May 16, 2012

FOS and COSL representation

ASIC is still reviewing its position on EDR schemes jurisdiction over complaints when credit providers have commenced debt recovery proceedings.

It is important that disputes that are referred to FOS or COSL be dealt with properly at an early stage to avoid drawn out proceedings.

Langes offers assistance in 2 key areas, firstly drafting a comprehensive response by credit providers to borrowers’ claims and secondly in representing credit providers at conciliation conferences.

Contact Shannon Adams.

Print This Post Print This Post

Posted 16th May 2012 by David Jacobson in EDR

March 13, 2012

FOS identifies new systemic credit issues

FOS has summarised the new credit-related systemic issues that it identified during the December quarter of 2011 and reported to the Australian Securities and Investments Commission (ASIC):

Recovery from applicant of costs of dealing with FOS
Paragraph 1.1 of the FOS Terms of Reference states that the dispute resolution service provided by FOS is free of charge to applicants and is paid for by FSPs. ASIC Regulatory Guide 165: Licensing: Internal and external dispute resolution (RG 165) also affirms the principle that customers should not have to pay to use internal dispute resolution services.

An FSP acknowledged that, despite its policy providing that any costs incurred relating to accessing FOS must be borne by the FSP, it had identified instances where legal costs had erroneously been charged to a customer’s loan account.

In order to resolve the issue, FOS requested that all costs erroneously charged to the affected customers be refunded in full, together with interest payable at the relevant loan rate and that lawyers should produce separate invoices for legal costs relating to disputes lodged with FOS to reduce the likelihood of similar errors occurring in future.

Error in credit listing
FOS has handled a number of disputes in which the applicant alleged that the FSP had made default listings on its personal credit files for amounts that were not 60 days overdue. It appeared that the FSP was incorrectly listing amounts equivalent to the accelerated amount of the debt, thus depriving applicants of the opportunity to remedy the default prior to listings being made.

In addition, FOS had concerns about the adequacy of the default notice used by the FSP. The apparent faults included the inaccuracy of the amount in arrears, the FSP’s failure to warn applicants that the remaining loan balance was payable if they failed to rectify the default within 35 days and its failure to specify the amount of the remaining loan balance as required by the Credit Code . Further, the notice did not mention the possibility that a report could be made to a credit reporting agency or that a default listing might follow if payment was not made within a specified time.

FOS also had concerns that the FSP appeared to treat the remaining loan balance as payable 30 days from the date of its notice rather than the deemed delivery date in the ordinary course of post.

Print This Post Print This Post

Posted 13th March 2012 by David Jacobson in EDR, legislation

March 9, 2012

FOS disputes and lender’s mortgage insurance

The Financial Ombudsman Scheme (FOS) has published an article outlining its views on a financial service provider’s obligations in dealing with a customer in financial difficulty when the FSP has made a lender’s mortgage insurance claim or may potentially do so after the sale of the customer’s property.

Making a claim on LMI
FOS argues that a FSP may not make an LMI policy claim while FOS is considering a dispute. It considers that entering into an LMI policy with an insurer does not override the duties or obligations that a FSP has to its customer, including the obligation to give genuine consideration to a customer experiencing financial difficulty.

Following directions from the mortgage insurer
FOS says that if a FSP merely follows the direction of its insurer and does not form its own view on the customer’s ability to repay the residual debt under a repayment arrangement, it may be unable to demonstrate that it has met its obligation to genuinely consider a hardship variation. If FOS concludes the FSP has not met its obligations, it can require the FSP to vary the credit contract in order to better address the applicant’s financial difficulty.

FOS can also make an award for non-financial loss if an FSP is found to have breached its obligations to assist borrowers in financial difficulty under 25.2 of the Code of Banking Practice or under the Mutual Banking Code of Practice (Codes) or good industry practice.

Resolving the dispute
How FOS handles a dispute will depend on where the debt resides:

  • If the debt is currently with the FSP, then in most cases FOS will raise the dispute against the FSP and it will expect the FSP to take no further steps in making an LMI policy claim until the dispute has been finalised.
  • If the FSP has made an LMI policy claim before the applicant lodges the dispute with FOS but the claim is yet to be paid by the insurer, FOS will not prevent the insurer from continuing to assess and process the claim. However, FOS will require documentation from the FSP to show that the claim was raised with the insurer before the dispute and FOS will still continue to consider the dispute against the FSP.
  • If the claim is approved, the dispute against the FSP will come to an end. The applicant can lodge a new dispute against the insurer with the relevant EDR scheme. If the applicant did lodge a new dispute, the insurer would have to cease all collection activity or recovery action while the EDR scheme is considering the dispute.
  • Alternatively, if the insurer declines the claim then the FSP must continue to respond to the dispute.

In FOS’s view, “it is therefore not appropriate for terms of settlement to provide that the shortfall debt, when known, be immediately referred to the insurer. This is because the passage of time between the date the terms of settlement are agreed and the settlement date of the sale of the security property may result in a change to the applicant’s financial circumstances. The FSP should genuinely consider the customer’s ability to pay the shortfall debt when it becomes due. A repayment arrangement may be more appropriate than any claim on the LMI policy at the relevant time.”

Langes can provide advice on handling a FOS dispute or negotiating the terms of settlement.

