Review 14 June 2016 Varying loan agreement Retrospective financial hardship Company loan Loan servicer Credit and Investments Ombudsman Limited ABN 59 104 961 882
Credit and Investments Ombudsman Ltd ABN 59 104 961 882 Case Management PO Box A252 Sydney South NSW 1235 14 June 2016 Consumer: T 02 9273 8400 F 02 9273 8440 info@cio.org.au www.cio.org.au Company S Financial Service Provider (FSP): FSP REVIEW 1. This Review provides the parties with our assessment of the consumer s complaint. Summary 2. We find that: (c) (d) we are unable to consider the consumer s concern about (the financial services provider, or the FSP) decision to decline a request to vary its loan from a Lo Doc loan product to a Full Doc loan product. This is because, we consider that this is a decision for the FSP s commercial judgement, 1 the FSP was not entitled to vary repayments on the consumer s loan from interest only to principal and interest, and the FSP did not provide appropriate financial hardship assistance to the consumer, the FSP s offer to: (i) (ii) provide compensation of $200 for stress and inconvenience, and refund of and $2,740.13 reflecting default interest and dishonour fees charged in April 2013, May 2013 and June 2013, is a reasonable offer. Accordingly for the reasons provided below, we recommend that the consumer accepts it in resolution of the complaint. 1 CIO Rule 10.1(f) 9 th Edition. Any reference in this letter to the CIO Rules is a reference to the ninth edition. Page 1 of 13
Background to complaint 3. On or about 8 February 2008, the consumer entered into two Lo Doc loan agreements a third party (the lender). 4. As we understand it, the consumer is a director of the consumer. 5. The FSP assists the lender in the management of the loan and responds to this complaint on behalf of the lender. 6. The first loan was for $348,000, Loan ID: 346698 (Loan 1). The loan had an initial variable interest rate of 8.77% per annum and repayments were to be interest only for a period of ten years. The monthly interest only repayments the consumer was required to make was $2,543.30. The consumer was required to repay the loan in full by 15 October 2035. 7. Loan 1 was secured by first registered mortgages on two properties located at consumers address one and consumers address two. Mr B also provided a guarantee and indemnity in his own right. 8. The second loan was a line of credit facility for $396,000, Loan ID: 346140 (Loan 2). The loan had an initial variable interest rate of 9.22% per annum, and repayments were also interest-only for the first ten years, although the consumer was not obliged to make any payments during that period if the loan balance was less than $500,000 and the loan to valuation ratio (LVR) as determined by the lender was less than 75%. Any unpaid interest was to be capitalised on a monthly basis. The consumer was required to repay the loan in full by 15 October 2035. 9. Loan 2 was secured by a first registered mortgage on a property located at address one. Mr B also provided a guarantee and indemnity in his own right. 10. The FSP has provided to us a copy of a valuation report obtained on the property located at address one, dated 5 April 2013. The valuation report shows that the property was valued at $340,000. A review of the consumer s loan account statements indicates that the loan balance on 18 April 2013 was $406,036.71. Accordingly, it appears that the LVR on the loan exceeded 75% at that time. Financial hardship assistance for Loan 1 11. By September 2012, the consumer had fallen behind on repayments. Following discussions in September 2012, on 21 September 2012 the parties orally agreed that if the consumer met the required monthly repayments for four consecutive months, then the FSP would agree to capitalise the arrears on the loan. 12. It appears that the consumer did meet the required repayments on the loan for four months and, on 3 January 2013, the FSP capitalised arrears of $4,743.30. Page 2 of 13
