The NCCPA introduced a requirement for credit providers and credit assistance providers to be licensed. As a holder of an Australian Credit Licence, a credit provider must comply with certain obligations, including a very important protection for consumers called responsible lending. In addition, there are certain formalities which must be fulfilled prior to entering into a credit contract. These matters are discussed in more detail in the next sections.
The NCC has added to the disclosure obligations originally imposed under the UCCC.
Section 126 of the NCCPA requires lenders to give consumers a credit guide as soon as practicable after it becomes apparent to the credit provider that it is likely to enter into a credit contract with the consumer. The credit guide must:
- be in writing;
- specify the credit provider's name, contact details and Australian credit license number;
- include details regarding complaint handling, including contact details of internal and external dispute resolution processes;
- disclose the credit provider's obligations to provide upon request a written copy of an assessment of the suitability of any proposed credit contract; and
- advise that the credit provider is prohibited from entering, or increasing the credit limit under, a credit contract that is unsuitable for the consumer.
A credit provider is required to undertake an assessment of the unsuitability of a loan, as part of the credit provider's responsible lending obligations. For more information about how this is done, see Responsible Lending Obligations.
Copy of Assessment on Request
A credit provider is required to provide a copy of the written preliminary assessement (if undertaken by the credit assistance provider) -s 120 NCCPA, or the written assessment (if undertaken by the credit provider) - s 132 NCCPA as to the unsuitability of the loan. There is no mandatory form of the assessment, but at the minimum it should show whether the lender has in fact complied with responsible lending obligations. For more detail about these obligations see above.
Prior to the debtor either entering into a credit contract or making an offer to enter into a credit contract (whichever occurs first), the credit provider must give to the debtor a statement disclosing the information set out in s 17 of the NCC (set out in more detail below). The disclosure required by S17 are required to be included in a credit contract, so the credit provider can simply provide a copy of that proposed credit contract to the debtor.
An alternative is for the credit provider to separately provide the disclosures required by s 17 in a pre-contractual statement, separate from the contract [s 16].
Prior to the debtor either entering into a credit contract or making an offer to enter into a credit contract (whichever occurs first), the credit provider must give the debtor a copy of an information statement in the form required by the NCCP Regulations setting out the debtor's statutory rights and obligations (Form 5: Things you should know about your proposed credit contract).
Form of credit contract
Section 17 of the NCC sets out information that must be included in a credit contract, as follows:
a. the credit provider's name;
b. the amount of credit;
c. the annual percentage rate or rates;
d. a calculation of interest charges;
e. a total amount of interest charges payable;
g. credit fees and charges;
h. changes affecting interest and credit fees and charges;
i. statements of account;
j. the default rate;
k. enforcement expenses;
l. mortgages or guarantees;
n. insurance financed by contract; and
o. an information schedule to be included above the signature clause of the contract in Form 6 or 7 of the NCCP Regulations.
Of these matters, those in italic text are deemed "key requirements" under section 111. Key requirements are slightly different for continuing credit contracts (s 111(2)).
These requirements have not been modified from the UCCC provisions.
After Signing the Contract
A debtor may, by written notice to the credit provider, terminate a credit contract at any time up until credit has been obtained under the contract (s 11 NCC).
A mortgage is void to the extent that it secures an amount exceeding the sum of the debtor's liabilities under the credit contract and any reasonable enforcement expenses associated with the mortgage [s 49 NCC]. Similarly, a mortgage is void to the extent that it seeks to secure an amount in excess of the guarantor's liabilityunder the guarantee and any reasonable enforcement expenses of the mortgage.
The NCC provides that a mortgage that does not describe or identify the property which is subject to the mortgage is void [s 44(1)]. A provision in the mortgage that charges all the property of the mortgagor (an all-property mortgage) is also void [s 44(2)].
Section 45 of the NCC places a restriction on the ability of a credit provider to take a mortgage over future properties. This section provides that a provision in a mortgage that has the effect of creating a mortgage over property that is to be or may be acquired by the mortgagor after the mortgage is entered into, is void. There are three exceptions to the restriction of taking a mortgage over future property. They are:
- where the mortgage provides that the property to be acquired will be obtained wholly or partly with the credit provided under the credit contract secured by the mortgage;
- where the mortgage relates to property or a class of property that is described or identified in the mortgage; and
- a provision in a mortgage relating to goods acquired in replacement for, or as addition or accessories to, other goods subject to the mortgage.
The final restriction on property is that a mortgage cannot have the effect of securing goods supplied from time to time under a continuing credit contract, unless those goods are specifically identified [s 46].
