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At LCollect we believe that knowledge is power. Every month our debt collection blog gives you practical tips, stories and news from around Australia and the world.

Increase in Debt Levels

Wednesday, July 01, 2009 - Posted by Philip Harvey

Present feedback we have received from our clients is that their delinquency ratios are at all time lows, with the majority of our clients below 1% in total arrears compared to their total loan portfolio. Whilst there is no one reason for this, we can generally say this is a result of our clients lending policies and avoiding broker originated finance.

Fujitsu Morgan white paper  reported;

"The total system dynamic LVR (i.e. total housing mortgage debt to the market value of Australian residential property) has risen from 12.1% in December 1992 to 24.2% in December 2007. Excluding the estimated 35% of residential properties with no debt, the dynamic LVR on geared residential properties is 36%. To highlight the household’s vulnerability to rising interest rates via this increased “gearing tolerance”, each 25bp increase in interest rates increases the interest burden on home loan borrowers by an estimated A$1.75bn (i.e. A$924bn x 76% x 0.25% = A$1.75bn). 
To highlight the household’s vulnerability to rising interest rates via this 
increased “gearing tolerance”, each 25bp increase in interest rates increases the interest burden on home loan borrowers by an estimated A$1.75bn (i.e. A$924bn x 76% x 0.25% = A$1.75bn)".

With interest rates having reduced significantly, the stress being experienced by debtors has reduced significantly. However the media & economists are already predicting that there will be no further interest rate cuts, and that interest rates will start to increase in 2010. It will be interesting to see how this economic outlook impacts bad debts in the years to come.


Hardship

Wednesday, July 01, 2009 - Posted by Philip Harvey

In the current financial climate, we have been receiving a significant increase in the number of questions about Hardship, what to look out for, when it applies and what must be done. In this article we go through the basic steps and some scenarios of what to look out for.


A debtor does not have to formally apply for hardship. Once the Financial Service provider is aware of the debtors financial circumstances, hardship must be offered. We have come across many instances where the financial service provider has advised us that hardship does not apply because the debtor has not formally applied for it. The Banking & Financial Services Ombudsmen has explained this previously (detail below).

The current threshold for hardship is $345,290. If the loan is above this amount, hardship does not formally apply, but as per the Ombudsmens advise, should still be considered.

Banking and Financial Services Bulletin 53 March 2007;


Section 66 of the UCCC gives debtors with a loan of not more than $305,910 ($125,000 in Tasmania) the right to seek a variation to their credit contract where:

  • They are unable to meet their contractual obligations because of illness, unemployment or other reasonable cause; and
  • There is a reasonable expectation of being able to repay the debt if the contract is varied.

A debtor may seek one of the following variation

  • An extension of the term of the contract and a corresponding reduction of payments
  • An extension of the term of the contract and postponement of payments during a specified period; or
  • Postponement of payments during a specified period with no extension of term (which would mean higher repayments after the postponement period).

There is no obligation on the credit provider to agree to the variation. However, if a credit provider does not, a debtor can apply to a relevant court or tribunal for an order varying the contract in one of these three ways.

The BFSO observes that, in contrast to the UCCC provisions, the hardship variation provisions under the Code are not limited to specific circumstances or outcomes. Neither are they limited to consumer lending, nor by reference to loan amount.

Clause 25.2 of the Code provides that a subscribing bank must inform a customer of the UCCC variation provisions if the provisions could apply to the customer's circumstances. In the BFSO's view, informing a customer of the UCCC provisions includes telling the customer at the time of rejecting a hardship variation application that they can apply to a relevant court or tribunal under s68 of the UCCC for an order changing the contract. This information should be relayed to the customer, irrespective of whether or not the credit provider considers that such an application would succeed.



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