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AFCA Approach to Financial Difficulty - Early Release of Superannuation

Thursday, May 30, 2019 - Posted by Michael McCulloch

Following on from last month where we looked at the AFCA Approach to Mortgagee Sales this month we look at the Australian Financial Complaints Authority (AFCA) approach to Financial Difficulty - Early Release of Superannuation.

The purpose of this article is to summarise the approach AFCA have regarding the early release of superannuation and what lenders obligations are when considering a request from a consumer to support the early release of superannuation.

Grounds for Release
There are 2 primary circumstances where a consumer may apply for the early release of superannuation. These are due to several financial hardship or compassionate grounds (mortgage arrears). A consumer that has been in receipt of a Government support payment, such as Newstart Allowance, continuously for 26 weeks may be entitled to the early release of superannuation on the grounds of financial hardship. A consumer may access between $1,000 to $10,000 once a year and the application must be made directly to their superannuation fund. The payment can be utilised for any purpose and does not require the support of the FSP.
Where the application is being made on compassionate grounds (mortgage arrears) the process is administered by the Australian Taxation Office (ATO). A consumers application to the ATO for payment of mortgage arrears will need a letter from their FSP stating that the amount is overdue and if the overdue amount is not paid by the due date the mortgagee will foreclose or force the sale of the consumers principal place of residence. More information is available from Access on Compassionate Grounds on the ATO website.

AFCA Expectations
There is an expectation from AFCA that FSPs will consider alternatives rather than simply supporting a request for the release of superannuation as the release of superannuation is a last resort. AFCA expects FSPs to take appropriate steps to understand the consumers financial position, decide what assistance it can provide the consumer and communicate its decision to the consumer. 

Factors to Consider
When considering if support should be given for the early release of superannuation the FSP, , should explore all alternative options -
Where it is apparent that the consumer can afford to continue with the contractual repayments but unable to clear the arrears the FSP may consider it more appropriate to capitalise the arrears. 
Where the FSP is unable to determine if the consumer can meet their ongoing contractual obligations it may be more appropriate for the FSP to provide a reasonable moratorium period to allow the consumer time for their situation to improve.
Where it is clear that the consumer will be unable to meet their ongoing contractual obligations supporting a release for superannuation may not be appropriate as any release will only delay the inevitable. In certain situations it may be beneficial for the FSP to allow the consumer time to sell the security property which will preserve their superannuation and may offer some financial relief.

Failing to Meet Obligations
Where AFCA believe that the FSP has failed to meet their obligations AFCA may rule that the FSP has failed to meet financial difficulty obligations under the AFCA Rules. Where the consumer has suffered a financial loss AFCA may award compensation.
Where the FSP has supported an early release for superannuation that AFCA believe inappropriate they will generally not require the FSP to refund the superannuation monies or reimburse any tax paid as a result of the withdrawal of the funds as in most cases the consumer will have obtained the benefit of the funds and will have potentially saved on interest, fees and charges.

To learn more or to read this article in its entirety visit AFCA Approaches - Early Release of Super.

Disclaimer: This article is general information only and does not constitute legal advice and is not intended to be relief on in any way.


AFCA Approach to Mortgagee Sales

Monday, April 29, 2019 - Posted by Michael McCulloch

Recently the Australian Financial Complaints Authority (AFCA) released a series of guides outlining their approach to common complaints. This month we take a look at the AFCA approach to Mortgagee Sales.

Where a consumer (Borrower) is unable to repay a loan a Financial Service Provider (FSP) may elect to take possession of the property to sell it to reduce or payout the loan. AFCA have set out their guidelines as to what a FSP must do when it takes possession and what they will take into account if there is a complaint raised by the Borrower about the sale process -

Reasonable Care
The FSP must take reasonable care when it takes possession to ensure that the property is sold at its market value. The FSP does this by making important decisions at key milestones and oversees the entire sale process.

Consulting the Borrower
The FSP does not need to consult the Borrower about key decisions or the sales process nor is there an obligation to keep the Borrower informed as to the progress of the sale. There is however an obligation on the FSP to communicate to the Borrower when the sale is completed and how the sale proceeds have been used.

Property Maintenance
The FSP generally does not have to spend money to improve the property nor does it need to find new tenants or let existing tenants stay to make money prior to the sale. The FSP however may need to pay for common maintenance issues such as repairing broken windows or replacing locks to secure the property, cleaning, gardening or lawn mowing, repairing pool equipment or fencing a pool if it is required by law before the property can be sold.

Insuring the Property
The FSP should insure the property prior to taking possession.

