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Consumer Credit

Credit involves the deferral of payment of a debt. Buying on credit is not free: the consumer pays interest and fees on the money borrowed as well as the original purchase price. In recent years the use of credit to obtain consumer goods and services has dramatically increased.

Credit can be provided in a variety of forms such as:

  • continuing credit contracts (credit cards)
  • contracts for the sale of goods or services where payment is made by instalment
  • loans (e.g. housing loans, personal loans, fixed term loans)
  • consumer leases (where goods are rented, but the consumer does not necessarily own the goods at the end of the contract)

Credit can be provided from a variety of sources:

  • banks
  • building society
  • credit unions
  • retailers
  • finance companies

The advantage of using credit is that the consumer is able to use the goods or services when they do not have available cash. Whilst the increased availability and flexibility of credit increases consumer choice comparisons between the various forms can be difficult and problems often occur.

The prudent consumer should take several steps to avoid problems. Consider whether the purchase needs to be made on credit at all. If cash is not available consider using lay-by as a cheaper alternative. Buying on credit should be treated like any other purchase and it is wise to shop around.

Important information to consider:

  • the rate of interest
  • whether the rate is fixed or flexible
  • any other charges or fees
  • how the repayments are to be made
  • whether security is required for the credit and if so what form of credit
  • the term of the loan
  • the amount of the instalments
  • the total amount that has to be repaid compared with the cash price
  • penalty fees and default charges.

For further detailed information about different types of credit problems and possible solutions for consumers, see www.moneysmart.gov.au

Laws that Protect Consumers when Borrowing Money

The rest of the chapter covers the laws relating to consumer credit, including the National Consumer Credit Protection Act 2009 (Cth) and the National Credit Code (NCC).

About the National Consumer Credit Protection Act and the NCC

Australia has legislation in place to protect consumers who borrow money. A national regime was introduced in July 2010. Prior to that date, the States each had individual (although very similar) pieces of legislation which protected consumers. The ealier legislation was called the Uniform Consumer Credit Code (UCCC).

The National Consumer Credit Protection Act 2009 (Cth) (the "NCCPA"), includes the National Credit Code ("NCC") as Schedule 1 to the Act and commenced on 1 July 2010 and many aspects of the NCC are identical to the UCCC.

The transitional arrangements mean that many credit contracts entered into under the UCCC (that is between 1 November 1996 and 30 June 2010) are also covered by the NCC. Schedule 1, S2A of the NCCP (Transitional and Consequential Amendments) Act 2009 (Cth) provides that if a credit contract is a “carried over instrument”, the NCC will apply to the credit contract, notwithstanding it was entered into prior to 1 July 2010. Legal advice should be sought to confirm which Code applies to a particular credit contract if there is any doubt.

The NCCPA requires all organisations who provide credit to consumers to be licensed. It is a condition of an Australian Credit Licence that the licensee is a member of an external dispute resolution scheme, which aims to ensure that access to justice is maintained for consumers.

Organisations who hold an Australian Credit Licence now must comply with laws regarding responsible lending, as well as give consumers the opportunity to ask for a variation of the credit contract where the consumer is suffering hardship. More detail about these protections is covered later in the chapter.

The Australian Securities and Investments Commission (ASIC) is now responsible for regulation of consumer credit under the NCCPA and NCC. It produces a number of guides which are useful for more detailed information for consumers and for credit providers, which are available on the ASIC website.

What credit contracts are regulated by the NCC?

The National Credit Code applies to all credit contracts entered into on or after 1 July 2010, where each of the following elements are met:

  • the debtor (also called the borrower) is a natural person or a strata corporation;
  • the credit is, or is intended to be, provided wholly or predominantly:

    - for personal, domestic or household purposes (including buying residential property); or

    - to purchase, renovate or improve residential property for investment purposes; or

    - to refinance credit that has been provided for such purposes;
  • a charge is or may be made for providing the credit; AND
  • the credit provider provides the credit in the course of a business of providing credit or as part of, or incidental to, any other business of the credit provider.

Note that the Uniform Consumer Credit Code (pre-1 July 2010) does not apply to credit provided for residential investment property.

Guarantees are regulated by the NCC as well as under the common law. For more information can be found under Guarantees.

Preliminary Requirements for NCC regulation

Natural person or strata corporation

The debtor must be a flesh and blood human and not a corporation or trust, or alternatively it may be a strata corporation.

