It is likely that a borrower will encounter a significant change in their financial circumstances at least once during a loan. A borrower may experience financial hardship even during a short-term loan.

An increasing number of borrowers are approaching COSL because they are experiencing difficulty in meeting their financial obligations. One out of every three complaints COSL received in the 2008/2009 financial year related to financial hardship.

Financial hardship may be due to reasons like successive increases in interest rates or a significant change in a borrower's financial circumstances (family break-up, death of spouse, workplace injury, unemployment or illness).

In these circumstances, a borrower may ask their lender to vary their payment obligations so that they can avoid defaulting (or avoid defaulting further) on their loan while they are experiencing financial difficulties.

Occasionally, a borrower may claim that their financial hardship was caused by their having been put into an inappropriate loan that they could not reasonably afford. In these cases, the loan may be unjust and the borrower should generally be placed in the same position they would have been had the improvident loan not been made. Less commonly, this may involve setting aside the loan. Where a borrower claims unjustness and seeks a financial hardship variation, we deal first with the financial hardship aspect (as this is almost always time critical) and the unjustness aspect later. However, often it will be the case that if the borrower never had the capacity to repay the loan, a financial hardship variation will not be appropriate.

COSL Rule 18 - 7th Edition applies to our Members, whether or not a credit contract is regulated under the Consumer Credit Code or the National Credit Code.

Lender must act when they become aware of financial difficulty

Under Rule 17, if the lender becomes aware or is informed by the borrower ('Complainant') that the borrower is or may be in financial difficulties, the lender must consider in good faith and within a reasonable time whether it is reasonably appropriate to vary the payment terms, having regard to the borrower's financial circumstances.

Financial information from borrower

The lender is only required to do so if the borrower provides the lender with the financial information and documents the lender reasonably needs to assess the borrower's financial situation. The lender must allow the borrower a reasonable time to provide these.

(There may be circumstances where the borrower may reasonably require more time to provide the financial information. For example, a borrower with special needs may find it difficult to gather the financial information without assistance; a borrower whose source of income comes from their own business may not have prepared profit and loss statements and tax returns; a borrower with multiple sources of income may not have readily available evidence of this; or a borrower who relies on a third party to provide proof of income may need extra time to obtain the proof. We consider, however, that the borrower must make all reasonable efforts to obtain the information and documents as quickly as possible.)

Lender must act reasonably and in good faith

The lender must act reasonably and in good faith in assessing the Complainant's request to vary the payment terms and must not impose unreasonable or burdensome conditions on the Complainant before agreeing to consider whether to, or agreeing to, vary the payment terms.

Where financial hardship application approved

We do not expect a lender to agree to a financial hardship application if the Complainant is not reasonably able to meet a proposed variation.

If the lender decides to vary the payment terms, it must promptly give to the Complainant and any guarantor of the credit facility a written notice setting out particulars of the varied payment terms. If the payments are reduced or suspended for a period of time, the written notice should also indicate how the shortfall in scheduled payments are to be managed (for example and without limitation, by debt waiver, capitalisation, increased payments over a period or a lump sum payment).

Where financial hardship application declined

If the lender decides not to vary the payment terms, it must promptly inform the Complainant in writing of:

1. its decision and the reasons for its decision;
2. the Complainant's right to make a complaint to COSL; and
3. COSL's contact particulars.

We will ask the lender to reconsider its decision to decline the financial hardship application where, for example, the borrower has put forward a reasonable payment proposal. However, unless the credit contract is regulated by the Consumer Credit Code or the National Credit Code, we will not substitute our decision for the lender's decision (that is, we will not direct the Member to vary the credit contract). Refer to COSL Rule 9.6(h) - 7th Edition.

It is always open to a lender and a borrower to agree between themselves to vary a credit contract, whether or not regulated, for any reason (including on grounds of financial hardship). We encourage lenders and borrowers to come to those agreements, wherever appropriate.

That is, regulated by the Consumer Credit Code or the National Credit Code. The credit contract will be regulated if, among other things, more than 50% of the loan was for personal, domestic or household purposes.