Market Value
The FSP should obtain at least 1 sworn valuation from an independent registered valuer.
According to the International Valuation Standards Council the definition of "market value" is -
"The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion."

Marketing the Property
The FSP should obtain at least 1 marketing proposal from a reputable property agent. This proposal should include recommendations on the market value, the best way to sell the property (auction, private sale, tender), marketing and advertising strategy and any work needed to prepare the property for sale such as repairs and maintenance.
Advertising campaigns may include print media, online ads through reputable sites such as domain.com.au and realestate.com.au, billboards at the property, flyers or handbills, contact with potential purchasers through an agents internal marketing list, public inspections or inspections by appointment.
It is at the discretion of the FSP is they advertise the sale of the property as a mortgagee in possession. This may attract more purchasers with the onus on the auctioneer to ensure that the auction generates competition between bidders to achieve a sale at market value.

The Sale Method
In a vast majority of cases the property will be sold an auction with AFCA recommending a minimum 4 week advertising campaign with weekly inspections and inspections on the day of the auction.
If there is advice from a the FSPs experts recommending a private sale the FSP must take reasonable care with marketing and advertising. It must show that it bought the property to the attention of all potential purchasers thus creating competition and achieving market value.
Where the property is being sold at auction all available information should be considered such as valuations, marketing reports and previous offers.

Proceeds of the Sale
All proceeds following the sale must be accounted for and must be explained to the Borrower after the sale has been completed.
Funds from the sale may be used to reduce or payout the debt the Borrower owes to the FSP or other Creditor with a mortgage over the property, pay reasonable costs incurred in taking possession of, maintaining and selling the property.
Any surplus from the sale should be paid to the Borrower. Where the Borrower has loans from the FSP for more than one property any surplus may be used to reduce the balance of the other loan.

Reasonable Costs
The FSP should only do what is necessary to obtain possession of the property. For example if the Borrower is prepared to offer up possession and agreeing to the sale it would be unnecessary for legal action.
Once in possession the FSP can reimburse itself for costs relating to the security, insurance and maintenance of the property as well as the relevant advertising and sale costs including agent commissions.
The FSP, under the Loan Contract or Mortgage, will also usually be allowed to recover reasonable and proper legal costs. The FSP, of course, must not recover more costs than was paid to it legal representative and must apply any discount or rebate to the Borrowers loan.
In the event of a complaint the FSP must provide invoices for all costs it has taken from the sale proceeds.

To learn more or to read this article in it's entirety visit AFCA Approaches - Mortgagee Sales.

Disclaimer: This article is general information only and does not constitute legal advice and is not intended to be relied on in any way.

Farmers to Benefit from New Mediation Scheme

Wednesday, February 27, 2019 - Posted by Michael McCulloch

With the Government set to adopt all 76 changes recommended by the Royal Commission into Misconduct in Banking, including amending the Australian Financial Complaints Authority (AFCA) Rules to accept disputes dating back to January 2008, it appears as though farmers will also benefit with the Commissioner calling for a national farm debt mediation scheme.

Both The Weekly Times and Beef Central are reporting that the Federal Treasurer, Josh Frydenberg, has indicated that the Government would look at introducing a new farm debt mediation scheme which would require financiers not to charge default interest on agricultural loans in areas considered in drought or impacted by a declared natural disaster. Financiers would also be required to ensure that only those experienced in agriculture would manage distressed farm loans.

In the original interim report released by Commissioner Hayne he commented, "Properly used, however, mediation may allow the lender and the borrower to agree upon practical measures that will, or may, lead to the borrower working out of the financial difficulties that have caused the lender to treat the loan as distressed. Ordinarily, then, I consider that lenders should offer farm debt mediation as soon as the loan is classified as distressed. If used in conjunction with rural financial counselling services, early farm debt mediation should allow wider and better choices for the lender and borrower about servicing, and ultimately repaying the loan."

Fiona Simson, President of the National Farmers' Federation said, "The Royal Commission shone a bright light on Australia's banking sector, on which Australian farmers are heavily dependent. Justice Hayne's recommendations and the Government's affirmative response, has recognised the unique situations farm businesses often face and the always unequal playing field when negotiating with the big banks."

Minister for Agriculture and Water Resources, David Littleproud, released a statement on his website which you can read here.


NSW Government Launch Online Legal Service

Wednesday, January 30, 2019 - Posted by Michael McCulloch

The NSW State Government has recently announced a new free online legal service to assist people who may be experiencing mortgage stress.

The LawAccess NSW website now provides 2 interactive guided pathways to match people with the information they may need to assist them in resolving issues surrounding mortgage stress or unpaid council rates with another 4 pathways on other topics to come online later this year.

