With pressures on consumers and small businesses rising rapidly because of increasing interest rates and the high cost of living, many broker clients may need hardship assistance.
In an MFAA webinar, a panel of experts discussed how brokers can help manage these conversations about financial hardship, the legal obligations for both brokers and lenders to clients in hardship, and in particular, the impact of hardship on these clients’ credit report.
“It’s really important that brokers know what to tell a customer in terms of what are the lender’s obligations,” said Elise Ivory (pictured above left), partner at finance group and law firm Dentons.
“A broker can say, ‘if you approach the lender and do these things, they can consider a hardship application’, and that is very important.”
Much has been said about the struggles Australian borrowers are going through.
A Roy Morgan study found over 1.5 million borrowers are at risk of mortgage stress while other research showed that nearly one quarter of homebuyers are using half their income to pay their mortgage.
Because of this stress, two-thirds of homebuyers want their credit provider to monitor their financial situation before they fall behind in their payments.
If these borrowers were suddenly to face a challenging life event – such as job loss, illness or injury, income reduction, parental leave, relationship breakdown, or business failure – there may be grounds for financial hardship.
Importantly, financial hardship does not account for forgotten payments, a short-term unforeseen large expense that is not ongoing, or a payment timing issue.
Webinar facilitator and MFAA executive policy and legal Naveen Ahluwalia (pictured above right), said brokers were often the first point of contact with borrowers struggling with difficult financial situations.
“The situation generally goes the customer comes and sees a broker and they say repayments have been increasing and now we are at a point where we are finding it really challenging. How can you help me?” Ahluwalia said.
“Generally, the broker will engage in a reprice conversation with the lender and negotiate the rate or look to market and see if the borrower can move and get a better rate. But there are some customers out there who are just not able to reprice or move.”
Ahluwalia said these people would find it a challenge to meet their payments going forward or they were already in arrears.
“That’s really where the situation would arise as to whether the customer is in hardship.”
Another problem for brokers is understanding what they are obligated to do and what falls under the obligation of the lender.
Ivory said she had been getting a lot of questions about financial hardship, especially after ASIC’s warning to lenders in August.
“ASIC expect the lenders to work with the customers and make hardship visible to customers. It’s a really important thing to get right in this economic climate especially with people rolling off record low fixed rates,” said Ivory, who advises the banking and mortgage industry on consumer and commercial credit regulation and compliance.
Part of ASIC’s open letter to Australia’s biggest lenders involved reminding them of their obligations under the National Credit Code where financial hardship is regulated.
“The Code requires that the lender considers a hardship arrangement if a borrower makes an application and it says that they are unable to meet their obligations under their credit contract,” Ivory said.
However, Ivory said this the section within the Code was “broad” and “open for interpretation”.
“The biggest difficulty for many lenders is determining when a hardship notice has been given. All lending staff who deal directly with customers need to understand hardship triggers,” Ivory said.
“From a lender’s perspective, a customer does not need to ask to apply for hardship nor do they need to use the word hardship or specifically ask to apply … it’s quite a low threshold that places the obligation on the lender to help with financial hardship.”
Importantly, Ivory said brokers need to know that it was “a lender’s obligation” – however, how much brokers should be obligated to do in certain circumstances was up for debate.
“Brokers are the main the point of contact for a lot of borrowers and recognising the signs and being able to tell the customer what to say to their lender is really important,” Ivory said.
“A lender can then come up with a range of things – there is no limit to what a lender can do to help a customer and they can be quite creative with what they can do to assist.”
Ivory pointed out a variety of instruments lenders could use, including payment holidays, reducing interest for a period of time, extending the term of the loan, or giving the borrower time to sell.
“Basically, if there is a broker that has a customer experiencing hardship, they can say there is a wide variation of what they can expect from a lender in terms of how they can manage their payments going forward,” Ahluwalia said.
For the full discussion, including a detailed breakdown of the structure of credit reporting and how financial hardship effects a borrower’s credit score from the Australian Credit Retail Association’s Michael Blyth, click here if you are a MFAA member.
How do you help customers experiencing financial hardship? Comment below.
