Mortgage Lenders must improve procedures for assisting mortgage and finance customers in that fall behind in repayments.
Borrowers who get into trouble with their home loan or credit card repayments should be able to go to their lender and nut out a plan to help overcome the crisis without pushing the borrower into default.
But the reality is few people would know their lender has such a facility, so poor is the communication about this area of banking. Problems that could be fixed end up getting worse.
The Banking and Financial Services Ombudsman has warned lenders they need to improve this area of their business. The office says it has advised some lenders their communication with customers about hardship provisions needs to be better, as does their staff training.
It cited examples where requests for assistance were ignored by staff, even after repeated approaches. It said some lenders risked being disciplined for maladministration of loan accounts. Among the complaints the ombudsman recently dealt with was a case where a lender made an inappropriate request for detailed medical evidence when a borrower reported financial difficulty resulting from illness.
In another case, the credit provider transferred the balance owing on a credit card account to a personal loan at a lower interest rate to assist a borrower having difficult making payments - but failed to cancel the credit card account.
Several lenders had made default listings on customers' credit reference files while requests for assistance were still being negotiated.
One lender was negotiating a repayment arrangement with a borrower whose monthly credit card interest was taking the account over the credit limit each month, while continuing to charge overlimit fees. All lenders report increases in the numbers of borrowers falling into arrears with their loan repayments. For example, the Bank of Queensland reported a 56 per cent increase in arrears over a six-month period. Loans payments 90 days or more past due jumped from $60.3 million at August 31 last year to $94.4 million at February 28. Borrowers affected included home loan, credit card and personal loan customers.
Increases in interest rates last year hit borrowers hard and it is not just low-income earners feeling the pinch. Financial counselling services such as Canberra's Care Inc report they are seeing more middle- and high-income earners with financial problems. Care's David Tennant says: "When I started working here in 1995, the country's credit card bill was about $5 billion. Today it is $40 billion."
In the latest issue of the Banking and Financial Services Ombudsman Bulletin, published in March, the Ombudsman cautions lenders to review their obligations under the Code of Banking Practice. Section 25.2 of the code says: "With your agreement, we will try to help you overcome your financial difficulties with any credit facility you have with us. We would, for example, work with you to develop a repayment plan. If, at the time, the hardship variation provisos of the Uniform Consumer Credit Code could apply to your circumstances, we will inform you about them."
The ombudsman says: "While the outcome [of a response to an application for assistance] is a commercial matter for the bank, whether or not the steps taken amount to compliance with the promise (made in section 25.2 of the code) falls squarely within our jurisdiction.
"At the centre of compliance with these obligations is that the credit provider responds when put on notice that the customer is in financial difficulty and gives real and genuine consideration to the relevant information their customer has provided about their financial position."
Catriona Lowe, the co-chief executive of the Consumer Action Law Centre in Melbourne, says borrowers need to be aware that compliance with section 25.2 of the Code of Banking Practice extends beyond signatory banks: "The ombudsman uses that provision of the code as the benchmark for all lenders under its jurisdiction."
Lowe says banks are better at handling approaches from customers experiencing financial difficulty than organisations in some other industries. She says the telecommunications industry probably has the worst record in that respect.
But the banks are well behind other industries.
"The utilities industry is well advanced in this area. Companies in the industry have developed tools to assess their customers' capacity to pay and they put these to use in working out payment plans.
"Yarra Valley Water has an incentive plan for customers in financial hardship where if they make five payments on time the next one is waived. We have not seen anything of that nature coming from the banks.
"To be fair to the banks, section 25.2 of the code is relatively new; it was added as part of a review in 2003. But I would say it is time they engaged with it. They need to make it a higher priority for their staff. And they need to make sure staff are listening to the customer and responding with flexibility, rather than dealing with approaches in a legalistic fashion," she says.
The ombudsman says one of the biggest systemic problems is that lenders tend to devise short-term assistance programs, usually no longer than a few months, when longer-term programs would be more appropriate in many cases.
Lowe agrees. "The lender has got to take a realistic view of what the borrower is capable of managing. If it is not a realistic plan, it will fall over and then the borrower will have another black mark on their file."
A finance sector organisation called the Code Compliance Monitoring Committee has also reviewed the way the banks deal with approaches from customers in financial hardship. It reported that "generally, banks have good systems and staff in place to ensure they are meeting their obligations under section 25.2 of the code.
"However, the committee has some concerns about the possibility that not all customers suffering hardship are being identified and referred for assessment to the appropriate area of the bank."
The committee says there is a tendency for lenders to apply a "one-size-fits-all" approach to dealing with customers, which is not appropriate. It is critical of the approach taken by some lenders of not raising the issue of financial hardship with customers in default but relying on the customer to raise the issue.
As a result, "some customers in genuine hardship may not receive the assistance they are entitled to under the code because they do not, for whatever reason, provide unsolicited information about their financial circumstances".
What you should do
If you find yourself in financial trouble, you should act quickly.
■ Raise the issue with the lender. Lenders have been criticised for not being more upfront about their obligations in dealing with customers in financial difficlty. So it is up to you to let them know.
■ Get advice. Some organisations that will help consumers with money problems include the Consumer Action Law Centre in Melbourne, the Consumer Credit Legal Centre in Sydney and Care Inc in Canberra.
■ Complain. If a lender will not discuss your problems with you, find out what complaints body they are part of and get in contact with it. The most commonly used is the Banking and Financial Services Ombudsman.
Source: Sydney Morning Herald
