June 25, 2015
We often have to deal with the heart-wrenching task of defending attempted home foreclosures, enforcement action on overdue credit cards, business overdrafts and so on. In a great deal of cases, the debtor is just a few weeks short of being able to satisfy the debt or the repayment, as the case may be, in full. Similarly, more often than not, the debtor has tried to negotiate some further time with the bank, to the point of pleading or begging, but to no avail. We have all heard one sad story or another of a credit provider – be it a bank, finance company, credit union or building society – mercilessly crunching down and selling off assets following repayment defaults.
Perhaps strangely, in the majority of cases, at least in the initial stages, it seems the creditor would rather go through the litigation process to enforce, rather than to strike a commercial settlement, even when the debtor has made it clear that this alternative is likely to produce much less of a return for them in the circumstances. To illustrate, in the case of a home mortgage, that would involve applying to the Supreme Court and seeking declaratory relief and orders for a mortgagee sale (which will often only be awarded after a contested hearing), which is by no means an efficient, cheap or sensible way to approach things if a better offer is on the table (not to mention the legal costs the debtor might end up being liable for also, which is another matter altogether). Without providing our own personal opinion on that or even taking sides, in this post we’ll reveal a more efficient alternative to Court to achieve a fair and reasonable arrangement, and in the process, hopefully provide at least some level of comfort to distressed debtors feeling the pinch.
The starting point is the fact that most of the major banks have adopted the Australian Bankers Association Code of Banking Practice (the 2013 version is most current) (“the Code”), which is a sort of code of conduct regulating its signatories in the industry. In general terms, the Code applies to most banking services and financial products, i.e. meaning your mortgage. Some key provisions of the Code establish what can be critical obligations on the banks in favour of the consumer. For example, they are required to explain certain things, provide you with certain information and steer you in the right direction for obtaining adequate advice. Perhaps the most critical though, is the obligation to try to help you overcome your financial difficulties with any credit facility you have with them, for example, by working with you to develop a repayment plan. Obviously this sounds great in theory, but you’re probably naturally thinking that it’s only a voluntary code of conduct, and doesn’t carry any real weight? Wrong…
Credit providers such as the banks are generally required to have a license under the National Consumer Credit Protection Act 2009 (Cth) (“the Act”). One of the general conditions of such a license set out in section 47 of the Act is that the credit provider be a member of an approved external resolution scheme. The most popular is the Financial Ombudsman Service (“the FOS”), and most major banks are members. The FOS’ publicised approach to breaches of the Code are to treat them as breaches of the terms of the bank’s contract with you. Therefore, if the credit provider does not put a real and genuine effort into trying to help you overcoming your financial difficulties with one of their credit products, in circumstances where you have made it known to them that you are having those difficulties, they are arguably in breach of contract and arguably unable to enforce their security.
In addition to the above, once a complaint has been lodged with FOS, the credit provider is basically prohibited from taking any enforcement action, generally speaking. Further, the FOS is not just a figurehead or a mediation service – it actually has the power to make binding determinations that cannot be appealed from and that are enforceable, including, for example, for the payment of compensation to the debtor (in an appropriate case) and, in some cases, to declare the particular contract void or voidable or illegal (and therefore unenforceable). Further, the FOS is obviously not a Court, and is generally a much, much cheaper forum and process.
Ultimately, if you are experiencing genuine financial difficulty, speak to your bank – put it in writing, marked “without prejudice”, and both explain the difficulty and propose a reasonable alternative payment plan that sees you catch up at some point in time that’s not too remote, for example. If the bank seeks to enforce or ignores you, check to see whether they’re a signatory to the Code and a member of FOS, and lodge a complaint with FOS immediately. You can of course appoint a legal representative to do this for you and act on your behalf also. That will buy you some time and give you the opportunity to get your affairs in order, and to hopefully secure a workable arrangement.
As always, feel free to contact us about any related issues.