Case study: responding to a borrower in financial difficulty

One of the best ways to assess your understanding of an issue is to work through a case study.

Here’s the hypothetical scenario the Customer Owned Banking Code Compliance Committee used in its recent investigation of the approach of 30 mutuals to financial difficulty.

The customer contacts your Institution via telephone to discuss a recent transaction/ their account. During that call they advise that they have lost their job and that they will be unable to make repayments on their credit card/ personal loan as they fall due until they find another job.

Summary of financial difficulty assistance request:
“In the past, I have been late in making repayments to my credit card/ personal loan as the number of hours I got at work fluctuates. Recently I have lost my job and now I am concerned about my credit card/personal loan debt in particular. My debt is currently at $10,000 and I am over my limit/ $10,000. I am currently looking and applying for a new job and am hoping that I will be back on my feet soon.”

Further information:
Your Institution reviewed the customer’s details and found that they have no savings or substantive assets to make a lump sum payment.

The results are discussed in COBCCC’s report on financial difficulty:

  • participating Institutions were divided about whether the case scenario described a customer in short (2 months or less) or longer term financial difficulty (more than two months);
  • 13 out of 30 Institutions confirmed that they have a documented procedure to assist in making this distinction. Six Institutions confirmed they used a set of key criteria to assist staff to make this assessment;
  • Most of the participating Institutions advised that they would refer the borrower to a financial counsellor, where they were unable to reach an agreement about a repayment arrangement. Some Institutions refer customers to a particular financial counselling service or to a local council where counselling services can be provided. Others preferred not to advocate for a particular organisation. Rather, they refer customers to the ASIC website, which provides links and contacts suitable in the customer’s state, free of charge;
  • Most participating Institutions advised that they usually offer customers who seek financial difficulty assistance a reduced payment arrangement (for a period of three or six months) or a short term moratorium on payments. Nine Institutions would have agreed to a temporary or permanent suspension and/or freeze of payable interest on the loans of our hypothetical customer;
  • Other types of assistance the participating Institutions would have offered to the customer in the case scenario included:
    1.consolidate or refinance existing debt to a different product with a lower interest rate if the customer had multiple debts with the Institution, but only if there is evidence of serviceability (16 Institutions);
    2.capitalise the arrears if the customer continued in financial difficulty for some time (3 Institutions), and
    3. write the debt off if other assistance was unsuccessful or as a compassionate decision (4 Institutions).

The Committee also made specific recommendations in respect of financial services websites.

The Committee believes that customer awareness and access to website-based information in relation to financial difficulty may be improved if relevant information is provided on websites.

The Committee recommends that:

  • Institutions should consider providing information about financial difficulty assistance on their websites.
  • Institutions should consider developing a financial difficulty information fact sheet, which includes what happens if the Institution does not agree to the customer’s request for financial difficulty assistance.
  • Institutions should consider placing links to financial counselling and similar services in local areas on their websites.
  • Access to complaints resolution information, which includes the timeframe in which a customer may bring a complaint to an external dispute resolution scheme, is considered good industry practice.
  • Online financial difficulty application forms and online tools, such as budget spreadsheet and calculators, may assist customers facing financial difficulty to engage proactively with their Institution.
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