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Credit law toolkit

Home repossession (Part 5 Division 2 NCC)

Main Points

  • Unlike goods and vehicles, the Credit Law does not prescribe a process for taking possession of real estate.
  • The usual enforcement procedures in relation to issuing a default notice covered in Chapter 5 Enforcement apply.
  • Some States/ Territories impose additional obligations on the credit provider under property law.
  • The most useful tool for dealing with home repossessions will be the financial hardship provisions (including the Codes of Practice for loans over the threshold) and EDR (See External dispute resolution  & Financial Hardship).
  • Consumers can go to EDR even after legal proceedings have commenced.
  • Consumers cannot go to EDR after judgment except in very limited circumstances.
  • You may also wish to challenge a home lending decision under the responsible lending or unjust contract provisions.

Home repossession

The only procedural protection in the Credit Law for consumers facing home repossession is the default notice. None of the requirements regarding the repossession of goods apply. Of course, your client may still have rights covered in other sections of this toolkit (eg, Financial hardship, Responsible lending conduct, and Unjustness).

This means that consumers are not entitled under the Credit Law to:

  • Any right to get the home back after repossession even if the consumer can now afford to pay the arrears and repayments
  • Details of how much the home was sold for with details of the enforcement expenses charged8

8 Although there is a common law duty to account and this information can be requested through EDR.

Credit providers have two ways to take possession of a home used as a security for a loan:

Method 1

  1. Issue a default notice
  2. Default notice expires without default being fixed
  3. Take possession of home
  4. This method is uncommon unless the home is unoccupied or vacant land

Method 2

  1. Issue a default notice
  2. Default notice expires without default being fixed
  3. Issue a Statement of Claim/Summons in court
  4. Wait the required time under the Statement of Claim/Summons (21 or 28 days depending on State/Territory)
  5. If no defence is filed, the credit provider can obtain judgment
  6. Credit provider can then apply for an order for possession through the court
  7. Court order issued for possession of home giving the consumer notice of when they must leave the home
  8. Sheriff takes possession and changes locks after giving notice to home owner/occupier of home

Once the credit provider obtains judgment (step 5), the consumer cannot:

  • Access EDR (except in very limited circumstances)
  • Apply for hardship under the Credit Law9

9 Based on the decision in Permanent Mortgages Pty Ltd v. Upston [2006] NSWSC 1128 (27 October, 2006). However, there is some question that this decision may be incorrect on this point as the time limit for applying for hardship (section 80) is “2 years after the relevant credit contract is rescinded, discharged or otherwise comes to an end”. The contract comes to an end at judgment. However, pursuant to s. 80 the consumer still has 2 years to apply for hardship. This issue needs to be resolved by a further court decision.

It is essential that you keep track of where the consumer is up to in the repossession process. If legal proceedings have commenced, consideration should be given to immediately lodging in EDR.

Negotiating for time to sell the home

If the consumer will inevitably lose the home, it is best that they negotiate or apply for a financial hardship arrangement allowing for time to sell the home. If the consumer sells the home this will mean they have the best chance of getting the best price for the home.

If the consumer wishes to negotiate on this basis, they need to:

  • Provide evidence to the credit provider that the home is on the market, such as–
    • Copy of contract with real estate agent
    • Marketing plan
    • Advertisements of the home
  • Set a realistic price so the home will sell in the time negotiated (usually 3 to 6 months)
  • Make sure the contract of sale is unconditional
  • Make sure the settlement time frame is 6 weeks or less
  • Get the credit provider’s permission to sell at the nominated price (if the loan will not be repaid in full with the sale of the home)

Financial hardship and selling the home

Consumers who need time to sell their home may benefit from applying for a hardship variation from the credit provider. The application for financial hardship would be on the basis that the consumer has a certain time to sell their home with the loan being repaid when the home is sold.

The financial hardship application would satisfy the requirements under s. 72 NCC because:

  • The consumer is in financial hardship for a reasonable cause (the reason why the consumer needs to sell the home)
  • The contract can be changed to either reduce repayments or not make any repayments until the home is sold
  • The consumer would reasonably expect to discharge their obligations because the sale of the home will repay the loan

So if the consumer is selling the home then consider making an application for a financial hardship arrangement to give the consumer time to sell.

