COVID-19: The ticking credit crunch time bomb – ASIC issues Guidelines to Retail Lenders on dealing with loan repayment deferrals
Published on August 27, 2020
By the end of May 2020, the Australian banking sector had provided repayment holidays on around half-a-million home loans worth more than $190 billion”[1] Given the impact of the Coronavirus pandemic on Banks – and potential future losses – the Banking Sector is eager to return business as normal, receiving regular payments from consumers.
To humanise that process and reduce loan default recovery proceedings – ASIC has recently set out guidelines to how Retail Lenders should deal with consumers regarding those loan repayment deferrals; ASIC Guidelines to Retail Lenders (ASIC Guidelines). This article explains those changes, some current pain points and what you can do now to better resolve them.
Debt Repayment Deferrals to end
Businesses and families are understandably anxious about the “ticking credit crunch time bomb” because:
- COVID-19 related 6 month repayment deferrals on mortgages and loans for consumers are coming to an end; and
- It is not clear how the expiry of the debt and eviction moratoriums may impact;
(a) The broader economy and ramifications at an industry, state or national level; or
(b) An area of their business (such as cash flow).
The Domino Effect
The action of one creditor can draw cash from other creditors or the business. A business under pressure will press harder on their own debtors.
A creditor exercising their debt recovery options is impacted by how their debtor manages their voluntary and/or involuntary insolvency options.
Consumers must consider the domino effect before negotiating payment commitments, and any insolvency consequences that may not arise until much later. Such as at the point of external administration (i.e. a bankruptcy or liquidator claw back claims and voidable transactions pursuant to insolvency law).
How can I take control?
Businesses and families under financial stress may have some degree of control over their own circumstances.
Government support and regulatory bodies have laid down the framework and guidelines to support consumers who are proactive in finance disputes.
The first step is obtaining independent advice. During a crisis, it is difficult to see the forest from the trees.
The ASIC Guidelines
On 13 August 2020, ASIC issued its expectations of retail lenders when loan deferrals end;
- Lenders should make reasonable efforts to contact consumers prior to their repayment deferral expiring (that allows consumers reasonable time to consider options);
- If consumers cannot resume repayments, lenders are expected to make reasonable efforts to interact with the consumer directly (i.e. by telephone).
- If a lender determines that it would be appropriate to offer further assistance to a consumer, lenders’ processes should be flexible and empower staff to offer tailored assistance that genuinely addresses the needs of the consumer.
- Importantly, Lenders should keep records which set out the assistance options they are providing to each individual consumer.
Interestingly, the ASIC Guidelines may have a scope to consumers experiencing financial difficulties due to COVID-19, across credit products including not only mortgages, but potentially personal loans, credit facilities, overdrafts or credit cards.
What can I do?
Consumers must consider and balance many moving parts before negotiating with retail lenders, banks and/or financial institutions. Ask yourself some important questions:
- How can you or your business make a commitment that you might not be able to keep?
- What happens if there are further COVID related issues that impact your business?
- What are the consequences of default upon your business, family and you?
Small to mid size businesses often rely on facilities that are often cross collateralised with assets (their family home) and are unaware (or may not recall) personal guarantees.
Business owners and directors must truly understand their business, the market and the industry, before committing to repayments or further draw downs offered through Government schemes or financial institutions. Once business owners and directors truly understand those issues, it is much easier to make the right decision, about what to do when negotiations fail.
Dispute Resolution Options
If loan deferral negotiations fail, consumers can consider the following dispute resolution options, which include, but are not limited to:
- Debtor Hardship Notices; section 72 of the National Credit Code, which is Schedule 1 of the National Consumer Credit Protection Act 2009 (Cth);
- A complaint to the Australian Financial Complaints Authority (AFCA). The AFCA provides consumers and small business with independent dispute resolution for financial disputes (credit, insurance, banking, investments and financial advice and superannuation);
- Internal and external dispute resolution; ASIC’s Regulatory Guide 165; and
- Other Dispute Resolution options.
Key Points
- The ASIC Guidelines create options for impacted consumers to negotiate with Retail Lenders
- Consumers need to understand the domino effect of existing debts on their business, and assess exposures to risks
- There are a number of dispute resolution and restructuring options available to businesses who want to take control by:
- seeking independent legal advice; and
- come prepared to discuss their options (with the relevant documentation) with an updated business strategy, board strategy and risk appetite to survive and thrive the coronavirus crisis.
Please contact Carroll & O’Dea Business Lawyers to discuss legal aspects of Loan Deferral issues and other business law matters.
You can also read our COVID-19 updates for Business here , which includes links to the JobKeeper/JobSeeker Payment Scheme that has been extended, and Coronavirus SME Guarantee Scheme which offers options for the flow of credit for small and medium businesses with less than $50 million turnover which includes self-employed individuals and not-for-profits.