If a lender and borrower agree to vary the terms of a regulated credit contract, both sections 65 Consumer Credit Code and 71 National Credit Code require the lender to give the borrower written notice of the particulars of the change not later than 30 days after the date of the agreement. The lender is, however, under no obligation to agree to a change under these sections.

If the credit contract is regulated by the Consumer Credit Code or the National Credit Code, a borrower may make a financial hardship application to the lender if the borrower is unable, because of unemployment, illness or 'other reasonable cause', to make the payments the contract requires.

The credit contract may be varied in any of the following ways:

1. extending the term of the credit contract and reducing payments; or
2. postponing payments during a specified period (without extending the term of the loan); or
3. extending the term of the credit contract and postponing payments during a specified period.

It is implicit that when payments are postponed under section 66 Consumer Credit Code or section 72 National Credit Code, they can be 'caught up' by:

1. making a lump sum payment after the postponement; or
2. making extra payments over a period of time; or
3. capitalising the arrears.

Although section 66 Consumer Credit Code and section 72 National Credit Code refer to three types of variations, we recommend that a lender should also consider other types of variations, in appropriate circumstances. Without limitation, a lender may agree to:

1. reduce the interest rate for a specified period;
2. reverse default fees, default interest and enforcement costs;
3. waive default fees and default interest for a specified period;
4. waive part of the arrears or principal;
5. extend periods of reduced or nil repayments;
6. capitalise all, or a portion of, the arrears; and
7. allow the borrower time to sell the property, during which the lender will not require payments or will require reduced payments.

The test under section 66 Consumer Credit Code and section 72 National Credit Code of whether a hardship variation is appropriate is whether the borrower reasonably expects to meet their obligations under the credit contract if the contract was changed in a particular way. If capitalising the postponed payments enables the borrower to meet their obligations under the loan, then we consider that it is appropriate for the lender to agree to this. The lender is not generally disadvantaged as the borrower will still pay interest on the capitalised amount.

Any capitalisation could increase the loan's loan to value ratio ('LVR') beyond that covered by a lender's mortgage insurance policy with respect to the loan ('LMI'). However, case law suggests that LMI may not be a relevant consideration for a lender to take into account when considering a financial hardship application in good faith.

Within 21 days of receiving the financial hardship application, the lender is required to give the borrower a written notice stating:

1. whether or not the lender agrees to the borrower's request to vary the payment terms; and
2. if the lender does not agree to the variation, the reasons for not agreeing; the name of the EDR scheme of which the lender is a member; and the borrower's rights under that scheme.

If a lender agrees to the financial hardship application (and the loan is regulated), the lender must, within 30 days of the agreement, give the borrower and any guarantor a written notice setting out the particulars of the change in the terms of the credit contract.

If the lender has declined a financial hardship application, we consider that a lender should generally allow a borrower reasonable time to refinance where there is a realistic prospect of this or where the financial position of the lender is fully protected because the value of the security property significantly exceeds the outstanding balance of the loan.

We consider that a lender should allow a borrower reasonable time to sell the security property if the sale of the property is likely to discharge the loan. This is consistent with section 66 Consumer Credit Code and section 72 National Credit Code in that the sale will enable the borrower to meet their obligations under the loan. In this case, payments may be reduced or postponed during the sale period.

Even if the sale may not discharge the loan, a lender should consider whether it is appropriate to allow a borrower time to sell the security property, noting that:

1. borrowers generally prefer to "sell with dignity" rather than by mortgagee sale; and
2. this saves on enforcement costs that would otherwise be borne by the borrower.

In allowing the borrower reasonable time to sell the security property, we accept that it may be appropriate in the particular circumstances for the lender to require the borrower to agree to some or all of the following:

1. The security property being put up for sale within a certain period.
2. Unconditional contracts of sale to be exchanged by a certain date (this must be reasonable).
3. The borrower agrees in writing that if contracts of sale are not exchanged by a certain date, the borrower will give possession of the property to the lender.
4. The contract for sale provide that settlement will take place within a certain period (we consider six weeks would be reasonable in most circumstances).
5. The borrower agrees to make whatever payments they can during the sale period. The borrower should provide financial information so that a reasonable payment amount may be established.
6. The borrower signs an authority to allow the lender to obtain updates from time to time on the progress of the sale from the real estate agent.