The purpose of the loan

The NCC applies to loans given for predominantly personal, domestic or household purposes, including residential property investment.

However, the NCC does not apply if the credit is provided wholly or predominantly for business purposes, or for investment other than residential property investment. That is, if more than half of the credit is intended to be used for business purposes, the NCC doesn't apply (S5 (4)). A common example to illustrate the difficulties of dividing up the purpose of the credit to determine its predominant purpose is the purchase of a motor vehicle which is intended to be used partly by a business and partly for private purposes. In those circumstances, a business purpose declaration under S13 (2) NCC will often assist a credit provider.

If in legal proceedings (whether brought under the NCC or not), a party (usually the borrower) claims that the NCC applies to a credit contract, S13 NCC creates that presumption, unless the contrary is established by the other party, usually the credit provider.

Business Purpose Declarations

A "business purpose declaration" may be signed by a borrower before entering into the credit contract, if the purpose of the credit (including a re-finance) is not for personal, domestic or household purposes or for a residential investment property (S13(2) NCC). Such a declaration is ineffective if a credit provider knew that it was not true - that is if a borrower's purpose was in fact personal, domestic or household.

Unscrupulous lenders may coax vulnerable consumers to sign a business purpose declaration when applying for credit, even though the borrower is borrowing purely for personal, domestic or household purposes. This is so that the credit provider can avoid having to comply with the NCC, which may have devastating effects on a borrower. If a person signs a business purpose declaration, and it is later proved that the credit was not for business purposes (that is the borrower was persuaded to sign it to get the loan), the credit provider may have committed an offence.

The declaration must be substantially in the form prescribed by regulation 68 of the National Consumer Credit Protection Regulations 2010 ("NCCP Regulations") (otherwise it will be ineffective), and must contain a warning that the protection of the NCC may be lost as a result of signing the declaration.

Charge for providing credit

The NCC applies only if a charge is or may be made for providing the credit. The charge is not limited to interest, and any charge will be sufficient (S5(1) (c) NCC). If a consumer buys goods or services on an instalment basis, with a discount offered for up-front payment, there may be an argument that a charge has been made for providing "credit".

If title and possession of the goods passes to the purchaser (compared to a lay-buy, where the goods are held by the supplier until payment is made in full, even though there might be a nominal charge) or if the services are provided, there is likely to be a conclusion that credit has been provided and the contract is regulated by the NCC.

The credit provider must provide credit in the course of a business

The NCC will only apply if the credit provider provides credit in the course of a business of providing credit or as part of, or incidental to, any other business. However, where credit is provided incidentally to another business, such as where a retailer allows a customer to pay by installments, there would appear to be no requirement that the retailer need be in the business of providing that type of credit. If the credit is provided incidentally to the retail business, that will be sufficient.

If a shopkeeper provides credit on only one occasion, then that transaction will probably fall within the NCC, provided the other jurisdictional factors are met. However, a one-off loan by a person to a friend would not be covered by the NCC, whether or not interest was charged on that loan.

Book-up, which is commonly used by store owners and traders in indigenous and remote communities is a form of credit which is regulated by the NCC. Store owners must be licensed to provide book-up if the term exceeds 62 days and there is a charge to the customer, or if its for a term of less than 62 days, the charge for the book-up is 5% or more of the amount, or an equivalent of more than 24% per annum.

For more information about book-up see Book-up on www.moneysmart.gov.au

Sale by instalments

The new laws unambiguously apply to:

  • goods leases with a right or obligation to purchase the goods, where the total charge exceeds the cash price. The NCC regards this type of contract to be a sale of goods and property “in the goods passes under the contract to whom the goods are hired on delivery of the goods or the making of the contract, whichever occurs last” (S9 NCC);
  • executory contracts for the sale of land by instalments, known as "vendor terms contracts" or "terms contracts" (S10 NCC); and
  • certain contracts for the sale of goods by instalments (SS11-12 NCC).

These types of contracts have commonly been used to provide high-cost credit to low-income and disadvantaged consumers on onerous terms and have previously avoided regulation under consumer credit protection laws. The important characteristic is whether the charge for providing the credit is an amount that exceeds the cash price for the goods.

In South Australia, there are laws to protect purchasers of land by instalments. S6 of the Land and Business (Sale and Conveyancing) Act abolishes instalment purchase or rental purchases of land and entitles a purchaser to recover monies paid under such a contract from any court of competent jurisdiction.

What credit contracts are excluded from the NCC?