Accessing superannuation

Applying for early access to a portion of the consumer’s superannuation is sometimes a possibility where foreclosure (repossession) on a mortgage is threatened. More details on how to do this can be found at: www.humanservices.gov.au

However, you should be aware that:

  • The amount that can be obtained is limited
  • The process can take much longer than anticipated (and possibly longer than the credit provider’s patience)
  • Approval is not guaranteed
  • Tax will have to be paid on the amount withdrawn
  • The amount withdrawn will no longer be protected in Bankruptcy (as superannuation usually is)—if it is inevitable the home will be lost, then it is better not to erode the superannuation account by early withdrawals
  • If there is a judgment for possession of the property, accessing superannuation may still not save the home

It is recommended that consumers only access their Superannuation in limited circumstances. For example, where they have found a job after a period of unemployment and can afford the normal repayment, but cannot catch up on the arrears, or where they have a serious but temporary illness.

It is never enough to accept the credit provider’s verbal assurances that it will not enforce a debt pending an application for Superannuation. Always request a hardship variation that is not dependent on approval for the access of the superannuation.

Saving the home, or delaying enforcement, after judgment

If the credit provider has obtained judgment in relation to an application for possession of the consumer’s property, the options are much more limited. However, you may still have the following courses of action available (this may vary from State to State):

  • Setting aside the judgment in some circumstances. Usually this will only be an option if the consumer has a good reason for not filing a defence earlier AND they have a defence/cross claim. The consumer will need legal advice and representation.
  • Seeking a stay of enforcement from the court – usually to seek more time to either sell the house, refinance, or find alternative accommodation. Occasionally, a hardship arrangement can be negotiated with the credit provider at this late stage after obtaining a stay. Stays granted by the court are usually for short periods (days or weeks rather than months) and applications need to be supported with good evidence. Always get or recommend legal advice for consumers seeking a stay through the court.
  • If the credit provider is a member of CIO, lodge a dispute seeking a stay of enforcement. (See External dispute resolution for more detail in relation to CIO’s post judgment jurisdiction.)

Voluntary surrender

The consumer has the option of voluntarily surrendering the home. Although it is preferable that the consumer sell the home him or herself, there are circumstances when surrender may save costs. The main reason would be that there is little equity and the consumer wants to save on legal costs, as this would reduce any shortfall. Get advice.

Shortfalls/mortgage insurance

Mortgage insurance is paid by the consumer to the credit provider when a home loan is first obtained. The insurance is to protect the credit provider in the event that the consumer defaults on the home loan and the home is sold but the sale price does not repay the home loan. This means the credit provider will be repaid the shortfall. The mortgage insurer then takes over the shortfall debt (subrogation). The consumer will then be pursued for the shortfall by the mortgage insurer. Mortgage insurers are required to be licensed and members of EDR.

If there is no mortgage insurance, then the consumer will be pursued for the debt by the credit provider (or a debt collector if the credit provider appoints it as an agent or sells the debt).

If the consumer is being pursued for a shortfall debt:

  • Apply for a release from the debt on compassionate grounds or on the basis of long term financial hardship (if applicable)
  • Negotiate a repayment arrangement on the grounds of financial hardship (there may be no right to a variation at law because there will often already be a judgment – you can still negotiate)
  • Lodge in EDR if you cannot come to a satisfactory arrangement
  • Consider other options, such as bankruptcy

Post repossession and EDR

The credit provider owes certain duties to the consumer in the sale of the home following repossession or surrender. The credit provider has a duty to:

  • Take reasonable steps to sell the property at market value; and
  • Act in good faith; and
  • Not recklessly sacrifice the interests of the mortgagor (consumer who owned the home)

There are also laws in States and Territories in Australia imposing additional obligations.

There is no requirement for the credit provider to keep the mortgagor informed about the progress of the sale of the home. The credit provider has no obligation to improve the property for sale. The credit provider can charge the consumer for its reasonable costs in taking possession of the home, maintaining it (eg. insurance) and selling it.

The credit provider has a duty to account after the sale of the property. It is recommended that the consumer always ask for a full account of all the expenses and costs in selling the home. If the costs seem excessive, a dispute should be raised with the credit provider at first instance, and then in EDR if the dispute cannot be resolved with the credit provider.

See FOS Approach Mortgagee Sales at www.fos.org.au

Some matters that could be considered in deciding whether the credit provider has acted inappropriately in the sale of the home are:

  • The credit provider did not take reasonable care when selling the property. Some examples of possible arguments are:
    • The home was sold well below the market value. The credit provider will obtain a valuation and you are entitled to ask for a copy.
  • Whether the sale was not an independent bargain or “arms length”.
  • Only seek to get a sale to cover the outstanding debt and not consider whether a higher price could be achieved
  • A lack of advertising of the property

See also Unreasonable enforcement expenses.