Whether or not the credit contract is regulated, the borrower may submit a complaint to us if the lender has declined their financial hardship application. Alternatively, if the loan is regulated and the loan amount is under the financial hardship threshold amount, the borrower may also apply to the Court to change the terms of the credit contract.

On receipt of a financial hardship application (or, more accurately, a complaint that the lender has declined the borrower's request for a payment variation), we review, among other things:

1. whether the borrower was in fact, and continues to be, in financial hardship;
2. the borrower's financial circumstances; and
3. whether the borrower is likely to be able to meet any revised payment terms being proposed, given their financial circumstances.

We also examine whether the lender considered the borrower's hardship variation application in good faith.

COSL Rule 17 imposes an obligation on each lender to consider in good faith whether a financial hardship application is reasonably appropriate, having regard to the borrower's financial circumstances.

If the lender does not do so, it may affect its ability to:

1. charge the borrower default fees, default interest and enforcement costs; and/or
2. charge the borrower the costs of staying legal proceedings,

if the enforcement action could have been avoided had the lender considered the financial hardship application in good faith and, if appropriate, granted a variation of payment terms at the time.

However, the requirement of good faith does not impose an obligation on the lender to act for or on behalf of the borrower.

Also, we consider that to act in good faith the lender should:

1. participate in the process of negotiation, mediation or conciliation; and
2. demonstrate:
• a willingness to consider the options proposed by the other party for resolution of the complaint; and
• a willingness to put forward options for the resolution of the complaint.

The obligation on a lender to act in good faith will include the lender doing the following:

• allowing the borrower sufficient time to provide information about their financial circumstances;
• considering the borrower's financial circumstances;
• considering whether it is reasonably appropriate to vary the payment terms, having regard to the borrower's financial circumstances;
• considering any reasonable proposal to vary the payment terms of the contract;
• considering only matters relevant to the hardship application (for example, the borrower's poor payment history and the LVR of the loan are generally not relevant considerations);
• not imposing an unreasonable or burdensome alternative payment arrangement; and
• giving adequate reasons for declining a financial hardship application.

If the lender has not considered the financial hardship application in good faith, we:

1. will require the lender to re-consider their decision to decline the application; or
2. in the case of a regulated credit contract, will consider if the credit contract should be varied in the manner described in section 66 Consumer Credit Code or section 72 National Credit Code.

The decision to vary a credit contract is discretionary and the matters we will consider depend on the circumstances of the complaint. In determining whether and how a credit contract should be varied, we will be guided by a number of principles, including among others:

The borrower must have first made a financial hardship application to the lender and the application must have been rejected. The application need not be in writing. However, the lender may ask the borrower to put an oral request in writing and provide written particulars of the borrower's financial situation. Circumstances where we consider that a borrower's application has been rejected include (without limitation):

1. where the lender has offered an arrangement that the borrower cannot reasonably meet;
2. where the lender has not responded to the borrower's application; or
3. where the lender has informed the borrower that their request for financial hardship assistance has been declined.

We must be satisfied that the borrower is unable reasonably to meet their obligations under the credit contract because of illness, unemployment or other reasonable cause;

1. The borrower must be able to demonstrate that they reasonably expect to meet their obligations under the credit contract if the credit contract is varied. (This means that if the terms of the credit contract are varied, the borrower must reasonably expect to be able to pay:
• the balance outstanding (including any accrued arrears, default interest and fees and enforcement expenses); and
• interest on the outstanding loan balance,
2. at the interest rate specified in the credit contract (unless otherwise agreed) over the term of the loan, as extended if appropriate.)

Amortisation tables generated from a loan repayment calculator can be used to ascertain whether the borrower will be able to meet the proposed payment arrangement.