Section 6 of the NCC exempts from regulation certain categories of contracts that would otherwise be covered under section 5.

Short-term credit

Generally, the NCC will not apply to a credit contract that limits the period for which credit will be provided to 62 days or less.

However, the NCC does apply to a loan of less than 62 days if fees and charges exceed 5% of the amount of the loan or if the interest rate exceeds 24% p.a. Additional anti-avoidance provisions have been included in the NCC that ensure the definition of fees and charges for the purposes of this exemption will cover:

a. a fee or charge payable by the debtor to any person for an introduction to the credit provider;

b. a fee or charge payable by the debtor to any person for any service if the person has been introduced to the debtor by the credit provider; and

c. a fee or charge payable by the debtor to the credit provider for any service related to the provision of credit, other than a service mentioned in paragraph (b).

These provisions have been drafted in an attempt to ensure that short-term high-cost lenders such as pay-day lenders are unable to avail themselves of the exemption. Because the interest rate is low, very few payday lenders are likely to fall into the category set out in the S6 (1) exception.

From March 2013, the NCCPA and NCC were amended to enhance consumer protection in relation to pay-day lending. Some new definitions of small amount loans have been introduced. For more information see section on Short Term and Small Amount Credit Contracts, below.

Credit without prior arrangement

The NCC will not apply to credit that is provided without prior agreement between the credit provider and the debtor (s 6(4)). An example is where a cheque account becomes overdrawn but there is no agreed overdraft facility, or when a savings account falls into debit.

Credit contracts where only an account charge is payable

Continuing credit contracts are excluded from the NCC if the only charge that is made with respect to the provision of credit under that contract is a periodic or other fixed charge that does not vary according to the amount of credit provided and the charge is $200 or less for the first 12 months and $125 or less for each 12-month period after that (r.51 NCCP Regulations).

Joint credit and debit facilities

A number of products offered by banks and other financial institutions now allow a consumer to use the account as both a savings and a credit facility. Under such a facility, a consumer who has funds to his or her credit in the account will receive interest on that amount, while the facility also allows the consumer to run the balance below zero to an agreed credit limit, upon which the consumer will pay interest. Section 6(6) of the NCC provides that these products will be regulated, but only in respect of the aspect of the arrangement that represents the credit facility.

Therefore, a consumer could not use the NCC to challenge the validity of a new fee which was imposed only when the consumer had funds in the account. On the other hand, a consumer could challenge a fee, such as a monthly account charge, which applied to the account irrespective of whether the account was in credit or debit.

Bills of exchange and promissory notes

Section 6(7) ensures that bills of exchange and promissory notes are regulated under the NCC, except for where such bill facilities are provided by an authorised deposit-taking institution, or where otherwise exempted under the NCCP Regulations.

Insurance premiums payable by instalments

Many insurers now allow annual insurance premiums to be paid by monthly instalments. Often the combined amount of the monthly premiums exceeds the annual premium by an amount equivalent to a finance company interest rate, e.g. 20%. However, these agreements are not regulated by the NCC.

Pawnbrokers

The NCC does not apply to credit provided by a pawnbroker in the ordinary course of a pawnbroker's business as long as:

  • the pawnbroker is lawfully conducting business; and
  • if the debtor is in default, the pawnbroker's only recourse is against the goods provided as security.

However, pawnbroking transactions may be re-opened as unjust under sections 76 to 81 of the NCC. See also: "Pawnbrokers", below.

Trustees of estates

The NCC will not apply where credit is provided by a trustee of the estate of a deceased person to a beneficiary or prospective beneficiary of the deceased's estate. However, such arrangements are subject to the unjust transactions provisions of sections 76 to 81 of the NCC.

Employee loans

A partial exemption from the NCC applies where credit is provided by an employer, or a related corporation of an employer, to an employee or former employee if:

  • credit is provided on the condition that the debtor is either an employee or a former employee of either the employer or the related corporation; or
  • where the employer or related corporation provides the credit in the course of a business of providing credit, the credit is provided on more favourable terms to the debtor than the credit provider would grant to other debtors who were not employees or former employees.

Nevertheless, Part 1, Part 4, Division 3 of Part 5, Division 4 and 5 of Part 7 and Parts 12, 13 and 14 of the NCC do apply to employee loans.

Margin loans

The NCC does not apply to margin loans within the meaning of section 761EA(1) of the Corporations Act 2001 (Cth). Margin loans are regulated as a financial product under Chapter 7 of that Act.