13. From 3 January 2013 to 13 October 2014, the consumer made repayments towards the loan however, some repayments dishonoured or did not meet the minimum required amount. 14. The last repayment received on the loan was on 13 October 2014 and the balance as at 30 November 2015 was $477,255.28. Financial hardship assistance for Loan 2 15. On 22 February 2013, Mr B telephoned the FSP and requested that the arrears on the loan be capitalised. 2 Further to discussions between the parties: on 25 February 2013, the consumer made a lump sum payment of $4,300 towards the loan, and on 28 February 2013, the FSP capitalised arrears of $12,263.41 on Loan 2. Interest of $3,834.51 was also debited to the loan account. 16. After the payment of $4,300 on 25 February 2013, Mr B informed the FSP of this on the same day 3 and requested the FSP inform him what the new monthly repayments would be. Mr B also informed the FSP that he would schedule Bpay payments until he was advised further. 4 17. On 28 February 2013, interest of $3,834.51 was charged to Loan 2. 18. By 26 March 2013, it appears Mr B had not received a response to his previous request as to what the new repayments would be after capitalisation. 19. Mr B states that he believed the monthly required repayments would be $3,000. Accordingly, on 26 March 2013: the consumer made two BPAY payments totalling $3,000, (c) (d) Mr B emailed the FSP requesting confirmation that the arrears on his loan had been capitalised. As well, Mr B again sought advice regarding what the new repayment would be, the FSP replied to Mr B s email and informed him that the consumer had not paid the required repayment for March 2013. Accordingly, the account was in arrears. The FSP stated that they would be in contact with him regarding this, Mr B emailed the FSP advising he had assumed the new repayments would be $3,000 per month. In accordance with this assumption, he had made a Bpay payment of $3,000, as shown in the account statements. Mr B noted he had sought the FSP s advice the previous week about what the new repayments were and was concerned that they had not responded and now informed him that the account was in arrears. Mr B requested that the FSP rectify his concerns and also confirm that a default interest rate would not be charged as a result of the FSP s conduct, 2 FSP file note entry dated 22 February 2013. 3 See loan account statements and FSP file note entry dated 25 February 2013. 4 FSP file note entry dated 25 February 2013. Page 3 of 13
(e) (f) the FSP then informed Mr B that the interest only repayment period expired on 7 February 2013 and that monthly payments from 24 February 2013 would be principal and interest repayments of $4,507.71. They also asked Mr B to pay the outstanding arrears on the loan, and Mr B and the FSP then exchanged further emails regarding the repayments required. In particular, Mr B stated that the loan agreement provided that the repayments on the loan were to be interest only for ten years. 5 20. On 27 March 2013: (c) Mr B was informed that the consumer was over the loan facility limit of $396,000 and the loan balance was $410,110.89. Accordingly, the consumer was required to make principal and interest repayments in order for the repayments to convert back to interest only, Mr B then requested that the loan revert back to interest only repayments as the consumer was experiencing financial hardship, in response, the FSP informed Mr B that they could not revert the loan back to interest only repayments and that the account was in arrears of $1,507.71. As well, the FSP noted that the repayment due on 24 April 2013 was $4,507.71, 21. On 31 March 2013, the loan account statements shows interest of $2,732.97 was charged to the account. 22. The consumer also requested that the loans be varied from a Lo Doc loan product to a Full Doc loan product. The consumer has stated that this was because he understood the applicable interest rate would decrease as a consequence and enable him to have the capacity to meet the required repayments. However, this request was declined by the FSP. 23. On 1 April 2013, the consumer was charged default interest of 11.90% per annum. 6 24. On 3 April 2013, Mr B again requested in good faith and in light of the repayments revert back to interest only and that the loan be converted to a full doc loan product. The FSP declined Mr B s requests. 7 25. On 10 April 2013, the FSP informed Mr B that if the loan amount was reduced to the facility limit they would reconsider varying the repayments to interest only. Mr B agreed and stated he would pay the arrears in a week. 8 26. On 18 April 2013, the consumer made a Bpay payment of $1,600. 9 5 See emails exchanged between FSP and consumer dated 27 March 2013 and file notes. 6 Interest rates schedule. 7 File note entry dated 3 April 2013. 8 File note entry dated 10 April 2013. 9 Loan account statements Page 4 of 13
