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.

Background:
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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