Exclusions in the Regulations

Regulations 51 to 63 of the NCCP Regulations provide for a number of further exemptions relating to various government schemes, the provision of credit by particular credit providers and other limited circumstances. Most notable of these provisions is the exclusion from regulation in certain circumstances of credit under $50 (r.52).

Short Term and Small Amount Credit Contracts

From March 2013, the NCCPA and NCC offers borrowers additional protections in relation to short-term lending and small amount credit contracts (also known as pay-day lending). The definitions set out below are new.

Section 5 (1) of the NCCPA defines a “short term credit contract” (STCC) as follows:

  • The credit is part of a continuing credit contract
  • The credit provider is not an ADI (Authorised Deposit-taking Institution)
  • The limit of the contract is $2000 (or other amount set under the regulations)
  • The term of the contract is 15 days or less.

Credit providers who hold an Australian Credit Licence (with the exception of an ADI) are prohibited from offering STCCs. An Authorised Deposit-taking Institution is a Bank, a Building Society or a Credit Union.

Section 5 (1) also defines a “small amount credit contract” (SACC) as follows:

  • The credit is not continuing
  • The credit provider is not an ADI
  • The limit of the contract is $2000 (or other amount set under the regulations)
  • The term of the contract is between 16 days and 1 year.
  • The loan is not or will not be secured

From March 2013, providers of small amount credit contracts will have additional obligations in relation to responsible lending and disclosure which are described in more detail below. These additional obligations are intended to further protect borrowers who are most vulnerable in terms of their lack of ability to repay debts.

Reverse Mortgages

A reverse mortgage is a specific type of mortgage regulated under the National Consumer Credit Protection Act 2009 (Cth) and the National Credit Code (NCC).

The borrower’s total liability under the credit contract or mortgage may exceed the maximum amount of credit that may be provided under the contract, with no requirement to reduce the amount owing (S13A NCC). There may be other conditions prescribed by regulation.

In other words, a reverse mortgage allows a borrower to access the equity on his or her own property (secured by a mortgage), without being required to make any repayments on the debt whilst still living in the home.

Depending on the terms of the credit contract, the debt usually becomes repayable (with interest) once the property is sold, either because the borrower dies or moves into other accommodation.

Even though no repayments are required during the life of the reverse mortgage, lenders are required to comply with the responsible lending regime set out in Chapter 3 of the NCCPA. This includes an assessment as to whether or not the reverse mortgage suits the needs and objectives of the borrower.

In addition, prior to undertaking any assessment as to whether or not the loan is unsuitable, the lender must give the borrower certain information, as follows:

  • A projection of the potential effect a reverse mortgage will have on the equity in the borrower’s home (S133DB NCCPA); and
  • Provide the borrower with a copy of a 'reverse mortgage information statement' which includes information about the loan, how interest is calculated, and questions a borrower should consider before entering into the loan (S133DC NCCPA).

Borrowers are also protected against negative equity, which means that the amount repayable to the lender will never exceed the market value of the property (at the time the property is sold) SS86A – 86F NCC.

The interests of a non-title holding resident may be protected in the credit contract. This means that a person who is not an owner of the property can, if nominated by the borrower, remain in the property once the borrower leaves. If the credit contract does not have this provision, the credit provider must give the borrower a notice to that effect prior to entry into the contract - S18B NCC.

The NCC does not require a person to seek independent legal advice before entry into a reverse mortgage. However, the Regulations may require it, and it is highly recommended given the complexity of reverse mortgages. Members of the Senior Australian Equity Release Association (SEQUAL) subscribe to a Code of Conduct that requires lenders to ensure that prospective borrowers to obtain legal advice first. In addition, borrowers also need to check with the Financial Information Service of the Department of Human Services to see how entering into a reverse mortgage might affect benefits received from Centrelink.

More information can be found on ASIC’s Moneysmart website.

Responsible Lending and Other Obligations of Licensed Credit Providers

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.

Formalities before entering a contract

The NCC has added to the disclosure obligations originally imposed under the UCCC.

Credit Guide

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.

Pre-Contractual Statement

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].

Information Statement

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;

f. repayments;

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;

m. commission;

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).

Prohibited mortgages

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.

ALL-PROPERTY MORTGAGES

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 MORTGAGES

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.

THIRD-PARTY MORTGAGES

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)].

BLACKMAIL SECURITIES

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).