All-accounts mortgage, that is, mortgages which cover all debt owed by a debtor to the credit provider, are allowed under the NCC, provided certain requirements are met [s 47]. Borrowers must agree in writing in advance to a mortgage covering all accounts (for example a separate future credit contract or related guarantee), otherwise the mortgage will be unenforceable. This is to prevent credit providers from retrospectively adding an unsecured loan to a mortgage without the borrower's prior agreement.
The NCC prohibits a credit provider from entering into a mortgage to secure obligations under a credit contract unless the mortgagor is a debtor under the contract or a guarantor under a related guarantee [ss 48(1) & (2)].
A third-party mortgage is unenforceable [s 48(3)]. A party to the mortgage may apply to a court for an order that the credit provider take such steps as are necessary to discharge the mortgage [s 48(4)].
The NCC aims to stamp out the practice of taking security over low-value chattels that do not genuinely secure the obligations of the lender. Such securities are used only to enable the lender to threaten deprivation of those goods in the event of non-payment under the secured loan, even though seizure of sale of such goods would not significantly reduce the balance of the loan.
Section 50 of the NCC prohibits the creation of mortgage over essential household property, as defined in section 116(2)(b)(i) of the Bankruptcy Act 1966 (Cth). The prohibition does not apply, however, where the mortgagee supplied the goods to the mortgagor as part of a business carried on by the mortgagee of supplying goods and the mortgagor has not, as a previous owner of the goods, sold them to the mortgagee for the purposes of the supply, or where the mortgagee is a linked credit provider of the person who supplied the goods to the mortgagor.
Section 50 also prohibits mortgages over goods that are used in earning income by personal exertion if the goods do not have a total value greater than the relevant limit set by the Bankruptcy Regulations 1966 (Cth).
The credit contract may allow the credit provider to vary essential terms of the credit contract, such as the interest rate and level of repayments. Under Division 1 of Part 4 of the NCC, the credit provider must give notice to the debtor of these changes so that the debtor can decide whether or not to terminate the facility and obtain credit elsewhere. However, there is no such requirement to give notice regarding:
- a variation in the annual percentage rate under the contract where it is ascertainable from the contract what the level of the new interest rate will be and when it will take effect;
- an increase in the amount of repayments, if the increase occurs automatically, as specified by the contract, and both the amount of the increase and when it takes effect are ascertainable from the contract; and
- an increase in the term of the credit contract, if the increase occurs only because of increase in the annual percentage rate or rates payable under the contract.
Chapter 2 of the NCCPA generally requires all persons engaging in "credit activities" to hold an Australian credit licence. An Australian Credit Licence carries with it onerous obligations which are set out more fully on the ASIC website. Professional assistance and advice must be obtained if an organisation wishes to obtain a licence.
"Credit activity" is defined comprehensively in section 6 of the NCCPA. In brief, a person is engaged in a credit activity if the person:
- is a credit provider under a regulated credit contract(that is, regulated by the NCC);
- carries on a business of providing regulated credit;
- provides credit assistance (see below);
- acts as an intermediary (see below);
- is a lessor under a regulated consumer lease;
- carries on a business of providing regulated consumer leases;
- is a mortgagee under a regulated mortgage; or
- is a beneficiary of a regulated guarantee.
Section 8 of the NCCPA defines the following activities as credit assistance:
- suggesting that the consumer apply for a particular credit contract with a particular credit provider;
- suggesting that the consumer apply for an increase to the credit limit of a particular credit contract with a particular credit provider;
- suggesting that the consumer remain in a particular credit contract with a particular credit provider;
- assisting the consumer to apply for a particular credit contract with a particular credit provider;
- assisting the consumer to apply for an increase to the credit limit of a particular credit contract with a particular credit provider;
- suggesting that the consumer apply for a particular consumer lease with a particular lessor;
- suggesting that the consumer remain in a particular consumer lease with a particular lessor; or
- assisting the consumer to apply for a particular consumer lease with a particular lessor.
The definition will capture the provision of finance broking services.
"Acts as an intermediary"
Consumer credit regulation has historically had difficulty regulating conduct in multi-party credit arrangements such as those involving finance brokers, solicitors, mortgage originators and mortgage managers. Section 9 of the NCCPA defines the phrase "acts as an intermediary" with the intent of requiring persons engaged in such conduct to hold an Australian credit license and therefore be subject to regulation under the new national regime.
A person acts as an intermediary if, in the course of, as part of, or incidentally to, a business carried on in this jurisdiction by the person or another person, the person:
- acts as an intermediary (whether directly or indirectly) between a credit provider and a consumer wholly or partly for the purposes of securing a provision of credit for the consumer under a credit contractfor the consumer with the credit provider; or
- acts as an intermediary (whether directly or indirectly) between a lessor and a consumer wholly or partly for the purposes of securing a consumer lease for the consumer with the lessor.