Attorney General Mark Speakman said, "This service is arriving at a crucial time for families facing mortgage stress. The online pathways are convenient and easy to use, with users only needing to answer a few simple questions to get reliable legal information and practical solutions tailored to address their situation. For example, the mortgage stress pathways provide information on budgeting, seeking a ‘hardship variation’ to a loan and tips on avoiding ‘quick fix’ pitfalls that could ultimately cause greater financial pain."

The pathways are a new online resource which makes up part of the NSW Government's $24 million Civil Justice Action Plan which harnesses technology and innovation to make it faster and easier for people to navigate the Court system and resolve their legal issues. Other key aspects of the plan include:

- creating a $1 million Access to Justice Innovation Fund to encourage legal professionals, digital experts and community groups to develop ideas to improve the way legal problems are solved;
- allocating almost $20 million in new funds for community legal centres over the next 4 years;
- expanding the online Court services to allow more people to finalise their case from the convenience of their own PC;
- increasing the jurisdiction of the Local Court's Small Claims Division to hear disputes up to $20,000 (the current limit being $10,000); and
- introducing online guidelines to encourage local and State Government to resolve unpaid debts early including negotiating time to pay arrangements.

Learn more via the Guided Pathways site at LawAccess NSW.


25% of Buyers Don't Understand LMI

Wednesday, May 30, 2018 - Posted by Michael McCulloch

A recent survey conducted by Mortgage Choice has shown that 25% of buyers do not understand what Lenders Mortgage Insurance (LMI) is.

Out of the 1,000 people who took part in the survey 8% thought that LMI protected them with almost 18% thinking that it protected both them and the lender. Buyers in the age bracket of 18-29 were the most likely not to know what LMI was with a higher proportion of women (45%) not knowing what LMI is versus 37% of men.

On a State by State comparison, Victoria had the highest proportion of buyers who did not know what LMI was (46%) followed by Queensland (40%), Western Australia (39.6%) with NSW the most knowledgeable State coming in at 34.6%

CEO for Mortgage Choice, Susan Mitchell, said in a statement, "For many first home buyers, LMI is likely to be a cost they have to pay to get into the property market, particularly if they do not have a deposit that is at least 20% of the purchase price. The reality is that saving for a home deposit is a major challenge for first home buyers and this has been the result of strong price growth over the last few years."

Ms Mitchell went on to say that it was concerning that a large proportion of Australians had either a limited or no understanding of LMI and that lenders should take an active role in educating borrowers.

For a detailed explanation as to what LMI is visit the Lenders Mortgage Insurance entry on Wikipedia.


FOS Approach to Early Release of Superannuation

Wednesday, April 26, 2017 - Posted by Michael McCulloch

As you may be aware the Financial Ombudsman Service ("FOS") periodically release and update documents to assist both consumers and Financial Service Providers ("FSPs") in how they come to the decisions that they do.

This month we have reviewed and re-produced an extract from the FOS Approach to Early Release of Superannuation which you can read below:

2.1 Grounds for Early Release of Superannuation
There are limited circumstances in which a person may apply for their superannuation to be released early to help meet their loan obligations. These are:

Severe Financial Hardship
A person who has received an eligible government support payment continuously for 26 weeks may be entitled to an early release of superannuation on the grounds of several financial hardship. On this basis, a person may access up to $10,000 once a year. To do so, they must obtain a supporting letter from DHS and then apply directly to their superannuation fund. The payment can be used for any purpose and the FSP's support is not required.

Compassionate Grounds for Mortgage Assistance
A person can apply for early release of superannuation on specific compassionate grounds. One of these is mortgage assistance to prevent the foreclosure of a mortgage, or the exercise of a mortgagee's power of sale over the person's principle place of residence. This process is administered by DHS. Foreclosure is rate, so this article focuses on the power of sale.
DHS may approve the release only if the borrower provides a written statement from the mortgagee that:

  • A payment of an amount is overdue; and
  • If the person fails to pay the amount, the mortgagee will:
    Foreclose the mortgage on the person's principle place of residence or
    Exercise its power of sale of the person's principle place of residence.

A limit applies such that in each 12 month period, DHS may approve the release of an amount of a person's preserved benefits in a superannuation entity only where that amount does not exceed 3 months of repayments plus 12 months' interest on the outstanding loan balance.
An amount released on the compassion grounds of mortgage assistance is taxed as a normal superannuation lump sum, which means there will often be tax implications for the borrower.