Changing a credit contract, mortgage or guarantee

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.
Australian Credit Licence

Licensed activity

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.

"Credit assistance"

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.

Responsible Lending Obligations

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.

Small Amount Credit Contracts and Responsible Lending

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.

Mandatory Warnings

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].

What if the disclosure requirements of the NCC have not been met?

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
  • ASIC.

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.

Consumer leases

Consumer leases are regulated by the provisions of Part 11 of the NCC. Enhancements to the NCCPA were introduced in March 2013, including changes to the NCC which make a consumer lease more like a loan, notwithstanding that a consumer lease does not result in the consumer actually owning the goods at the end of the agreement. Under a consumer lease the person who owns the goods and gives the consumer the lease may be called the lessor; and the consumer who hires the goods may be called the lessee. We will use the terms lessor and lessee in this section.

What is a Consumer Lease?

A contract for the hire of goods by a person for a specified time at a specified rental is treated by the NCC as a "consumer lease". However, the NCC does not apply to leases for a fixed period of four months or less, or those for an indefinite period [s 171(1)].

Check the terms of any consumer lease agreement carefully, because although the agreement may say it is for an indefinite period, consumer lessees may be asked to nominate a fixed period, which potentially means that an unregulated lease could indeed be regulated. Companies who act as lessors who use these types of terms may be in breach of the NCCPA, for providing credit to a consumer without a licence.

Consumers may be attracted to hire common consumer goods such as computers, household white goods, televisions or sound systems on a consumer lease. Be careful because although monthly payments may seem low, a consumer may find that they pay many times the original purchase price of the goods at the end of the contract. In addition, the terms of a consumer lease may also make the consumer responsible if the goods are lost or stolen whilst being hired. It may be difficult to obtain insurance cover for hired goods, because standard household insurance policies generally exclude items that are not owned by the consumer.

Section 172 of the NCC, which deals with presumptions and declarations as to the purpose for which a consumer lease is entered into, has been updated from the old Credit Code in line with the modifications applied to the equivalent provisions of the NCC in respect of credit contracts.

Under section 174, a consumer lease must be in writing and disclose, at a minimum, the following:

  • a description of the goods;
  • amounts payable by the lessee prior to delivery;
  • stamp duty and other government charges payable by the lessee;
  • any charges additional to rental;
  • the amounts and timing of rental payments;
  • the number of rental payments and the total amount payable;
  • the circumstances in which the lessee may terminate the lease; and
  • the liabilities of the lessee on termination of the lease.

The lessee must get a copy of the lease within 14 days with an explanatory statement in the statutory form (Form 17 NCCPA Regulations) which sets out a consumer’s rights relation to the lease [s 175].

From March 2013, lessors are also required to give lessees periodic statements of account (not more than 12 months apart) which must include prescribed information as provided in r 105A:

  • The lessee will not own the goods at the end of the lease; and
  • The lessee does not have a right or obligation to purchase the goods at the end of the lease.

Regulation 105C provides that, at least 90 days before the end of the consumer lease, a lessee must be given a notice including the following information:

  • The end date of the lease, and that the goods must be returned;
  • Collection arrangements;
  • Monthly liability if the goods are not returned; and
  • Whether or not the lessor is prepared negotiate the sale of the goods and an estimate of the price.

Finally, s 177F now extends to lessees under a consumer lease the right to apply to a Court to re-open transactions on the grounds of injustice. The wording of ss 177F – 177K is largely similar to s 76 NCC, including the matters which the Court will take into account when looking at whether a lease contract is unjust.

Renting consumer goods is an expensive option, and lessees often end up paying well in excess of the original price after the entire contract is paid out. Other alternatives exist to assist with the purchase of consumer goods, including the No Interest Loans Scheme, and Centrelink advances. Visit the Money Smart website www.moneysmart.gov.au for more information about other options.

Responsible Lending Obligations and Consumer Leases

Under Part 3-4 of NCCPA (in particular, ss 151 - 155), a lessor under a consumer lease is required to comply with provisions that are largely equivalent to the responsible lending provisions imposed upon credit providers (see: "Responsible lending obligations", above). This includes carrying out an assessment (which must be provided to a lessee upon request) as to the unsuitability of the lease, including taking into account the lessee’s objectives.

The lessee has the same rights as a borrower to obtain a copy of the written assessment on request pursuant to s 132 NCCPA,.

