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Released every month our debt collection blog contains news, stories and tips to keep you informed.

Does Hardship apply to an Investment Property

Monday, November 01, 2010 - Posted by Philip Harvey

You have a loan where the debtor has borrowed to buy a house as an investment & that loan is now in arrears. The debtor has been sent default notices & has now submitted a Hardship Application. Does hardship actually apply?

The National Credit Code (NCC) was extended to cover loans given to purchase / renovate / improve a residential property for investment purposes. Section 72 of the NCC allows a borrower to request a change to the terms of their credit contract on the grounds of financial hardship. As the NCC applied to residential property brought for investment purposes, Hardship does apply.

The finer print:

  • Credit for residential investment purposes was not regulated by the UCCC. The new NCC commenced on 1 July 2010. An existing  loan for investment purposes that was written prior to 1 July 2010 is not regulated by the NCC.
  • External Dispute Resolution (EDR). We note the above point about contracts prior to 1 July 2010, your EDR scheme may still get involved & force a binding decision on you contrary to the above.

An aside note about Tenants & Hardship:

Tenants can now apply for hardship and be given a 'payment holiday' and not have to pay there rent for a period, with increased once payments resume to catch up. Whilst this is nothing to do with the lender, there is a natural flow on effect. This may see owners of investment properties struggle with payments whilst the payment holiday occurs. You may find the investor applying for hardship with there lender in these circumstances.

Early Release of Superannuation

Sunday, November 01, 2009 - Posted by Philip Harvey

The early release of superannuation can be an effective way for a debtor to clear their arrears and get back on track with their mortgage.  Both ASIC & APRA have some basic requirements that need to be met before superannuation is released.

When reviewing these requirements, you will note that a Credit Card / Personal Loan is not included. Also of note is that an investment property / second property is not included.

ASIC Requirements:

Incapacity 


Requires the debtor to contact the superannuation fund. The debtor may also be paid a 'non-commutable' income stream during a period of temporary incapacity (debtors won't be able to get a lump sum in the case of a temporary incapacity). 

Severe financial hardship 

Requires the debtor to contact the superannuation fund. If the rules allow early release of benefits, you must satisfy the trustee that you have been receiving a Commonwealth income support payment for a continuous period of 26 weeks and you cannot meet your reasonable and immediate family living expenses. 

Compassionate grounds 

Requires the debtor to contact the superannuation fund. If the rules allow early release of benefits, the 'compassionate grounds' are set out in the law. 
Compassionate grounds involve medical treatment for serious conditions that is not readily available through the public health system, transport for medical treatment, changes to a home or vehicle because of a severe disability, palliative care, funeral and burial expenses, or to prevent the forced sale of your home by your mortgagee. 

APRA Requirements:

Medical treatment 

To help pay for medical costs, for you or your dependant, required to: 
- treat a life-threatening illness or injury; and/or 
- alleviate acute or chronic physical pain; and/or 
- alleviate an acute or chronic mental condition 
provided that the treatment is not readily available through the public health system and is not covered by any applicable private health insurance and/or Workers’ Compensation. 

Medical transport 

To assist with the cost of transportation to and from medical treatment, for you or your dependant, when that treatment is required to: 
- treat a life-threatening illness or injury; and/or 
- alleviate acute or chronic physical pain; and/or 
- alleviate an acute or chronic mental condition 
provided that the transport is not readily available through the public health system and is not covered by any applicable private health insurance and/or Workers’ Compensation. 

Mortgage assistance 

To prevent your home from being sold by the lender with whom you have the home’s mortgage. 

This ground does not include rent, or making payment on a mortgage: 
- for which you expect to have difficulty paying in the future (but are not yet in arrears); 
- for which you are in arrears, but not to the extent that the lender has decided to sell; 
- for which one of your dependants, other family member or friend is liable; or 
- that is for a second or investment property. 

The substantiation required from the mortgagee (lender) to satisfy APRA's requirements may be set out in a single letter or document or in separate letters or documents. Providing mortgage account details and BSB numbers will also enable funds to be directly deposited to the mortgage account once they are released by the superannuation fund. Documentation from mortgagees (lenders) must be clear about the mortgagee’s (lender’s) intention to continue or commence enforcement action. Using phrases such as “may proceed”, “may be entitled to commence”, or “reserve the right to proceed” is not considered sufficient to meet the requirements of the 
legislation. The legislation requires that the mortgagee (lender) must state that if the borrower fails to pay the overdue amount, the mortgagee (lender).

LCollect can issue a Mortgage Default Notice on your behalf which satisfies the requirements for superannuation to be released under this category.

Modifications to your home and/or motor vehicle 

To pay for modifications required to accommodate special needs if you or one of your dependants has a severe disability 

Funeral assistance 

To assist with funeral, burial, cremation and other expenses related to the death of a dependant. 

The deceased person must have been reliant on you financially, domestically or personally on you: it is not enough that the person was a family member. 

Care for terminal medical condition 

To provide care for yourself or your dependant if you or your dependant is dying from a terminal medical condition. This kind of care is often referred to as “palliative care”.

APRA Statistics for the Early Release of Superannuation

Sunday, November 01, 2009 - Posted by Philip Harvey

You will note a downward trend for 2008/09 which can be directly attributable to the sharp decline in interest rates during the period.                                                                       
   
  

Financial year  

 Number of 
applications received

Applications 
approved 
in part or full  

Amount 
approved 
for release 
$  

Average amount 
released 
per application 
$

2003/04*

11,504

8,558

55,459,704

6,480

2004/05*

11,818

9,764

77,680,070

7,956

2005/06*

15,027

12,754

120,842,292

9,475

 2006/07

18,245

15,412

156,905,338

10,181

2007/08*

20,524

14,947

 173,602,110

11,615

2008/09

17,918

11,776

144,739,434

12,291

*Revised figures.

Building Societies, Credit Unions and Retail Banks Sign Up to Help Borrowers in Distress

Saturday, August 01, 2009 - Posted by Philip Harvey

Following from last months article on Hardship, The Federal Treasurer (Wayne Swan) recently announced "that all 144 retail banks, building societies and credit unions have signed up to the Government's Principles to assist borrowers who are experiencing financial difficulty as a result of the global recession." 

Options available under these principles to assist borrows in distress include;

  • postponement for up to 12 months the dates on which payments are due under a mortgage contract (with interest to be capitalised into the loan);
  • an extension of the period of the contract and a reduction in the amount of each payment due under the contract;
  • interest-only breaks on loan repayments;
  • fee waivers;
  • extending the loan term and reducing repayments;
  • reducing the limit available under the credit contract and
  • one off temporary overdrafts for short term needs

Additional to this is the Hardship threshold limit increasing to $500,000.

All members of the Association of Building Societies and Credit Unions (ABACUS) have signed and agreed to these principles. ABACUS have released these principles which are located on this link.

To view the full press release made by the Treasurer click here

Further the the Treasurer's announcement and ABACUS accepting the principles, an ASIC press release under the new National Consumer Credit Bill has advised that ASIC's expectation is that Credit Licensees have a contact number for hardship applications. 
ASIC's comments;
"We consider that credit licensees should have clear and effective arrangements to assist borrowers who are facing financial hardship. This includes having a dedicated telephone number for consumers to make hardship applications."

The full ASIC release can be viewed here (ASIC consultation paper 112) 


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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