PROPERTY LOAN ALERT
for property investors
and home buyers
Are credit repair and debt
relief companies worth using? ASIC has its doubts.
The debt management industry is booming in Australia. It
helps people repair their credit to get a loan, and to
obtain debt relief when loan repayments or debts become
unmanageable.
The Australian Securities and Investments Commission (ASIC)
investigated the industry and found that the industry
charges exorbitant fees for poor service, when good service
is available for free elsewhere.
In particular, ASIC found that:
- The fees are opaque: hidden either in the fine print
or not advised until the consumer is committed;
- The fees are high for the services provided and are
heavily ‘front loaded’ (payable up front);
- High pressure sales techniques are used, often to
‘sell’ a debt consolidation loan;
- Important risks with debt agreements are not
disclosed, given that it is similar to bankruptcy;
- Unsuitable services are being offered: usually
standardised instead of being tailor-made;
- Rarely are consumers referred to the free services
provided by financial counsellors, not-for-profit
agencies, consumer law services or ombudsman schemes, or
advised they can do the same themselves for free.
These findings are contained in the ASIC Consumer
Advisory Panel report – Paying to get out of debt or clear
your record: The promise of debt management firms [Report
465, January 2016].
This is commentary on the ASIC report, followed by a
commentary on the marketing practices used in the debt
management industry:
What services do credit
repair companies offer?
‘Credit fix’ companies offer to ‘clear black marks from
the record’ to improve the borrower’s credit score so that
they qualify for a loan. They identify incorrect credit
listings on the borrower’s credit file and apply to the
credit agency to remove or amend those listings.
Errors in credit files are common. According to the
Office of the Australian Information Commissioner (OAIC),
three in ten (30%) of those who obtained a credit report
found errors, and of those, nearly six in ten (57%) had the
credit file corrected by the credit agency (Veda or Dun and
Bradstreet).
Common errors found in credit files are: out of date
personal data appears, expired credit default listings are
not removed, the same debt appears twice, paid debts appear
as unpaid, and credit reports for different individuals are
combined by mistake.
Credit files contain more data than ever before. Since
March 2014, the Privacy Act, 1988 has allowed credit
agencies to include data showing regular payments under the
‘positive credit reporting regime’. In return, the credit
agencies agreed to allow the individuals to complain about
incorrect credit listings free of charge, with a 30 day
turnaround. For more details about credit files click
Qualifying for a loan is about to become harder.
If the credit agency fails to correct a credit listing, a
complaint may be made free of charge directly to the Credit
and Investments Ombudsman (CIO) or the Financial Ombudsman
Service (FOS) (for credit defaults) or an ASIC-approved
External dispute resolution (EDR) scheme (for utility
defaults). In 2013, 89% of the complaints made were to amend
a default credit listing.
ASIC commissioned a ‘mystery shopping exercise’ of the
fees charged by prominent debt management firms for credit
repair. ASIC found that several companies had a ‘no win, no
removal fee’ policy. That is, they charged an upfront fee of
between $495 and $1,095, which was not refundable, but
charged a removal fee only if the default credit listing was
removed. Removal fees of between $880 and $1,029 were
charged per removal – the total is often higher
because often several listings are removed. One company
charged a contract cancellation fee of $990. Unpaid fees are
collected through court processes, and it comes as no
surprise that they place a default listing on the
individual’s credit file.
This is a lucrative business - complaints made by debt
management firms (on behalf of clients) to CIO, FOS and
other EDRs increased from just 99 in 2010 to 2,580 in 2013.
The ‘front loaded’ fee structure encourages applications
with little prospect of success. The statistics are that
complaints made to CIO and FOS were successful just 12% of
the time, and were compromised 31% of the time.
ASIC questioned the need to use debt management firms
given the complaints / dispute resolution processes provided
by the credit agencies, the CIO, FOS and other EDRs, were
free, and easy to use.
What debt relief
assistance do debt management firms offer?
The ‘flip side’ of cleansing credit default listings to
qualify for a loan, is helping consumers to stop harassing
calls from debt collectors and to manage financial hardship
– to deal with loan repayments which are in arrears,
unaffordable mortgage and credit card payments and
situations where there is no money at hand to pay pressing
debts.