27. On 19 April 2013, the FSP and Mr B agreed that the payment for 24 April 2013 would be deferred to 17 May 2013. 10 28. On the same day the consumer s interest rate was reduced to a lower rate of 7.90% per annum. 11 29. On 30 April 2013, the loan account statements show interest of $ 3,446.27 payable in May 2013 was charged to the account. 30. On 1 May 2013, the consumer was charged default interest at the interest rate of 11.90% per annum. 12 31. On 17 May 2013, the consumer did not make the payment as agreed. 32. On 31 May 2013, the loan account statements show interest of $3,414.65 payable in June 2013, was charged to the account. 33. On 1 June 2013, the consumer was charged default interest at the interest rate of 11.65% per annum, 13 34. On 21 June 2013, the consumer was charged at the interest rate of 7.65% per annum. 14 35. From July 2013 to December 2014, the consumer made intermittent repayments towards the loan. 36. The last payment on the loan was made by the consumer on 12 December 2014 of $3,000. 37. The closing balance as at 30 November 2015 was $503,463.54. Consumer s claims 38. The consumer claims that: the FSP acted inappropriately by declining its request to vary the loan from a Lo Doc loan to a Full Doc loan, and in relation to Loan 2: (i) the FSP breached the terms of Loan 2 by varying the repayments on Loan 2 from interest only to principal and interest prior to the ten year interest only repayment period, and (ii) the FSP provided a financial hardship variation that was inappropriate. This was because, the FSP varied the repayments on the loan from about $3,000 to $4,500 causing the consumer financial hardship and to default on the loan. 10 File note entry dated 19 April 2013. 11 Interest rates schedule. 12 Interest rates schedule. 13 Interest rates schedule. 14 Interest rates schedule. Page 5 of 13
39. In resolution of the complaint the consumer is seeking to have all the default interest, fees and charges reversed. FSP s response 40. The FSP says that: they made a commercial decision to decline the consumer s request to vary the loan from a Lo Doc loan to a Full Doc loan as the consumer did not meet their lending criteria, 15 in relation to the repayments, the FSP says that: (i) on Loan 1, the repayments are variable interest only repayments for a ten year period, with the interest only period expiring on 15 February 2018, and (ii) on Loan 2, the repayments on the line credit are variable interest only repayments for a ten year period with the interest only period expiring on 7 February 2018. 16 Accordingly, they provided incorrect information to the consumer that the repayments had changed to principal and interest, 17 (c) in relation to the hardship variation the FSP says that: (i) they capitalised the arrears on the consumer s loans further to the consumer s request, 18 and (ii) the consumer was not charged default interest on the loans after the FSP agreed to capitalise the arrears. The consumer was only charged default interest from 1 April 2013 as a result of the consumer not meeting the required repayments on the two loans. 19 Considerations CIO is required to have regard to 41. In dealing with this complaint, CIO has observed procedural fairness and has had regard to: (c) relevant legal requirements and rights provided by law to consumers, applicable codes of practice, good industry practice in the financial services industry, and (d) fairness in all the circumstances. 20 15 Email from FSP to CIO dated 16 January 2015 at 10:47AM. 16 Email from FSP to CIO dated 6 February 2015 at 12:27AM. 17 Telephone conversation between the FSP and CIO on 7 December 2015. 18 Email from FSP to CIO dated 16 January 2015 at 10:47AM. 19 Email from FSP to CIO dated 1 December 2015 at 4:29PM. 20 CIO Rule 12.1. Page 6 of 13
42. All parties to the complaint have been given the opportunity to provide information in support of their respective positions. With the exception of any information considered to be commercially sensitive21 all information provided by the parties has been exchanged between the parties and each party is aware of the issues raised in the complaint. 43. We confirm that the FSP has stated that the valuations for the security properties located at address one and address two are commercially sensitive. Accordingly, copies of these have not been provided to the consumer. 44. We confirm we have not relied on the valuations in our review of the consumer s complaint. Did the FSP act inappropriately by not accepting the consumer s request to vary the loans from Lo Doc loans to Full Doc loans? 45. The consumer says that, in March 2013, the FSP declined the consumer s request to vary the loans from Lo Doc to Full Doc, which would have decreased the interest rate applicable and repayments required on the loans. 