Print This Post Print This Post

Posted 9th March 2012 by David Jacobson in EDR

February 2, 2012

COSL Annual Report: systemic issues

The Credit Ombudsman Service Limited (COSL) has published its 2010-2011 annual report on its operations.

It identified complaints relating to financial hardship, deferred establishment fees, default listings and motor vehicle leases as systemic issues.

The single largest source of complaints was financial hardship: 34% of all complaints it received related in some way to financial hardship, specifically the failure of a lender to agree to a payment variation on grounds of financial hardship.

The underlying causes of the financial hardship complaints were identified as unemployment or reduced income (30%), cost of living, including other debt (21%), followed closely by illness of the borrower or their family member (19%), business failure (14%), interest rate increases (8%), relationship breakdown (7%) and natural disasters (1%).

In about 72 per cent of those cases the borrower had been served with a default notice or the lender had commenced legal proceedings, repossessed the security or issued a notice to vacate.

Print This Post Print This Post

Posted 2nd February 2012 by David Jacobson in EDR

December 8, 2011

COSL Position Statement on responsible lending

The Credit Ombudsman Service Limited (COSL) has published a position statement giving guidance as to how it will deal with a complaint that a consumer was provided with an unsuitable credit product.

The 27 page document sets outs COSL’s views on the law but emphasises that it is not a court but a dispute resolution scheme.

Its view on the enquiries that must be made regarding a consumer’s capacity to repay a loan is summarised as follows:

5.5 We are of the view that the information required to form a view on a consumer’s ability to repay a credit contract will be more than just a snapshot of their current financial position. It should include information that allows the person making the assessment to form a view on whether the consumer’s financial position could change during the term of the loan (and if so, how).
5.6 We do not propose to provide a checklist of the inquiries that should be made.
5.7 The obligation should be approached on the basis that it is necessary to make as many inquiries as are necessary to adequately understand the consumer’s financial position. It is valid to start with a checklist, but it is likely that other inquiries will also need to be made and these will vary from consumer to consumer; responses to initial inquiries may prompt further inquiries and so on until the person making the inquiries is satisfied that they have a full understanding of the consumer’s financial position.
5.8 Although an application for credit may satisfy a credit provider’s own policies for affordability, it does not necessarily mean that it meets the responsible lending standard in the legislation.

COSL also has regard to the complexity and risk of the product and the consumer’s capacity to understand the product.

If COSL finds that there has been a contravention of the responsible lending obligations, it may require the following actions, among others, to be taken:
(a) waiver or refund of fees and charges by the credit provider in return for the repayment of the principal sum lent under the credit contract;
(b) refund of any fees paid to a credit assistance provider who assisted the consumer into the unsuitable credit contract;
(c) variation of the repayments required under the credit contract so as to make them possible for the consumer without hardship; or
(d) release of the consumer entirely from the credit contract including any mortgage or security (subject to unjust enrichment).

Print This Post Print This Post

Posted 8th December 2011 by admin in EDR, responsible lending

December 5, 2011

ASIC review of EDR jurisdiction

ASIC has released Consultation Paper 172: Review: EDR jurisdiction over complaints when members commence debt recovery proceedings (CP 172).

The review seeks feedback on whether ASIC should refine its policy settings in Regulatory Guide 139 Approval and oversight of external dispute resolution schemes (RG 139) which require both EDR schemes – FOS and the Credit Ombudsman Service Limited (COSL) – to handle complaints under their Terms of Reference or Rules where members have commenced debt recovery legal proceedings. This must cover proceedings that are in their early stages, but need not cover those that have progressed beyond the complainant lodging a defence or defence and counterclaim.

There have been criticisms by Financial Service Providers that EDR schemes are taking too long to resolve consumer claims, especially those lodged after default notices and legal proceedings have issued, resulting in a postponement of enforcement proceedings.

Comments on the consultation paper are due by Monday 27 February 2012.

Print This Post Print This Post

Posted 5th December 2011 by David Jacobson in EDR

October 3, 2011

FOS reviews its financial difficulty EDR processes

The Financial Ombudsman Service’s latest circular responds indirectly to criticisms by Financial Service Provider members that FOS is taking too long to resolve consumer claims, especially those lodged after default notices and legal proceedings have issued, resulting in a postponement of enforcement proceedings.

The new Chief Ombudsman, Shane Tregellis, discusses delays in receiving mail from FOS as well as announcing a call system upgrade.

Concerns about EDR system shopping by consumers (where for a example a licensee and a credit representative are members of different EDR schemes) are discussed in an article about FOS’s agreement with COSL about which scheme will apply in such circumstances. FOS also sets out its approach when a dispute involves 2 separate FOS members.

FOS has also made it clear that in deciding financial difficulty disputes FOS will form an opinion about what is fair in all the circumstances, having regard to:

a.Legal principles;
b.Applicable industry codes or guidance as to practice;
c.Good industry practice; and
d.Previous relevant decisions of FOS or a predecessor scheme

FOS members may find it useful to undertake its elearning course on its terms of reference and case management in order to efficiently deal with the EDR process as well as review its Operational Guidelines.

The best way to shorten (or avoid) a lengthy EDR process is to improve the effectiveness of your IDR process.

Print This Post Print This Post

Posted 3rd October 2011 by David Jacobson in EDR