According to the ASIC report, the ‘target market’ is the
31.8% of households in Australia which are experiencing
financial stress, especially those experiencing financial
hardship.
Debt management firms offer three types of ‘debt relief
solutions’ to help people ‘get out of debt’:
- Debt negotiation services which are offers to
reach an informal debt agreement with creditors,
with the aim of reducing the debtors’ balance owed
without affecting their credit rating. They also
negotiate payment terms. Often a debt consolidation loan
is proposed, where a new loan is taken out to pay out
the debts. The ASIC Money Smart web page has advice on
debt consolidation and refinancing.
- Budgeting services which are offers create a
debt payment plan to manage the payment of bills and
reduce debt. In practice, this means that the consumer’s
wages are paid directly to the firm, which is
responsible for paying the bills and loan/credit card
repayments and an allowance for day-to-day expenses.
- Debt Agreement services which are offers to
arrange the entry into a formal debt agreement
with creditors to accept a sum of money (usually less
than the full amount owed) in full satisfaction of the
debts. It is called a Part IX Debt Agreement which is
often described as a ‘government program’ or ‘government
sponsored debt relief’ because it is made in accordance
with legislation, namely Part IX (Part 9) of the
Bankruptcy Act, 1966. It is an alternative to a Part
X Personal Insolvency Agreement and a Part XI
Bankruptcy.
The ASIC ‘mystery shopping exercise’ found a great
variation in fees charged for debt negotiation and budgeting
services. One firm charged an upfront ‘set-up’ fee of $550
with an ongoing fee based on the amount owing, another a
flat fee of $150 per month for a minimum of 6 months,
another $200 upfront and 10% of the original debt, and
another a fee of $330 per hour. There were cases where the
firm took the amount of the debt reduction negotiated as its
fee.
ASIC found that the fees for debt agreement services were
either a flat $500 to $660 upfront (+$200 government fee) or
a percentage of between 13% and 20% of the total debt.
ASIC was critical that debt management firms did not
disclose their fees on their website (excepting one firm),
even though ‘internet advertising appeared to represent the
largest source of referrals for debt management forms.’ The
sales technique is to not present a contract until the ‘free
consultation’ – a second conversation or a face-to-face
meeting, which ASIC interprets as a cost barrier (in terms
of time) to ensure that the caller is less likely to go
elsewhere.
ASIC was also critical of the poor disclosure of the
effects of a Part IX Debt Agreement, namely that proposing
one is an act of bankruptcy, the debtor’s name appears on
the public record – the National Personal Insolvency Index,
as well as appearing on the credit file for 5 years, and the
fact that it is available only to people with low to mid
incomes with unsecured debts and assets of just over
$100,000.
ASIC viewed the consumers who used debt management firms
as vulnerable, as compared with more sophisticated consumers
who accessed to good legal and accounting advice on their
debt options.
What does ASIC need to do
to fill the regulatory gaps?
Not only did the ASIC report find that the debt
management firms offered little value for money, but they
gave poor service, misrepresented the nature and
effectiveness of their services and preyed on the vulnerable
consumer. In short, ASIC had its doubts, and recommended
consumers use alternatives.
There is no uniform regulatory framework which applies to
debt management firms in Australia.
The introduction of the National Credit Act
licensing scheme on 1 July 2010 made giving credit
assistance a regulated credit activity. Debt
management companies need to hold an ASIC Australian Credit
Licence ‘if they suggest that a consumer take out a debt
consolidation loan with a particular lender’ or suggest that
a consumer ‘stays with the loan’ they have renegotiated.
Otherwise, they do not.
The Bankruptcy Act requires debt agreement
administrators to be registered with AFSA (the Australian
Financial Services Authority).
But for the most part, debt management firms do not need
to be licensed or registered and are not specifically
regulated in Australia for their credit repair and financial
hardship assistance activities.
They are governed only by the general consumer law
provisions under the ASIC Act in relation to misleading and
deceptive conduct and unconscionability in ‘financial
services’, and by the Australian Consumer Law. The
ASIC report discloses no prosecutions under this law.
To fill the regulatory gap, ASIC might choose to follow
the United Kingdom regulatory model, and bring the debt
management industry within the Australian Financial Services
Licensing regime, or follow the United States by laying down
rules such as requiring specific disclosures, restrictions
on fee payments and amounts, or both.
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