequent change in the customer’s circumstances. And if there is a breach of statutory provisions to do with misleading, deceptive or unconscionable conduct or unjust or unfair contracts, his approach will be different.

The new Code of Banking Practice introduced an obligation to try to help individual and small business customers overcome their financial difficulties and to provide information about the UCCC hardship variation processes if they could apply to the customer’s circumstances. Even if the Code does not apply to you, the Ombudsman comments that non-subscribing banks and other credit providers should consider implementing the guidelines.

Acting fairly and reasonably, in the Ombudsman's view, requires that credit providers:
• give genuine consideration to a repayment proposal or hardship variation application and any reasonable alternatives that will help the customer overcome their financial difficulties;
• give reasons for any rejection of the proposal, preferably in writing;
• ensure that those reasons reflect legitimate considerations and are referable to the particular customer’s circumstances;
• not start or conclude enforcement action before a decision is made and communicated; and
• respect the customer’s appointment of an advisor and, if one is appointed, not deal directly with the customer.

Acting consistently and ethically, in the Ombudsman's view, requires that credit providers:
• have clear and reasonable internal processes for assessing hardship variation or enforcement postponement requests and other repayment proposals;
• be able to demonstrate that their staff have followed those processes;
• record and keep any promises made, for example, about suspending enforcement action, and record and keep to any agreement reached. If that includes that the arrangement be reviewed at a certain date, credit providers should not seek to review the arrangement earlier if the customer is keeping to it. Any review should be based on a genuine consideration of the customer’s position at that time;
• ensure that any collection related correspondence is consistent with what has been promised or agreed; and
• confirm in writing any agreement reached and ensure that collection agents and/or later assignees have a copy.

Finally the Ombudsman's view is that "informing a customer of the UCCC provisions includes telling the customer, at the time of any rejection of a hardship variation application, that they can apply to the relevant court or tribunal under s 68 of the UCCC for an order changing the contract. This information should be given whether or not the credit provider thinks that the application would succeed – the obligation is to do so if those provisions could apply to the customer’s circumstances."

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Low doc loans and tax non-compliance

The Commissioner of Taxation has announced the results of the ATO's initial investigation into borrowers of "low doc loans":

Although the ATO findings indicate concerning levels of non-compliance amongst the users of low documentation loans, many users of these products are fully meeting their tax responsibilities. Many are funding repayments from legitimate sources like inheritances and capital gains, often derived from investments in property.

Where income has been omitted most of it has been derived from cash economy business activities predominantly in the building and construction industry.

The ATO will continue to check whether low doc borrowers have been paying tax.

He described 2 initiatives taken by the ATO:

In the first of our compliance initiatives, around 350 taxpayers were selected randomly from eight lenders to get a picture of the broader population using these products. This information was obtained using the access powers in the tax law. It identified failure to lodge tax returns as a primary concern.

Around 50 per cent of these people had not lodged returns – the average was three years outstanding.

In a second initiative we undertook a risk based approach that showed that, for certain low documentation loan users, concealment of income is a significant concern.

These high risk cases were identified using Tax Office and other information including complaints made against some mortgage brokers to offices of fair trading. This led us to focus more closely on the clients of certain mortgage brokers. A field of around 400 high risk clients were identified.

140 of these were selected for the first round of audit activity. These cases were chosen because the broker involved was also a tax agent who had been identified as high risk as part of our profiling of tax agents. The broker/tax agent was also subject to audit.

These audits raised over $23 million in tax and penalties.

Audits of the remaining high risk clients of selected brokers are now underway.

In the coming year we will systematically check the lodgement status of people obtaining finance through low documentation loans, and potentially other sources. We will work with the finance industry on the best way to achieve this. Because most low documentation loans are made subject to mortgage insurance we will explore the possibility of matching insurance company records against our data as a way to streamline this process.

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