2.2 What FOS Expects of FSPs
We expect FSPs to genuinely consider requests for financial difficulty assistance. Wven where a borrower is asking only that the FSP support the request for release, the FSP must be willing to consider alternatives. This is because supporting a release is an option of last resort - in many cases more appropriate options may be available if the parties work together.
To meet its financial difficulty obligations, we expect an FSP to:
  • Take appropriate steps to understand the borrower's financial position, and how their position may change in the future
  • Consider the borrower's request as well as any reasonable alternatives that may help the borrower
  • Decide what assistance it will provide to help the borrower (this decision should be reasonable and based on legitimate considerations)
  • Communicate its decision to the borrower and, if it declines the borrower's request, provide reasons.

An FSP following the above guidance should consistently meet its obligations.

2.3 Factors for FSPs to Consider
When considering whether to support a borrower's request for early release of superannuation:
  • FSPs cannot insist that a borrower apply for early release of superannuation to repay outstanding arrears (for example, clause 28.9(a) of the Code of Banking Practice states: We will not require you to apply for early release of your superannuation benefits to repay the whole or any part of your credit facility with us).
  • FSPs should explore alternative options with the borrower.
  • If it is apparent that the borrower can afford ongoing repayments but cannot clear the arrears on the loan, it may be more appropriate for FSPs to capitalise the arrears. This will resolve the arrears on the loan as well as preserve the borrower's superannuation balance.
  • Where it is uncertain whether a borrower may be able to meet their loan obligations, it may be more appropriate for FSPs to offer a serviceability test or a reasonable repayment moratorium to allow time for the borrower's situation to improve.
  • If it is clear that the borrower cannot meet their long-term obligations, support a superannuation release is unlikely to be appropriate. This is because the release will merely delay inevitable default. The borrower is still likely to lose their home, and will also have lost part of their superannuation. In these cases, FSPs should consider alternatives such as offering time to sell the security property.
  • Where superannuation releases have been tried and not helped to relieve the borrower's financial difficulty, FSPs should exercise greater diligence before supporting further applications for release.

It is never certain that a borrower will be successful in their application to DHS. This means that even when an FSP decides to support a superannuation release, it needs to consider what assistance it can provide if the borrower's application is unsuccessful. This might include offering time to sell the security property.

2.4 Where an FSP Does Not Meet Its Obligations
Where we consider that an FSP has not met it's obligations, the usual remedies apply for a failure to meet financial difficulty obligations under the FOS Terms of Reference. This often includes compensation for non-financial loss. The borrower may also have suffered financial loss for which we would award compensation.
If an FSP has supported a release of superannuation that we considered inappropriate, we will generally not require an FSP to refund the superannuation amounts received, or reimburse any tax paid by the borrower as a result of the withdrawal of those funds. This is because, in most cases, the borrower will have obtained the benefit of the funds and will have saved interest and fees on the loan.

Our Experience
In our experience in dealing with mortgagee sales at LCollect we have found that it was not appropriate for the FSP to support an early release of superannuation because better alternatives were available or it was unlikely that any such release would assist the borrower in overcoming their financial difficulty. In almost all instances, where a FSP declined to support a release, we found that decision was appropriate.

Source: The FOS Approach to Early Release of Superannuation

Note: Please note that this article does not constitute legal advice. If in doubt you should seek your own proper, independent legal advice.


Council Considers Home Repossessions

Monday, February 27, 2017 - Posted by Michael McCulloch

Several councils located in the Bowen Basin Local Government Area in Queensland are attempting to recoup $10 million in unpaid rates.

The Bowen Basin, which covers an area of approximately 600km long by 250km wide, extending from Collinsville to Moura, has been hit hard by the downturn in the mining industry with unpaid rates impacting heavily on council cash reserves. Mayor Kerry Hayes, of Central Highlands Regional Council based in Emerald, said, "At the moment we have about 16 properties we've indicated, and we've sent the letters out to those ratepayers ... this is the last course of action. As a council and as a business, if the money isn't coming in then obviously works and capital expenditure can't happen".

Pursuant to the Local Government (Finance, Plans and Reporting) Regulation 2010 properties can be sold by Council under s74:

74 Notice of Intention to Sell Land for Overdue Rates or Charges

(1) This section applies if--
(a) There are overdue rates or charges on land; and
(b) The liability to pay the overdue rates or charges is not the subject of court proceedings; and
(c) Some or all of the overdue rates or charges have been overdue for at least-
   (i) Generally--3 years; or
   (ii) If the rates or charges were levied on vacant land or land used only for commercial purposes, and the local government has obtained Judgment for the overdue rates or charges--1 year; or
  (iii) If the rates or charges were levied on a mining claim--3 months.

(2) The local government may, by resolution, decide to sell the land.

(3) If the local government does so, the local government must, as soon as practicable, give all interested parties a notice of intention to sell the land.

