Lenders are making if difficult to get help and more than one-third of people seeking assistance drop out of the process.
A new ASIC report says banks aren't doing what the law says they must do to help customers in trouble, as the number of borrowers in strife rises due to high interest rates, rocketing rents and increases in the cost of living.
"We found that in a number of respects, banks and other lenders are failing to live up to community expectations," said Australian Securities and Investments Commissioner Alan Kirkland.
"They've got processes that are so complicated and convoluted that more than a third of people have dropped out of the process at least once after lodging a notice of hardship."
40 per cent fail
So-called 'hardship provisions' and processes set out what lenders must do if customers are in financial difficulty.
The vast majority of customers who request hardship assistance get it.
But the ASIC report found 40 per cent of customers who got assistance — through things like the reduction or deferral of payments — fell into arrears right after the assistance period ended.
The regulator's chair Joe Longo has tipped legal action against some of Australia's biggest names in finance over the failures.
"ASIC has made this a priority focus area, and where appropriate, we will not hesitate to take enforcement action to protect consumers," he said.
The report lays out how hard many lenders can make it for customers seeking help:
- Customers often need to repeat their stories multiple times to different people
- Some lenders have "onerous requests for documents" that aren't relevant to the lending
- Many lenders didn't follow up, meaning some applications were denied because customers didn't know the bank was waiting for information from them
Report shows 54 per cent jump in home loan hardship
In addition to outlining the failures for many customers accessing the hardship process, the ASIC report highlighted a massive jump in mortgage stress.
ASIC surveyed 10 lenders in detail and a further 10 large lenders in relation to their mortgage hardship figures, finding more than a quarter of a million hardship notices were issued in relation to 144,000 accounts.
The regulator noted a 54 per cent jump in hardship notices received in the final three months of 2023 (52,826) compared with the same period a year earlier (34,396).
Last year saw the peak of pandemic-era cheap fixed mortgages rolling over onto much higher variable interest rates, with many borrowers up for a rate more than three times higher than when they took their loan out.
A large number of cheap fixed loans are still rolling off onto variable rates this year.
More than 80 per cent of the home loan hardship notices related to owner-occupiers, while the average loan size for those requesting hardship provisions was $312,000.
The most common reason for requesting hardship assistance was "overcommitment", which raises questions about whether banks lent responsibly during the low-rate period, with reduced income, medical, unemployment and relationship separation the other main reasons for mortgage difficulty.
New South Wales had the largest number of borrowers in difficulty but, relative to population size, more Victorians were in mortgage hardship.
Community expectations
In a statement with the release of the report, titled 'Hardship, hard to get help: Lenders fall short in financial hardship support', ASIC chair Joe Longo said "in the worst cases, lenders ignored hardship notices, effectively abandoning customers who needed their support" and that lenders were not meeting community expectations.
The repeated use of the phrase 'community expectations' will chill the hearts of banking executives.
That's because it was used extensively during the banking royal commission to describe unacceptable conduct where firms technically or minimally complied with the law.
They didn't do anything illegal, but it wasn't fair conduct and didn't lead to good customer outcomes.
In some cases this led to laws being changed so that the intent — or 'spirit' — behind them became cemented in practice.
What is hardship?
If you're in trouble, your lender must try to help you. That's the law. This new report outlines how that system is failing.
Under the National Credit Code, if a consumer tells their lender they can't or won't be able to meet their payments, lenders must consider varying the credit contract and then advise the customer of the decision within a specified period of time.
These variations could include payment deferrals, reduced payments or interest-only payments for a time, an extension to the term of the loan, interest-rate reductions and more.
In August 2023, the regulator published an open letter to the chief executives of all lenders advising them of focus on financial hardship and what is expected of lenders.??After collecting data from 30 large lenders it reviewed 10 of them — a mixture of big banks (Commonwealth Bank, Westpac, NAB) and smaller lenders (Pepper Money, Liberty Financial and Bendigo Bank).
The report notes how the hardship process is a critical protection for customers, but also good for banks.
"It provides the customer with an opportunity to work constructively with their lender to resolve their financial hardship, potentially avoiding the need to sell their home," it said.
Forced sales are difficult, with costs including sales and relocation as well as non-financial costs like stress and disruption.
It can be good for banks too, because it "provides lenders with an opportunity to restore the loan’s performance" and can avoid the costs of debt collection and enforcement.
And the demand for help is growing.
Comparing the fourth quarter of 2022 and the same period in 2023, there was a 54 per cent increase in the number of hardship notices relating to home loans.
Stress increase
The managing director of not-for-profit Mortgage Stress Victoria, Nadia Harrison, often helps people in the middle of trying to get assistance from their lender.
"There are individuals and even teams within some banks who will listen, be flexible and deliver great outcomes for customers experiencing hardship," she said.
"But there's huge variability between the banks, and even within the same bank."
In addition, Ms Harrison said what's on offer doesn't take into account the reality of how long assistance will be needed.
A third of the Mortgage Stress Victoria's clients are victim survivors of family violence.
"But at the moment, we’re finding it hard to get more than a three-month repayment pause for those clients – and even then, interest will be accumulating," she said.
Often women in these situations are working through issues of property settlement, custody, trauma, disruptions to work and intervention orders.
"Three months is never enough time to regain control of your life and your mortgage repayments when family violence is involved."
Bankers respond
The report does not take institutions to task over individual results, so it isn't clear out of the 10 examined who is better or worse.
It does note larger lenders are better-resourced and have more established processes to deal with customers in difficulty.
Australian Banking Association chair Anna Bligh said banks used a range of tools to help out customers, including restructuring loans to lower repayments, moving to interest-only arrangements or deferring payments for a period of time.
"Banks have longstanding arrangements in place to support people facing financial difficulty, including highly experienced and dedicated hardship teams ready to help customers," she said in a statement.
"In any organisation, there is always room for improvement. Banks will consider these findings and work with ASIC on any further ways to support customers.
"Customers who are feeling the pinch financially should take heart from the fact that the report finds that 94 per cent of all completed applications for assistance are approved."
The Australian Finance Industry Association, which represents non-bank lenders, were approached to comment on the report.
The full report is available on ASIC's website.
