FOS Determination on hardship variations, and credit reporting

The Financial Ombudsman Service (FOS) has recently made a determination which has important implications for credit reporting in Australia, particularly in how it relates to hardship variations.

Providers of consumer finance (including mortgages, car loans, personal loans and credit cards) are required under consumer credit law to consider hardship variations, (sometimes called “payment arrangements”), to your loan if you are experiencing financial hardship. The credit provider must give genuine consideration to that request and confirm whether a variation to the credit contract is appropriate.

Variations could include a short-term stop on payments, a reduction to regular payments to a more affordable level, or any other flexible arrangement. If the credit provider is unwilling to vary the contract, it must provide reasons and let you know about its external dispute resolution scheme—click here for more information on your rights in these circumstances.

Since 2014, credit providers have been able to list more information on your credit report, including ‘repayment history information’ (RHI). RHI is information about whether monthly repayments have been paid on time over the past two years (or within a ‘grace period’ of 15 days).

If you are late paying your credit contract, your credit report can display RHI of ‘1’, denoting one month of arrears; if you do not pay the following month, the credit report can display RHI of ‘2’, and so on. It should be noted that as of mid-2016, only a small number of credit providers are providing RHI to credit reporting bureaus.

There has been contention about how RHI is displayed on credit reports when a consumer has entered into a hardship variation.

The consumer movement view

The National Credit Code states that a hardship variation made pursuant to the code results in a change to the contract. Consumer advocates have therefore argued that any RHI must be reset to “zero” once the arrangement is entered into, as the consumer is up-to-date in accordance with the agreement.

The finance industry view

Industry advocates have generally taken a different view, stating that RHI on a credit report should show the consumer to be in arrears in accordance with the repayments due under the initial contract.

Consumer advocates have been wary of this view because we believe hardship variations are extremely useful and consumers should be encouraged to enter into them.

Hardship variations can be an excellent way to reduce financial stress, and allow the consumer to stabilise their finances. However, consumers are wary of having a bad credit report. If hardship variations are harmful to a consumer’s credit report, then this may discourage their use.

The FOS finding

The recent FOS finding is important, because FOS have determined that credit reports should not record RHI as in arrears if the parties have agreed to change the contract following an application for a hardship variation, and the consumer complies with the arrangement This is because repayments required under the initial contract are not ‘due and payable’; rather, according to the variation agreed to, the consumer is up-to-date with their obligations. The determination is in line with the position of consumer advocates—and this is good news for consumers!

In the case in question, a financial service provider (FSP) had recorded defaults against overdue payments in July and August 2015.

FOS found that the FSP had complied with all notification requirements and that those default records were accurate and correct. However, on 15 September 2015, the consumer entered into a payment arrangement with the FSP. FOS found that this varied the contract between the two parties—but the FSP continued to report the consumer’s RHI “based on compliance with the original contract”.

FOS found that during the September and October 2015 period, the consumer made all payments due under the varied loan contract.

On that basis, FOS found:

It was therefore inappropriate for the FSP to record the Applicant as having missed payments in September or October 2015.

Accordingly, the FSP should update the Applicant’s repayment history information in relation to the Loan so that she is not recorded as having missed payments in September or October 2015.

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