Variation or Enforcement of a Consumer Lease

The rules that apply to variation, reopening and enforcement of credit contracts apply, in general, to consumer leases. Under section 178, a lessee must be given 30 days notice of repossession except:

  • at the end of the term of the lease;
  • if the lessor believes on reasonable grounds that the lessee has or will dispose of the goods in breach of the lease;
  • where the lessor cannot find the lessee after making reasonable efforts;
  • if the lessee is insolvent; or
  • if the court allows the lessor to do otherwise.

Many of the new provisions that commenced in March 2013 bring the rights of consumers who lease goods into line with the rights of borrowers under a credit contract.

Section 179A provides that a consumer is entitled to a written statement of the amount required to terminate a consumer lease, as well as certain other information, as long as the request by the consumer is in writing.

Warning: Some traders, car dealers, finance brokers and lenders sign people up for consumer leases when in fact the consumer intended to enter into a loan contract. It is crucial that consumers check a finance contract before signing to see if the goods will be owned at the end of the agreement. If a lease is entered into in such circumstances advice should be obtained about having the transaction reopened as unjust.

Novated Leases

A Novated Lease is not covered by the NCC, by virtue of s 171 (2), which provides that it does not apply to goods hired by an employee in connection with their remuneration or other employee benefits.

A Novated lease is one under which an employee will lease (or more accurately, "hire purchase") a car from a seller, but the employer will be responsible for the lease repayments. The employer then deducts the repayments from the employee’s pre-tax income. Usually, a novated lease comes to an end when an employee ceases to work for the particular employer, in which case the employee is then liable for the lease payments. The lease may be assigned to another employer to tak over, but if the employee cannot find work, the car may have to be surrendered to the seller.

The lease may also come to an end when all payments are made, and the ownership of the vehicle then passes to the employee.

Problems with Credit Contracts

Problems may arise with credit contracts for any reason. There are a number of things that a borrower can do to when there is difficulty meeting repayments, or if the terms of the contract seem unfair or unjust. It is important to act quickly as delays can result in added unnecessary costs.

If a loan is secured meaning that the credit provider has an interest in property which entitles it to sell the property to recover the debt, the credit provider can take steps to repossess the property, as long the right process is followed.

If the loan is unsecured the credit provider may have to take legal action to enforce the debt.

One of the features of the NCC is the ability for a borrower to ask for a Hardship Variation of a loan as set out in s 72 NCC (discussed in more detail below). This is quite commonly used, and borrowers should seek help from a financial counsellor if unsure about what to do.

Other problems which may affect credit contracts include:

  • Unjust transactions - s 76 NCC
  • Unconscionable conduct
  • Breaches of responsible lending obligations

These are also discussed in more detail below.

Enforcement of a Credit Contract

Under section 88 of the NCC, the credit provider cannot issue legal proceedings or repossess or take any other enforcement action unless and until:

  • the debtor has defaulted (i.e. is behind in payments);
  • the credit provider has given or posted a notice to the last known address of both the debtor and any guarantor (it is important for this reason to keep the credit provider informed in writing of any change of address); and
  • the account remains in default after the expiration of the notice period (at least 30 days).

The notice must specify:

  1. the default;
  2. the action necessary to remedy the default;
  3. a period for remedying the default;
  4. the date after which enforcement proceedings in relation to the default, and, if relevant, repossession of mortgaged property may begin if the default has not been remedied;
  5. that repossession and sale of mortgaged property may not extinguish the debtor's liability;
  6. the information prescribed by the regulations about the debtor's right to:
  • make an application to the credit provider under section 72; or
  • negotiate with the credit provider under section 94; or
  • make an application to the court under sections 74 and 96;
  1. the information prescribed by the regulations about:
  • the approved external dispute resolution scheme of which the credit provider is a member; or
  • the debtor's rights under that scheme;
  1. that a subsequent default of the same kind that occurs during the period specified for remedying the original default may be the subject of enforcement proceedings without further notice if it is not remedied within the period;
  2. that, under the Privacy Act 1988 (Cth), the debt may be included in a credit reporting agency's credit information file about the debtor if:
  • the debt remains overdue for 60 days or more; and
  • the credit provider has taken steps to recover all or part of the debt; and
  1. any other information prescribed by the regulations.

These pre-conditions do not apply if the credit provider proves that there are reasonable grounds for believing:

  • it was induced to enter the contract or mortgage by fraud by the debtor;
  • the goods mortgaged have been or will be concealed, damaged or disposed of;
  • it cannot find the debtor despite reasonable efforts; or
  • a court allows the credit provider to repossess.

