On 1 March 2013, the National Credit Code (“Code”) amendments will come into force. One of the significant amendments is the changes that are being made to section 72 of the Code. This section relates to hardship applications that may be made by borrowers experiencing hardship. These changes affect both borrowers and lenders, but if you are a borrower, you should read on.
What is the National Credit Code and how does it work?
The Code is the law that relates to credit contracts. Credit contracts are entered into by lenders (generally, a bank or financial institution) and borrowers (individuals or strata corporations).
For large sums of money, a lender is likely to take security over your home (if you own one). This is known as a mortgage. You become the mortgagor, and the lender is the mortgagee. If you fail to make the required repayments on the loan, the lender can take possession of the secured asset, being your home, and sell it to recover its money.
If you are at risk of having this happen, there are some things that can be done to hopefully help. One of them may involve making a ‘hardship application’.
What is the current hardship provision of the Code?
The current hardship provision allows you to request that the terms of the credit contract be changed to either:
- Extend the period of the credit contract and reduce the amount of the periodic repayments;
- Postpone the dates on which repayments are due for a specified period of time; or
- Extend the period of the credit contract and postpone the dates on which the repayments are due for a specified period of time.
Note: None of these options allow you to request a change to the annual percentage rate or rates.
To be eligible to make a hardship application, certain criteria must be met, including:
- You are the home owner of the mortgaged property (and live in the property); and
- You are reasonably unable to meet your obligations under the credit contract because of illness, unemployment or other reasonable cause; and
- You expect that you would be able to meet your obligations if the change to the credit contract was made; and
- The maximum amount of credit provided is less than $500,000.
The lender has 21 days to respond to a hardship application and advise you whether they agree or do not agree to the changes requested.
How and when will this change?
From 1 March 2013, section 72 of the Code will be amended to allow you to notify the lender, either written or orally, that you are experiencing hardship and you believe that you will be unable to meet your obligations under the credit contract. This means that you do not have to be ill or unemployed to make an application. Also, there is no requirement that the amount of credit is less than $500,000.00.
Upon receiving your notification, the lender may then respond within 21 days advising you of whether they agree (or otherwise) to negotiate a variation of the credit contract and whether they require more information from you. You mustcomply with this request if it is made.
It’s likely that the lender will ask for information like:
- Why can’t you meet your obligations?
- What changes would you like to be made to the credit contract?
Whilst the lender is likely to consider the same things as in the current Code (for example, illness and unemployment), this change puts the onus on lenders to define the information they require, rather than the borrower being forced to pre-empt the lender’s questions and provide vast amounts of information just to have their application considered.
Another positive for borrowers is that the types of changes that can be made to credit contracts under the new law are not limited, so long as you and the lender can agree. Therefore, you can request changes that are more suitable to your needs.
Lenders must, under the new law, respond to a hardship application (if one has been made) before they are able to begin proceedings to take possession of the mortgaged asset.
What will the change achieve?
The changes to the hardship provisions of the Code are designed to make application easier and give you greater scope to request variations to your credit contract. Also, in February 2014, many banks will be required to comply with the new Code of Banking Practice (“Banking Code”). The Banking Code (released by the Australian Bankers’ Association Inc.) incorporates its obligations under the Code, meaning that borrowers are able to get better protection under the law.
The new process will also prevent lenders from attempting to take possession of the secured home without first having made reasonable attempts to come to an agreement to vary the contract terms so that:
- The borrower can keep their home;
- The lender doesn’t spend time and money taking possession and selling the property; and
- Lengthy court battles can be avoided!
What should I do?
- If you are having temporary trouble in making your repayments you should communicate with your lender as soon as possible, because this process can take some time. Hopefully, alternate arrangements can be made to get you back on track.
- You should also ensure that you read the Banking Code once it is released in February 2014. Once a bank adopts it, it becomes part of the legal contract between you and your bank thereby giving you protection under the Code and under contract law.
- Seek legal advice for more information on hardship applications and/or other options available to you.
For further information, please contact the author.
This article is posted in Adelaide, South Australia by Tri-meridian Corporate & Commercial Law and is intended to be used as a guide only. It is not, and is not intended to be, advice on any specific matter. We do not accept responsibility for any acts or omissions resulting from reliance upon the content of this article. Before acting on the basis of any material in this article, we recommend that you consult your professional adviser.