1. Documentary evidence is necessary to assess the financial circumstances of the borrower.
2. We will look at the borrower's circumstances at the time the borrower made the financial hardship application to us, not at the time they made it to the lender.
3. The test is not what payments the borrower desires to make, but rather, whether the borrower can meet their obligations if the credit contract was changed in a particular way.
4. We will attempt to find a reasonable balance between the interests of the borrower and the lender.
5. The fact that the borrower caused their own financial hardship will not, of itself, disqualify them from seeking financial hardship relief.
6. A negative inference may sometimes be drawn from the length of time that the borrower has been unemployed.
7. We will not make judgments about the financial decisions of the borrower or how they may have prioritised one interest, or need for expenditure, above another.
8. We may sometimes take into account a commitment from a family member of the borrower to assist the borrower with payments.
9. We may require the lender to enter into an interim variation if there is uncertainty as to when the borrower will be able to meet their obligations (because, for example, it is uncertain when the borrower may be able to secure employment; or when the borrower will receive a worker's compensation payout; or when the borrower's business will improve).
10. We may impose conditions on the borrower to, for example, regularly report to the lender about changes in their circumstances.
11. The borrower is entitled to make a financial hardship application on more than one occasion. However, we will take into account whether the borrower's circumstances have changed since the previous application.
12. If the prospect of the borrower meeting the proposed variation is speculative, it is less likely that we will consider that a variation is reasonable (however, an interim arrangement may be suitable). Examples of these circumstances are:
• where there is no indication as to whether or when the borrower will receive compensation for an injury that has caused the hardship; or
• where there is no indication as to whether or when the borrower's business will improve as expected by the borrower; or
• where there is no indication as to when the borrower will receive an inheritance, or the amount of the inheritance.

If we determine that a regulated credit contract should be varied, we will direct the lender to vary the payment terms of the credit contract, even where the credit limit exceeds the hardship threshold under the Consumer Credit Code or the National Credit Code.

The lender must:

1. not treat the variation of the credit contract as a default (and, accordingly, should not charge default fees or default interest while the variation is in place and for as long as the borrower is complying with the arrangement);
2. if the lender previously listed the borrower as being in default but the listing could have been avoided if the lender had acted in good faith, request the credit reference body to remove the default listing, and provide the credit reference body with all necessary information to facilitate the removal; and
3. while the borrower is complying with the variation, not do anything that is inconsistent with the variation, like:
• commencing or resuming enforcement action;
• seeking judgement for the debt or taking possession of an asset securing the debt;
• assigning any right to recover the debt; or
• listing a default on the borrower's credit reference file.

Unless the loan is for a small amount, we recognise that if a borrower's financial difficulties are long term, they are unlikely to be able to repay their loan even if there was a variation of the loan terms. In these circumstances, we are unable to assist a borrower seeking a variation of their payment obligations.

We also recognise that a borrower may sometimes be better off selling the security property. As we are not permitted to advise the borrower on these matters, we would normally refer them to a financial counsellor

However, we consider that in such cases, the lender should generally allow the borrower reasonable time to sell the security property themselves.

We consider that a lender is able to charge enforcement costs that are reasonably incurred if they are authorised under the credit contract. However, while the credit contract may entitle the lender to recover enforcement costs reasonably incurred by it, this must be done "having regard to the proper interests of the persons who will ultimately bear the burden of such costs".

If the borrower is able to reasonably demonstrate to us that a financial hardship application should have been approved by the lender at the time the borrower made the lender aware, or at the time the lender became aware, that the borrower was experiencing financial difficulties, the lender is generally not entitled to recover default interest and fees and enforcement costs from that time. However, if the lender requested documents reasonably necessary to consider the application and the borrower did not provide these, the lender is not obliged to reverse these costs.

For regulated loans, we will also look at whether the lender has breached section 99 Consumer Credit Code or section 107 National Credit Code, which provide that a lender must not recover enforcement expenses in excess of those reasonably incurred by the lender. These may include costs that have been unjustifiably or vexatiously incurred by the lender so as to impose an unwarrantable burden on the mortgagor.