46. The FSP has stated that the consumer s request was declined as the consumer was unable to meet their lending guidelines or provide the appropriate documentation to support a Full doc loan application. 47. We are not able to consider complaints where the FSP has done no more than exercise its commercial judgement. 22 48. We consider that the FSP s decision as to whether it would accept the consumer s request to vary the loan product on the loans is a matter for its commercial judgement. Accordingly, we cannot assist the consumer further with this aspect of the complaint. 23 Was the FSP entitled to vary the repayments on Loan 2 from interest only to principal and interest? 49. The consumer has raised concerns that, under the terms of the loan agreement, the repayments on the loan were to be interest only for ten years. However, the FSP varied the repayments to principal and interest after the FSP agreed to capitalise the arrears on the loan. 50. The FSP informed Mr B that the repayments on the loan had been varied from interest only to principal and interest as he was over the facility limit amount. As noted above, on 26 March 2013, Mr B was informed that from 24 February 2013 the repayment would be $4,507.71. 51. However, in their response of 16 January 2015, the FSP states that this was incorrect and, in fact, the repayments were in interest only at the time. 21 CIO Rule 33. 22 CIO Rule 10.1(f). 23 CIO Rule 10.1(f). Page 7 of 13
52. A review of the account statements provides that interest of $3,834.51 was charged on the account on 28 February 2013. Accordingly, it appears that Mr B was provided with incorrect information as, if the repayments required were interest only, the required repayment would have been $3,834.51, not $4,507.71 as advised by the FSP. 53. Further, a review of the loan agreement for Loan 2 provides that the consumer was not obliged to effect payment of interest for the first ten years if the loan balance was less than $500,000 and the loan to valuation ratio (LVR), as determined by the lender, was less than 75%. Otherwise, any unpaid interest was to be capitalised on a monthly basis. The consumer was required to repay the loan in full by 15 October 2035. 54. Based on the information available to us, it appears that the loan balance as at 26 March 2013, was $404,903.74. The FSP has provided us with a valuation report as at 5 April 2013, showing the value of the security property was $340,000. Accordingly, it appears that LVR would have exceeded 70% at that time. 55. In view of the above, we consider that, based on the terms of the loan agreement, the FSP was entitled to require the consumer pay interest only repayments towards Loan 2. However, the terms of the loan did not entitle the FSP to principal and interest repayments. Loss suffered by the consumer 56. We have considered what loss the consumer has suffered as a result of the incorrect repayment information provided to it by the FSP. In particular, whether the FSP s conduct caused the consumer to incur default fees and/or interest that it would not have if the FSP had provided it with correct information. 57. The consumer stated that, after the arrears were capitalised, it thought that the monthly required repayments would be $3,000. 58. A review of the account statement for Loan 2 shows that the following repayments were made after the arrears were capitalised: Month Date paid Repayments made March 2013 26/03/2013 $1,500.00 Total Repayments Required interest only repayment 26/03/2013 $1,500.00 $3,000.00 $3,834.51 April 2013 18/04/2013 $1,600.00 $1,600.00 $2,732.97 May 2013 23/05/2013 $2,641.00 $2,641.00 $3,446.27 June 2013 14/06/2013 $1,200.00 20/06/2013 $2,246.00 $3,446.00 $3,414.65 July 2013 $0 $3,468.47 August 2013 $0 $4,058.85 59. The information made available indicates that, although Mr B believed repayments would be $3,000, the consumer only paid this amount towards the loan in March 2013. Page 8 of 13
