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The hard line on hardship applications

A family is facing a possible mortgagee sale, after failing to produce evidence to their lender to prove they were in financial hardship.

Loan hardship applications and deferral payments have been in the spotlight following the Covid-19 lockdown last year. With many people not able to work, lenders provided these options to help assist customers through an unprecedented situation. Deferred payment programmes offered by lenders ended earlier this year.

Although hardship relief is available if your circumstances change, there must be evidence to convince a lender that this change is causing you significant financial hardship, says dispute resolution scheme, Financial Services Complaints Limited (FSCL).

Referring to a recent case which was brought to FSCL, the organisation found in favour of the lender, after the borrower failed to provide bank statements which evidenced their financial hardship. By not proactively engaging with their lender, their loan arrears skyrocketed and put them at risk of losing their home.

FSCL CEO, Susan Taylor, reminds consumers not to rely on hardship applications indefinitely, adding that it is important to keep talking to lenders proactively if you think that you may battle to make your loan repayments.

“It is important to remember that hardship relief does not and cannot last forever as that is not in anyone’s best interests,” says Ms Taylor.

“The longer that hardship relief continues, the longer it will take you to repay the loan in the long term. You will also pay more interest over the life of the loan. If you cannot afford to increase your payments when the hardship relief ends, there may be no alternative but to sell the secured asset, e.g. the house or car, rather than risk having the lender sell the asset in a forced sale.”

In the case note (which can be found here) Max, his wife Marie, and Max’s father Colin decided to buy a property together. The lender carefully checked with each of their employers that Max, Marie, and Colin were in stable employment, with combined monthly income of $9,000. The loan repayments would be $4,000 a month.

Shortly after drawing down the loan the family missed a loan payment. Max contacted the lender who agreed to restructure the loan to catch up the missed payment. The family paid only four of the next eight loan payments and the lender contacted them to ask what was going on.

Max said they could not afford the payments and asked for hardship relief. The hardship application showed combined monthly income of $8,700 and expenses of $3,100. The lender said that they should be able to afford to repay the loan but agreed to reduce the payments to $2,000 a month for six months.

When the six months were up, the $4,000 per month loan payments continued to be dishonoured and the family again submitted a hardship application. However, the hardship application showed they should be able to afford the payments. The lender was not prepared to reduce the payments again and started mortgagee sale action.

At about the same time, New Zealand went into Covid-19 lockdown and the lender put the mortgagee sale action on hold. In late May 2020, the lender reissued a Property Law Act notice, saying that the lender would start mortgagee sale action if the loan arrears weren’t paid.  Max made another hardship application. Again, the family appeared to be able to afford the payments, the application was declined, and Max complained to FSCL.

FSCL reviewed the events giving rise to the complaint and agreed that the lender’s response to the hardship requests was reasonable. The lender also demonstrated that the original decision to lend was responsible.

Max was not able to explain why there was not enough money available to repay the loan. FSCL asked Max for bank statements and supporting information to help us understand what had gone wrong and why, but the information was not forthcoming.

FSCL could not ask the lender to reduce the payments to $2,000 a month simply because the family said this would be more affordable for them.