The 7th Edition of the COSL Rules sets out specific provisions about enforcement action and financial hardship.

A lender must not commence or continue enforcement action while we are reviewing a financial hardship application.

By 'enforcement action', we mean making a demand for the payment of a debt or possession of an asset securing the debt, which involves:

• legal proceedings in a court to recover the debt or take possession of the asset; or
• any action (other than legal proceedings) to recover the debt or take possession of the asset.
Once we record a financial hardship application as having been received and for as long as we deal with the application:

1. the lender must not initiate enforcement action;
2. if enforcement action commenced before we received the financial hardship application, the lender must not continue the enforcement action and, in particular, must not seek judgment in the legal proceedings;
3. the lender must not sell the debt or otherwise assign any right to recover the debt; or
4. if it has not already listed a default, the lender must not list a default on the borrower's credit reference file.

While enforcement action is stayed, the borrower is obliged to continue making whatever payments they are able to.

There are certain circumstances where we will permit the lender to commence or continue legal proceedings. These are set out in COSL Rule 16.2 - 7th Edition. In particular, we will permit the continuation or resumption of legal proceedings if the borrower has taken a step in the legal proceedings beyond lodging a defence or a defence and counterclaim.

The lender must not do anything which is inconsistent with:

1. a decision by us in the borrower's favour; or
2. an agreement between the lender and the borrower on a variation of the payment terms; or
3. a direction by us to the lender to vary the terms of a credit contract.

The lender may resume enforcement action if:

1. we determine that we have no jurisdiction to deal with the financial hardship application;
2. we consider that the financial hardship application has not been made out; or
3. the borrower declines to accept our determination of the financial hardship application.

However, the lender may only resume enforcement action if it allows the borrower 14 days in which to file a defence or a defence and counterclaim (if they have not already done so).

Where appropriate, we can require a Member to, among other things:

1. reconsider its decision to decline a financial hardship application (where, for example, the borrower has put forward a reasonable repayment proposal or where the lender has taken into account inappropriate factors); or
2. where the loan is regulated, vary the payment terms of the credit contract; or
3. reverse default fees, default interest and enforcement costs;
4. pay compensation to the borrower; or
5. do something or refrain from doing something.

COSL Rule 17 makes it clear that the Member should consider whether it is appropriate to vary a borrower's payment obligations even where the borrower has not directly advised the Member that they are having financial difficulties.

A finance broker, who becomes aware that a borrower for whom they arranged a loan is in financial difficulties, should inform the borrower that the borrower may make an application to the lender or mortgage manager for a variation to their payments obligations on grounds of financial hardship.

We consider that a mortgage manager or lender should make enquiries as to whether a borrower is or may be in financial hardship when it becomes aware that the borrower has defaulted or a direct debit has been dishonoured. We recommend that the Member open early lines of communication with the borrower for the purpose of establishing whether this is the case and, if so, whether it is reasonably appropriate to vary the payment terms having regard to the borrower's circumstances.

Early communication with a borrower is also in the Member's interest because they may not otherwise be entitled to recover default interest, default fees and enforcement costs from the time they should have approved a financial hardship application.

Consequently, the Member should establish organisational systems (including training their staff and contractors), to identify borrowers who may be in financial difficulties. This will allow the Member to consider at the earliest possible time whether it is reasonably appropriate to vary the payment terms. It is in the interests of both the Member and the borrower that a material amount of arrears, and default fees and default interest, do not accrue on the borrower's loan.

We understand that a borrower can apply to APRA for the partial release of their superannuation benefits. Consequently, if the borrower requests the lender to do so, we expect that the lender will provide, as soon as practicable, the borrower with a letter containing the information required by APRA. While we do not express an opinion as to whether it is appropriate for a borrower to access their superannuation savings, we accept that sometimes it may be in the interests of the borrower to do so; for example, if the superannuation funds will entirely clear the arrears on the loan, avoid enforcement costs and enable the borrower to keep the property.