(4) A notice of intention to sell is a document, signed by the chief executive officer, stating-

(a) That the local government has, by resolution, decided under this section to sell land for overdue rates or charges; and
(b) The day on which the resolution was made; and
(c) The terms of the resolution; and
(d) A description of the location and size of the land, as shown in the local government's land record; and
(e) Details of the overdue rates or charges for the land, as at the date of the notice, including details of the period for which the rates or charges have been unpaid; and
(f) Details of the interest that is owing on the overdue rates or charges, as at the date of the notice, including-
   (i) Details of the rate at which interest is payable on the rates or charges; and
  (ii) A description of the way the interest is calculated; and
(g) The total amount of overdue rates or charges and the interest, as at the date of the notice; and
(h) A copy, or a general outline, of sections 75 to 78.


Local Government Association of Queensland Chief Executive, Greg Hallam, said in a statement to ABC Capricornia, "For every person that doesn't pay their rates, another person has to pay for them, so it's not all equitable or ethical".

Source: ABC News - Bowen Basin Council Considers Home Repossession to Recoup Unpaid Rates Amid Mining Downturn

This article does is not intended to be, and does not constitute legal advice.


New Requirements for Mortgagee in Possession of Land sales

Friday, July 15, 2016 - Posted by Philip Harvey

From 01/08/2016 in both New South Wales and Queensland, new identity requirements come into force.

In general terms, the changes mean that anyone signing a transfer of property on behalf of a mortgagee in possession must be identified. This will mean:

  • A company search being performed to ensure any signatory to a transfer holds the position as stated (ensuring they are empowered to sign). This applies to Directors, Company Secretaries etc; and 
  • An individual identity check necessitating the citing of original identity documents in the presence of the person being identified.

We will be in touch with you on any relevant mortgagee in possession files to ensure this requirement is met.

Accessing Superannuation for Mortgage Defaults

Thursday, November 12, 2015 - Posted by Philip Harvey

In our recent dealings with the Department of Human Services and a number superannuation funds concerning the release superannuation to stop a mortgage repossession, we learned some interesting anecdotal information:

  • The Department of Human Services advised the maximum amount that can be released is $26,885.26 to stop mortgage repossession
  • The Department of Human Services website advises that the maximum amount that can be released is the value of 3 months arrears AND 12 months interest.
  • Some superannuation funds have their own rules on the maximum amounts that can be released. $10,000 is a common figure we see.
  • For Self Managed Superannuation, the ATO website provides a maximum release of $10,000 in severe financial hardship.
  • This is the same figure the ATO advises for other superannuation funds.
  • As at the time of writing this, applications to the Department of Human Services are taking 4 weeks to process, with incorrectly completed forms returned.
  • The number of applications is increasing. Should this continue, the 4 weeks processing time will increase unless further resources are deployed.
  • A superannuation trustee requires the Department of Human Services to provide a letter in order to release funds.
  • Superannuation funds take at least 14 days to process the release of funds. In our experience this varies enormously.
  • We have one matter where 4 weeks have so far passed and the superannuation trustee has still not provided the release of funds.
  • Any superannuation release is taxed, so the amount released will not be the amount that is applied to the mortgage.


What can we take from all this?

  • If a superannuation release is going to be requested, it should be requested once a Real Property mortgage default notice has been received to allow sufficient time to be processed.
  • Furthermore, there should be open lines of communication between the mortgagor and mortgagee to avoid unnecessary costs.
  • There is no certainty in the final amount that may be released, though there is a very strong underlying intention from the Department of Human Services affording the opportunity for people to remain in their home.

Westpac switches Lenders Mortgage Insurance Provider possible implications in debt collection mortgage repossession

Friday, February 20, 2015 - Posted by Philip Harvey

Westpac has decided to move its Lenders Mortgage Insurance from Genworth to an international re-insurer located in Bermunda, Arch Capital Group.

The implications for the Australian market as evidenced in Genworth's share price dropping is that there are now more options available to lenders for lenders mortgage insurance. Westpac was reportedly 12% of Genworth's book.

So what are the possible implications for mortgage default / lenders mortgage insurance claims moving forward?

Many lenders have noted the tightening of what LMI will pay out on, with a trend to very strict enforcement of all sub limits. With limited competition in the LMI industry, there were not many competitive forces in play. If this is the start of a trend to offshore LMI by the big four banks, it may give lenders more room to negotiates with LMI providers in the future and subsequently obtain better deals and less restrictive sub limits. This has the potential to save lenders thousands of dollars in LMI claims.

Many commentators have already identified the risks the the Australian LMI providers. QBE was about to list its LMI.

Watch this space.



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