In South Australia, a notice is also required under s 55A of the Law of Property Act 1936 (SA) to commence any enforcement proceedings in relation to real property that is subject to a registered mortgage, and where the mortgagor is a natural person and the land is appropriated for domestic or agricultural use. It is the usual practice of lenders to combine the two notices into one to avoid duplication. A mortgagee in possession must certify that the requirements of S55A have been complied with prior to registering the transfer of real property.

Direct debit default notice

Section 87 of the NCC requires a credit provider to issue the debtor with a special notice within 14 days of the first occasion of default under a direct debit payment system using Form 11A. The notice does not replace or modify any other preconditions for enforcement action under the NCC.

Such a notice may alert a consumer to any deficiency in information provided to the credit provider about direct debit arrangements.

Unjust contracts - changes and charges

Sections 76 and 77 contain the NCC's version of statutory unconscionable conduct. These sections allow a court to grant relief to debtorfrom the consequences of entering into "unjust transactions". The provisions set out a two-step test.

STEP 1

Was the contract, mortgage or guarantee unjust at the time it was entered into or changed?

A definition of the term "unjust" is provided in section 76(8) of the NCC, which states that "unjust includes unconscionable, harsh or oppressive". This phrase, derived from the Contracts Review Act 1980 (NSW), has been dubbed the "tautological trinity": see West v AGC (Advances) Ltd(1986) 5 NSWLR 610 at 621 per McHugh JA.

The definition of unjust is wider than that of unconscionable conduct at common lawand includes unconscionability: Maisano v Car and Home Finance Pty Ltd [2005] VCAT 1755 (the Maisano case). The concept also includes both:

  • substantive unconscionability (pertaining to the terms of the document itself); and
  • procedural unconscionability (pertaining to the conduct of the parties at or prior to the time the transaction was entered into: see the Maisano case, above).

Further, the fact that a contract favours one party's rights over another (West v AGC (Advances) Ltd (1986) 5 NSWLR 610; Esanda Finance Corporation Ltd v Murphy(1989) ASC 55-703; Custom Credit Corporation Ltd v Lupi [1992] 1 VR 99; Custom Credit Corporation Ltd v Gray [1992] 1 VR 540), or that a contract fails to comply with the NCC (Custom Credit Corporation Ltd v Gray [1992] 1 VR 540; Morlend Finance Corporation (Vic) Pty Ltd v Westendorp [1993] 2 VR 284; Custom Credit Corporation Ltd v Lynch [1993] 2 VR 469; McKenzie v Smith (1998) ASC 155-025) will not, on their own, amount to unjust conduct.

Under section 76(2), when considering this question a court must have regard to:

  • the public interest; and
  • all the circumstances of the case.

Note the two competing public interests of consumer protection and upholding bargains.

Further, under section 76(2), a court may have regard to the following matters when deciding whether or not a contract is unjust:

a. the consequences of compliance, or non-compliance, with all or any of the provisions of the contract, mortgage or guarantee;

b. the relative bargaining power of the parties;

c. whether or not, at the time the contract, mortgage or guarantee was entered into or changed, its provisions were the subject of negotiation;

d. whether or not it was reasonably practicable for the applicant to negotiate for the alteration of, or to reject, any of the provisions of the contract, mortgage or guarantee or the change;

e. whether or not any of the provisions of the contract, mortgage or guarantee impose conditions that are unreasonably difficult to comply with, or not reasonably necessary for the protection of the legitimate interests of a party to the contract, mortgage or guarantee;

f. whether or not the debtor, mortgagor or guarantor, or a person who represented the debtor, mortgagor or guarantor, was reasonably able to protect the interests of the debtor, mortgagor or guarantor because of his or her age or physical or mental condition;

g. the form of the contract, mortgage or guarantee and the intelligibility of the language in which it is expressed;

h. whether or not, and if so when, independent legal or other expert advice was obtained by the debtor, mortgagor or guarantor;

i. the extent to which the provisions of the contract, mortgage or guarantee or change and their legal and practical effect were accurately explained to the debtor, mortgagor or guarantor and whether or not the debtor, mortgagor or guarantor understood those provisions and their effect;

j. whether the credit provider or any other person exerted or used unfair pressure, undue influence or unfair tactics on the debtor, mortgagor or guarantor and, if so, the nature and extent of that unfair pressure, undue influence or unfair tactics;