We expect that a lender will not require a borrower to apply for early release of superannuation or obtain funds from family members before considering whether to, or agreeing to, vary the payment terms.

Ideally, a financial hardship application should be made by all co-borrowers. However, there are occasions where one co-borrower is in financial hardship and the other:

1. is not able to make the repayments on their income alone; or
2. cannot be contacted; or
3. is not making payments (because, for example, there has been a breakdown in the relationship between the co-borrowers).

In each of these situations, the question arises whether the credit contract can be varied to reflect the proposed payment variation despite one of the co-borrowers either not being in financial hardship or not agreeing to the proposed payment variation.

We consider that the credit contract can be so varied in these circumstances on the basis that:

1. Section 66 Consumer Credit Code and section 72 National Credit Code merely provide that:
• "A debtor who is unable reasonably, because of illness, unemployment or other reasonable cause, to meet the debtor's obligations under a credit contract and who reasonably expects to be able to discharge the debtor's obligations if the terms of the contract were changed in a manner set out in subsection (2) may apply to the credit provider for such a change."
2. There is no requirement for all the co-borrowers to make a financial hardship application. In addition, clause 7 of schedule 2 of the Consumer Credit Code provides that when interpreting a provision in the Code, the interpretation that will best achieve the purpose or object of the Code is to be preferred to any other interpretation.
3. The obligations of each co-borrower under the credit contract are Ôseveral' as well as joint; that is, the lender is entitled to look to only one co-borrower to repay the loan and need not demand repayment from all co-borrowers. Conversely, each co-borrower is liable to repay the entire loan despite the contractual obligation of the other co-borrowers to also repay the loan.
4. Where one co-borrower is in financial hardship, the financial position of all co-borrowers as a whole will be adversely affected.

Where only one borrower is in financial hardship

A lender should consider in good faith a financial hardship application even if it is from only one of the co-borrowers. If the lender considers that the payment arrangement proposed by the borrower is appropriate, it should inform the other co-borrower of the proposed arrangement, invite them to indicate whether they are prepared to agree to the terms of the proposed arrangement or, if not, why the lender should not give effect to the arrangement.

Where one of the co-borrowers cannot be contacted

In circumstances where one co-borrower is in financial hardship, but the other is not contactable and is not contributing to the loan payments, we consider that a lender should consider in good faith the financial hardship application even if it is from only one of the co-borrowers.

We also consider that the lender should not insist that the assets or income of the absent co-borrower be provided before it will consider the financial hardship application, because those assets and income are irrelevant in circumstances where the absent co-borrower is not contributing to the loan payments. The remaining co-borrower will, however, still need to demonstrate that they would be able to meet the payment terms (on their own) if the loan contract was varied.

Where one co-borrower does not wish to make a financial hardship application

Where there has been a breakdown in the relationship between co-borrowers, one co-borrower may elect not to make payments, preferring instead for the loan to go into default and the security property sold by the lender. In such a case, the co-borrower will not be prepared to support a financial hardship application by the other co-borrower or agree to a payment arrangement.

In these circumstances, we consider that the lender should nonetheless consider in good faith whether a temporary payment arrangement would be appropriate to allow time for the co-borrowers to settle the issue in the Family Court or in another appropriate forum.

We consider that a bankrupt borrower can make a financial hardship application in their own name where the bankrupt is able to meet the loan payments from the income the bankrupt is permitted to retain. In these circumstances, the outcome of the financial hardship application will not normally concern the trustee because it would not adversely affect the interest of the bankrupt's creditors.

Furthermore, we consider it unlikely that a variation of the credit contract on grounds of financial hardship can be characterised as property that becomes vested in the trustee or that only the trustee can make a financial hardship application at its election on the creditors' behalf.

However, we are not able to consider complaints made by a bankrupt borrower where the subject matter of the complaint relates to the property which secures the debt; for example, a bankrupt seeking to recover possession of land in circumstances where the trustee in bankruptcy has declined to do so.