It does not matter whether the person does so on the person's own behalf or on behalf of another person.
Obligations of license holders
Australian credit licenses fall into different categories, depending upon the credit activity or activities in which the licensee engages. Under section 47 of the NCCPA, the obligations imposed on all licensees include:
- do all things necessary to ensure that the credit activities authorised by the licence are engaged in efficiently, honestly and fairly;
- ensure that its representatives are adequately trained, and are competent, to engage in the credit activities authorised by the licence;
- have an internal dispute resolution procedure that complies with ASIC standards; and
- be a member of an approved external dispute resolution scheme.
The Australian Securities and Investments Commission (ASIC) has approved the external dispute resolution schemes operated by the Financial Ombudsman Service (FOS) and the Credit Ombudsman Service Limited (COSL) for the purposes of section 47.
ASIC has also adopted Australian Standard AS ISO 10002 on Complaints Handling as the relevant standard for internal dispute resolution procedures for the purposes of section 47.
Additionally, under sections 47(1)(j) and 48, and section 12 of the NCCP Regulations, licensees must have insurance cover that is adequate to compensate persons for loss or damage suffered because of a contravention of the NCCPA.
Chapter 3 of the NCCPA is a central part of the new regulatory regime, imposing a series of obligations on credit providers and other licensees which are designed to reduce the instances of prejudicial or inappropriate loans being granted to consumers. Briefly the regime requires a lender to assess and verify a consumer’s financial situation and requirements before entering into a loan with that consumer. Failure to conduct a proper assessment is a breach of the responsible lending obligations, and has a number of consequences.
Section 128 of the NCCPA requires a lender to assess whether a credit contract will be unsuitable for a consumer not more than 90 days prior to entering or increasing the credit limit under that contract. Section 26 of the NCCP Regulations extends that period to 120 days in respect of secured credit used to purchase residential property.
From March 2013, a credit provider is also prohibited from making an unconditional representation before conducting a credit assessment to a consumer that the consumer is eligible to have the loan or enter into the consumer lease (s 128 NCCPA).
In making an assessment under s 128, a lender is required to:
a. make reasonable inquiries about the consumer's requirements and objectives in relation to the credit contract;
b. make reasonable inquiries about the consumer's financial situation; and
c. take reasonable steps to verify the consumer's financial situation.
(s 130 NCCPA)
NB Credit assistance providers (such as mortgage brokers) are also required to comply with responsible lending obligations as a condition of being licensed. They are required to make the same assessment of a consumer’s requirements and objectives and financial situation, and to take reasonable steps to verify the customer’s information. The assessment must be made prior to the credit assistance provider suggesting to a borrower or assisting that borrower enter into a particular loan or increase in credit limit. The responsible lending obligations for mortgage or lending brokers are set out in Part 3-2 of Chapter 3 of NCCPA.
ASIC's Regulatory Guide 209 "Credit licensing: Responsible lending conduct" provides some guidance to credit providers and credit assistance providers about how to fulfil these obligations. The Guide advises that the level of inquiries and steps taken to verify information will vary depending upon the circumstances (known as scaleability). Lenders can no longer simply rely upon information given to them by a borrower, but now must verify that information by independent inquiry.
Relevant factors will include:
- the potential impact upon the consumer of entering into an unsuitable credit contract;
- the complexity of the credit contract;
- the capacity of the consumer to understand the credit contract; and
- whether the consumer is an existing customer of a credit provider or a new customer.
Under section 131, a lender must assess that a credit contract will be unsuitable for a consumer if it is likely that:
a. the consumer will be unable to comply with the consumer's financial obligations under the contract, or could only comply with substantial hardship; or
b. the contract will not meet the consumer's requirements or objectives.
Under section 131(3), where a consumer could only comply with the consumer's financial obligations under the contract by selling the consumer's principal place of residence, it is presumed that the consumer could only comply with those obligations with substantial hardship, unless the contrary is proved. This directly targets the practice of asset based lending, where there is no regard for the ability of the consumer to properly service (repay) the loan, and the lender finds safety in the fact that there is equity available should there be a default by the borrower.
Courts are increasingly frowning upon the practice of asset based lending where the lender has made no effort to enquire about the consumer’s ability to service a loan and based the decision to lend purely on the availability of the equity in an asset.
Obtaining the Written Credit Assessment
Another important feature of the responsible lending regime is that consumers are permitted to obtain a copy of the written assessment done by the lender prior to entering into the loan. Under S S132 provides that if a consumer requests it, a lender must provide a written copy:
- where the request is made prior to entering a credit contract or increasing a credit limit, prior to entering a credit contract or increasing a credit limit;
- where the request is made within two years of entering a credit contract or increasing a credit limit, within seven business days of the request;
- where the request is made more than two years but less than seven years after entering a credit contract or increasing a credit limit, within 21 business days of the request.