60. In view of this, it appears that, even if the consumer had been provided with correct information about the required repayments, the consumer would have defaulted on Loan 2 by April 2013. 61. Accordingly, we find that the FSP s conduct caused the consumer to incur default fees and/or interest in March 2013 and the FSP ought to refund this amount to Loan 2. Compensation for stress and inconvenience caused 62. We consider that, by informing the Mr B that the consumer was required to make principal and interest repayments, the FSP would have caused Mr B stress and inconvenience. 63. In their response of 7 January 2016, the FSP has provided an offer of $200 to resolve this aspect of the complaint. 64. Under our Rules, we are able to award compensation for non-financial loss. 65. In considering whether compensation for non-financial loss should be awarded and how much, we consider: 24 the nature and amount of harassment, physical inconvenience, embarrassment, humiliation or distress suffered by the complainant, (c) (d) the amount of time taken to remedy the complainant s situation, how much the financial services provider s conduct and its consequences interfered with the complainant s privacy, legitimate expectations of enjoyment and peace of mind, and how a reasonable person would have acted in the particular circumstances. 66. In every case, a consumer is expected to take reasonable steps to minimise their own inconvenience, and tolerate a reasonable degree of inconvenience. 25 67. Having regard to the overall circumstances, including the FSP and the consumer s conduct, we consider the FSP s offer of $200 reflects a reasonable offer to address the stress and inconvenience experienced by the consumer. Did the FSP act inappropriately regarding the financial hardship arrangement for Loan 2? 68. As we understand, Mr B says: after the FSP agreed to capitalise the arrears on the account, he requested the FSP confirm what the new repayments on the loan would be. However, the FSP delayed in providing him with this information, and 24 CIO Guideline 117.2 5 th Edition. All references to the CIO s Guidelines in this Review refers to the fifth edition. 25 CIO Guideline 117.3. Page 9 of 13
the FSP s agreement to capitalise the arrears on Loan 2 negatively affected his financial position as he was unable to meet the higher required repayments after the arrears were capitalised. This caused the consumer to default on subsequent repayments on the loan. Applicable law and other considerations 69. Under our Rules, if the FSP becomes aware that the consumer is or may be unable to meet their obligations under the loan, it must consider in good faith whether to agree to a financial hardship application. 26 70. An FSP must act reasonably and in good faith in assessing a consumer s request for hardship assistance. The FSP must also not impose unreasonable conditions on the consumer, before agreeing to consider the consumer s request for hardship assistance. 27 71. If a consumer is able to reasonably demonstrate to CIO that a financial hardship application should have been approved by the FSP at the time the consumer made the request, the FSP is not entitled to recover default interest, default fees and enforcement costs for the requested hardship period. 28 72. Our Rules apply whether or not the loan is regulated under the National Credit Act. Our finding 73. Having regard to the information made available to us, and detailed at paragraphs [15] to [37], we note that: at the time the FSP entered into the financial hardship arrangement with the consumer, the consumer was in arrears of $12,263.41. We understand that the parties reached an agreement that the arrears would be capitalised, it was the consumer's position that, after the arrears were capitalised, the loan would revert back to the lower interest only amount. The only slight increase being the reflection of the small capped amount of 12k on top of the original balance of 396k. 29 74. We understand it is the consumer s concern that this arrangement increased the required repayments on Loan 2. In particular, the FSP informed the consumer that, after the arrears were capitalised, the monthly required repayments would be $4,507.01. 75. A summary of the repayments and when default interest was charged is as follows: Month Payment date Payment from consumer Monthly Total payments Required repayments Whether default interest was charged 26 CIO Rule 18.1 and 18.2. 27 CIO Rule 18.3 9 th Edition. 28 CIO Rule 18.5 9 th Edition. 29 Email from consumer to CIO dated 24 February 2015 at 9:05PM, subject Sunset Coast. Page 10 of 13
