The release last week of the Credit Ombudsman Service's annual report has highlighted sharp divisions within the finance sector concerning the way external dispute resolution services handle hardship cases.COSL said lenders were failing to give proper consideration to applications from borrowers in financial hardship. These accounted for 34 per cent of its complainants during the 2010/11 financial year.The Financial Ombudsman Service, which released its annual report in December, said that home loans, credit cards and personal loans were involved in 86 per cent of credit disputes, and financial hardship was an element in 47 per cent of credit disputes.Both COSL and FOS said the handling of financial hardship cases was the biggest systemic issue they faced last financial year.Lenders think it is a big issue too. Many of them think that external dispute resolution schemes have too much power to interfere in their legal rights when dealing with defaulting borrowers.At the heart of the matter is a section of the Australian Securities and Investments Commission's EDR regulatory guide of April last year (RG 139), which reads: "The terms of reference of an EDR scheme must require that legal proceedings by scheme members [lenders] should not be commenced where a complaint or dispute has been lodged with the scheme."The reason for this is that "commencing legal proceedings in relation to a complaint or dispute lodged at EDR creates the potential for scheme members to undermine the EDR process. There is also the possibility that the same complaint or dispute will be dealt with in two competing forums, wasting time and resources."The Australian Securities and Investments Commission has said this provision is primarily intended to assist complainants in hardship.The Financial Ombudsman Service's terms of reference says: "If a dispute is subsequently decided by FOS and becomes binding upon the financial services provider, the financial services provider will abandon any aspect of proceedings against the applicant that are inconsistent with that decision."The Credit Ombudsman Service's terms of reference say something similar: "The member must not initiate or resume enforcement action, or seek judgement for a debt or take possession of an asset securing the debt, which is inconsistent with a decision by COSL in the complainant's favour."The Australian Bankers Association and Abacus, the peak body for mutuals, have both raised concerns with ASIC about the handling of the "legal proceedings" section of RG 139.Their view is that in cases where the EDR scheme is unable to resolve a complaint the lender would need to be able to institute legal proceedings to preserve assets that would otherwise be lost or diminished without court orders. ASIC announced in December that it would review the EDR schemes' jurisdiction over consumer complaints in cases where lenders have commenced legal proceedings to recover debts from customers.Matthew Bransgrove, a partner at Bransgrove Lawyers, said RG 139 placed a lender's ability to enforce mortgages in the hands of the bureaucrats running the EDR schemes, instead of the courts.Bransgrove said: "The court's jurisdiction to hear mortgage enforcement matters has been ousted