A lender is prohibited from requesting or demanding payment for providing a copy of the assessment (s 132(4)).
Section 133 prohibits a lender from entering or increasing a credit limit under a credit contract that is unsuitable. Subsections 133(2) and (3) provide guidance on when a credit contract will be unsuitable; these replicate the relevant provisions of section 131.
Consumers affected by the failure to meet responsible lending obligations may be entitled to compensation (s 178 NCCPA), and may also be entitled to other remedies, but it is important to obtain advice from a lawyer first.
From March 2013, additional responsible lending obligations will apply to licensees to protect consumers looking to borrow small amounts (commonly known as pay-day loans). A small amount credit contract (SACC) is one for an amount less than $2 000, is unsecured, and the term of the contract is 15 days or more. A credit licensee is prohibited from lending $2 000 or less if the term is less than 15 days.
The following inquiries must be made by the lender:
A. Is the borrower already in default in an existing SACC, or has the borrower had 2 or more SACCs in the last 90 days?
This called a “presumption of unsuitability” – see ss 118(3A), 123(3A), 131(3A) and 133(3A) NCCPA. That is, the loan will be unsuitable for the borrower and the lender will be in breach of its responsible lending obligation if it lends the money. This is to prevent borrowers for having multiple small loans, or from rolling over a loan that the borrower could not afford in the first place.
B. What is the source of the borrowers income? Whilst this should be a mandatory question for all licensees to ask a consumer when making inquiries, the NCCPA [s 133CC] and Regulations [r 28] prohibits SACCs for:
- Borrowers who receive more than 50% of their income from payments under the Social Security Act 1991 (Cth); and
- Where the repayments would exceed 20% of that borrowers gross income.
Lenders proposing to enter into a SACC must obtain and review a prospective borrowers bank statements for the previous 90 days, even if the borrowers income is paid into a joint account (NCCPA S117(1A) and 130 (1A)). This obligation is in addition to other responsible lending obligations.
Licensees who offer SACCs must give borrowers warnings asking “Do you Really need a Loan Today?”, in one of three ways. If the lender offers on-line applications for finance, there must be a pop-up warning on the website. If the lender has a shop-front, the notice must be displayed prominently on the front door, and if the borrower applies for credit over the phone, the lender must read the warning to the borrower before providing credit or credit assistance.
The warning includes mandatory text which advises borrowers to consider other borrowing options, including:
- Asking utilities providers about payment plans;
- Accessing financial counselling services on 1800 007 007;
- Getting a loan from Centrelink.
Other Protections under NCCPA and Regulations for Small Amount Credit Contracts
When a borrower wishes to have repayments deducted from wages, the NCCPA prescribes a form of notice to be given to an employer. The notice is designed to better inform borrowers about the terms of any arrangement to have repayments deducted from their wages, and prevents lenders from requesting more than an authorised amount from the employer [s 160E NCCPA].
Under s 17 NCC, credit contracts must contain certain information (key requirements) including:
- The amount of credit to be provided
- To whom the credit is to be repaid
- Annual percentage rate/s
- Calculation of interest charges
- Repayments to be made
- Credit fees and charges
- Changes affecting interest and the credit fees and charges payable
- Frequency of statements of account
- Default rate payable (if applicable) and enforcement expenses
- If a mortgage is to be taken out over property, a description of the property
- Details of commission payable
Part 6 of the NCC holds credit providers liable to make payment of a civil penalty to the debtor, or to a government fund, in respect of a failure to disclose key requirements (set out generally above). The full list of key requirements under the NCC is set out in section 111.
The payments are penalties because they are punitive, not compensatory, in nature, and Part 6 does not require that any loss be suffered by a debtor in respect of a contravention of a key requirement. However, unlike most penalties, they may be paid to an individual, i.e. the debtor under the credit contract.
Section 112 of the NCC grants standing to apply to a court for an order under Part 6 to:
- a party to a credit contract;
- a guarantor; and
Seeking orders under Part 6 is a two-stage process. The court will be required to determine:
- whether a contravention of a key requirement has been established [s 113(1)]; and
- whether the contravention ought to give rise to a penalty [s 113(2)].
Section 114(1) provides that the amount of a penalty payable to a debtor or guarantor is limited to the total amount of interest charges payable under the credit contract. However, section 114(2) provides that, if the debtor has suffered a loss, the court may impose a greater penalty that shall be not less than the amount of the loss.
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