Consumer Contracts – Financial Support
Debt, Hardship and Uncertainty: COVID-19 and its Implications for Lending and Borrowing Arrangements
The impacts of COVID-19 have been far-reaching, affecting the economy in a variety of ways. The flow-on effects will likely still be felt for some time to come even after the transition to Alert Level 1 on 9 June 2020. Many people have had their employment situations change, whether it be their income capacity reduced or their position being made redundant entirely.
Many are struggling to financially support themselves and their families, whilst also meeting their repayment obligations under consumer credit contracts between a consumer and lender, such as hire-purchase arrangements, lines of credit, mortgages or personal loans.
This article seeks to provide some guidance on announcements by the Government for relief available to consumers and businesses, including general relief that may be available under the Consumer Credit Contracts and Consumer Finance Act 2003 (CCCFA).
Mortgages and Home Loans
Mortgage Repayment Holiday Scheme
In late March the Government announced a mortgage holiday repayment scheme in collaboration with retail banks. The purpose of the scheme is to provide support for those whose income has been reduced by the impacts of COVID-19.
However, accessing this scheme should be treated as an option of last resort. If payments are deferred for a mortgage or home loan, interest will still be charged to the principal amount during the non-repayment period. The loan balance will therefore increase, and borrowers may be left with making higher monthly repayment amounts unless the loan term is extended. An option that borrowers have is that they make payments of accrued interest and defer repayments of the principal amount.
The exact terms of the deferral scheme differ between each bank. It is important that customers engage with their bank to see what relief they may be entitled to so as to ensure that they do not place themselves in a position that is worse off in the long-term.
Other Available Relief
In addition to mortgage repayment schemes, borrowers may be instead able to reach agreement with their bank to make reduced payments for a period of time, commonly between three and six months, but even up to 12 months for some support options. Along with deferred payments, a reduced payment period also means that interest will accrue on the mortgage or home loan.
Whether a borrower is eligible is dependent on the criteria of each bank, however you may be able to discuss other support options with your provider.
Consumer Credit Contracts Generally
Borrowers may also be eligible for assistance or other support options on the grounds of hardship if otherwise impacted by the effects of COVID-19. This includes loss of income or employment, falling ill to COVID-19, or otherwise being affected negatively in some way which impairs the ability to meet obligations under a consumer credit contract.
A consumer credit contract is a contract where:
- The borrower is a natural person;
- Credit is used or intended for use wholly or predominantly for personal, domestic or household purposes;
- Interest charges and credit fees are, or may be, payable under the contract or a security interest is, or may be, taken; and
- The providing of credit forms as part of the lender’s business.
Application for Change to Consumer Credit Contract on Grounds of Hardship
A borrower who is unable reasonably, due to reasons of illness, injury, loss of employment, the end of a relationship, or other reasonable cause, to meet their obligations under a consumer credit contract, and is reasonably expected to meet those obligations if a change is made, can apply to the borrower to agree to that change.
To make an application, a borrower must do so in writing, provide it to the lender, and specify the reasonable cause for being unable to meet their obligations under the contract.
On an application being made by a borrower, the lender must acknowledge receipt of the application within five working days. The lender must request any further information from the borrower within 10 working days after receipt by serving written notice of its intention to do so.
Within 20 working days, the lender must: decide whether to agree to the change; give written notice of its decision; and if the changes are not accepted, provide written notice to the borrower of the reasons for refusal, and a clear summary of their rights to apply to the Court to change the terms of the contract if the lender does not agree to the proposed changes.
The Credit Contracts and Consumer Finance (Exemptions for COVID-19) Amendment Regulations 2020 provides an exemption to the above timeframes if:
- There is an existing or replacement contract;
- The lender is a bank; and
- The borrower is experiencing, or is reasonably expected to experience, financial difficulties as a result of the effect of COVID-19.
This exemption is on the condition that the bank must provide the necessary information, including its decision and summary of rights, as soon as reasonably practicable. The listed exemptions only apply to those consumer credit contracts entered into or varied on or before 31 October 2020.
Options for Changes to Contract Terms
Changes that can be made to the contract under these grounds include:
- Extending the term of the contract and reducing the amount of each payment due under the contract with no consequence for the annual interest rate(s);
- Postponing for a specific period dates on which payments are to be made under the contract (also with no consequential change to the annual interest rate(s)); or
- Extending the term of the contract and postponing, for a specific period, the dates on which payments are due (without a change to the annual interest rate(s).
Any change sought by a borrower must not be more extensive than necessary to enable them to meet their obligations; and must be fair and reasonable to both the borrower and lender in the circumstances.
It must be emphasised that contemporary “buy it now, pay later” options such as Afterpay, Layby, Oxipay or Partpay are not covered by the CCCFA. The hardship provisions therefore do not apply to these kinds of arrangements. Customers are recommended to discuss support options with their provider directly. This is an obvious gap in the current law, however, it is anticipated that eventual amendments may be made to extend coverage to these forms of credit.
Limitations on Relief under the Grounds of Hardship
There are limitations to when an application to vary a contract on the grounds of hardship can be made.
A borrower cannot apply to the lender to vary the contract if any of the following circumstances apply:
- The borrower has been in default of their obligations for two weeks or more after receiving a repossession notice or notice by mortgagee of exercising their powers (such as managing and recovering income from land, or selling the mortgaged land);
- The borrower has failed to make four or more consecutive payments by, or on, the due dates;
- The borrower has been in default for two months or more; or
- It was reasonably foreseeable to the borrower at the time of entering the contract that they would be able to meet their obligations under the contract due to reasons of illness, injury, loss of employment, the end of a relationship, or other reasonable cause.
If a borrower rectifies a default, this does not prevent the borrower from making an application on the grounds of hardship.
However, as for criterion (d), as mentioned above, a lender has obligations to make reasonable inquiries before entering an arrangement that the borrower can reasonably meet payments without suffering substantial hardship.
If a previous application has been made, a further application cannot be made unless:
- The subsequent application is made no less than four months after the previous application; or
- In terms of a previous application made less than four months prior:
- was accepted by the lender; or
- the reasons for making a new application are materially different to those given in the previous application.
It is likely that if a previous application has been made, the impacts of COVID-19 will be viewed as a reasonable cause (such as loss of employment or reduced income-earning capacity) and will permit a further application. The economic impacts of COVID-19 are ever-changing and so too is the Government’s financial response.
This article is intended as general information only and it is recommended that whether you are a lender or borrower, independent legal advice should be obtained to ensure that you are aware of your rights and obligations under the Consumer Credit Contracts and Consumer Finance Act 2003.
Please contact members of the Saunders & Co team for further advice and information, including advice on compliance.