March 26/03/2013 $1,500.00 26/03/2013 $1,500.00 $3,000.00 $3,834.51 No April 18/04/2013 $1,600.00 $1,600.00 $2,732.97 Yes, 1 April 2013 to 18 April 2013. 30 May 23/05/2013 $2,641.00 $2,641.00 $3,446.27 Yes, from 1 May 2013 to 16 May 2013. 31 June 14/06/2013 $1,200.00 20/06/2013 $2,246.00 $3,446.00 $3,414.65 Yes, from 1 June 2013 to 20 June 2013. 32 76. Based on the information made available to us, we find that, at the time the arrears were capitalised on the loan, the parties mutually agreed to the arrangement. 77. However, after the arrears were capitalised, the consumer informed the FSP that it was unable to meet the repayments the FSP stated the consumer was required to meet. 78. We consider that, upon being informed by the consumer that it was unable to meet the required repayment, the FSP ought to have offered the consumer financial hardship assistance. 79. Instead, the FSP continued to inform the consumer that it was in default on Loan 2 and no further financial hardship assistance was offered. 80. Accordingly, we have considered what financial hardship arrangement, if any, would have been reasonably appropriate at the time. We consider that it would have been appropriate for the FSP to have varied the terms of the loan agreement whilst the consumer was experiencing financial difficulties by not charging default interest and/or default fees on the loan for a short-term period, such as for three months from April 2013 to June 2013. 81. On 7 January 2016, the FSP offered to refund the default interest and dishonour fees charged of $1,346.25, $1,393.88 for April 2013, May 2013 and June. 82. In light of this, we consider that the FSP s offer to refund the default interest and dishonour fees charged on Loan ID: 346140 of $2,740.13 in April 2013, May 2013, and June 2013, is reasonable to compensate the consumer as the consumer attempted to continue making payments throughout this period. Recommendation of reasonable offer 83. CIO can recommend that the consumer accepts an offer if, in the circumstances, we consider that it is reasonable. 33 30 Based on loan statements provided, default interest at a rate of 11.90% was charged. The variable interest rate at the time appears to have been 7.90%. 31 Based on loan statements provided, default interest at a rate of 11.90% was charged. The variable interest rate at the time appears to have been 7.90%. 32 Based on loan statements provided, default interest at a rate of 11.90% was charged. The variable interest rate at the time appears to have been 7.90%. 33 CIO Rule 20.1. Page 11 of 13
84. For the reasons provided above, we consider that the FSP s offer to resolve the complaint represents the best outcome available to the consumer through the CIO process and we recommend that the consumer accept it in resolution to the complaint. 85. We confirm the FSP s offer is as follows: refund the default interest charged on Loan ID: 346140 of $2,740.13 in April 2013, May 2013 and June respectively, and provide compensation of $200 for any stress and inconvenience caused to Mr B as it does not appear the FSP provided a clear explanation as to why the repayments on the loan had changed from interest only to principal and interest. 86. Under our Rules, if the consumer does not accept the offer, CIO may close the complaint in the absence of further information from the consumer that would justify the complaint remaining open. Responding to this Review 87. The consumer is now required to notify us in writing as to whether they accept the FSP s offer by 28 June 2016. 88. If the consumer does not accept the FSP s offer, they must provide us with their reasons as to why, including any supporting information, within the required time period. 89. If the consumer provides us with new information, we will assess whether this changes the findings in our recommendation set out in this Review. If so, we will notify the parties and continue to deal with the complaint. 90. If our understanding of the events surrounding this complaint is incorrect, please inform us of this no later than 28 June 2016. 91. If the consumer provides us with new information by this date, we will review this information to consider whether it changes our findings and, if it does, we will continue our investigation. 92. The consumer can also ask for a Determination. A Determination is made by the Ombudsman and is a final decision about the complaint. 93. If we do not receive a response from the consumer within this time, or if the information received does not change our review, this complaint will be closed without further notice. Once closed a complaint can only be reopened in exceptional circumstances. 94. The consumer must respond within 14 days. If more time is needed, a request for an extension should be made as soon as possible and, at the very latest, before 28 June 2016. Page 12 of 13
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