k. whether the credit provider took measures to ensure that the debtor, mortgagor or guarantor understood the nature and implications of the transaction and, if so, the adequacy of those measures;

l. whether at the time the contract, mortgage or guarantee was entered into or changed, the credit provider knew, or could have ascertained by reasonable inquiry of the debtor at the time, that the debtor could not pay in accordance with its terms or not without substantial hardship;

m. whether the terms of the transaction or the conduct of the credit provider is justified in the light of the risks undertaken by the credit provider;

n. for any mortgage – any relevant purported provision of the mortgage that is void under section 50;

o. the terms of other comparable transactions involving other credit providers and, if the injustice is alleged to result from excessive interest charges, the annual percentage rate or rates payable in comparable cases; or

p. any other relevant factor.

Just because a transaction exhibitone of the above factors does not render that transaction unjust. See: Esanda Finance Corporation Ltd v Murphy (1989) ASC 55-703; Custom Credit Corporation Ltd v Lupi [1992] 1 VR 99; Australian Guarantee Corporation Ltd v McClelland (1993) ASC 56-230; Morlend Finance Corporation (Vic) Pty Ltd v Westendorp [1993] 2 VR 284.

STEP 2

If the transaction is reopened as unjust, what remedy should a court grant the debtor?

Under section 77 of the NCC, a court has a discretionary power to make any one or more of the following orders upon reopening a transaction under section 76:

a. reopen an account already taken between the parties;

b. relieve the debtor and any guarantor from payment of any amount in excess of such amount as the court, having regard to the risk involved and all other circumstances, considers to be reasonably payable;

c. set aside either wholly or in part or revise or alter an agreement made or mortgage given in connection with the transaction;

d. order that the mortgagee takes such steps as are necessary to discharge the mortgage;

e. give judgment for or make an order in favour of a party of such amount as, having regard to the relief (if any) which the court thinks fit to grant, is justly due to that party under the contract, mortgage or guarantee;

f. give judgment or make an order against a person for delivery of goods to which the contract, mortgage or guarantee relates and which are in the possession of that person; or

g. make ancillary or consequential orders.

An application under section 76 must be made within two years of the relevant credit contract being rescinded, discharged or otherwise brought to an end.

The decision of the Supreme Court of NSW in Permanent Mortgages Pty Ltd v Cook [2006] NSWSC 1104, in which a credit contract was set aside against a debtor on the basis that it was unjust, is a good example of the operation of the unjust transaction provisions of the old Credit Code.

UNCONSCIONABLE CHANGES AND CHARGES

Under section 78 of the NCC, a court can also annulor reduce any change in the annual percentage rate, any establishment fee or charge or fee payable on early termination of a contract. This can occur if the change or charge is unconscionable. A change is unconscionable if:

  • the change occurs in an unreasonable manner, having regard to the advertised rate and the period of time since the contract was entered into; or
  • the change discriminates against the debtor compared to other similar debtors.

A court has to decide if a charge is unconscionable taking into account the credit provider's reasonable costs.

Repossession of Mortgaged Goods

Please note this section applies to goods only. The procedure most commonly applies to the enforcement of car loans. Information about the repossession of real property that is subject to a mortgage (for example, a home loan) can be found in the Mortgage Stress Handbook, published by Legal Aid NSW and the Consumer Credit Legal Centre NSW.

When can the credit provider repossess?

The credit provider may be entitled to repossess mortgaged (secured) goods if the period specified in the default notice has expired and the default has not been remedied. The following procedure only applies if the borrower agreed at the time of entering into the loan that the goods would be secured. If a borrower is unsure, legal advice should be sought urgently.

Restrictions on the right to repossess

In most cases, the amount owing must be more than 25% of the amount of credit provided under the contract, or $10 000 (whichever is the lesser), unless a court otherwise consents s 91 NCC.

The credit provider or its agent cannot enter onto residential premises to repossess mortgaged goods unless a court has authorised entry, or the occupier of the premises has consented in writing, after being informed in writing of the provisions of this section s 99 NCC. (Note: the NCCP Regulations set out the form of the written consent (Form 13) and permitted hours of contact).

The credit provider can seek an order from a court to enter onto residential premises and take possession of mortgaged goods [s 100], or an order that the goods be delivered to the credit provider at a specified time and place s 101 NCC.

What can the debtor do to avoid repossession?

To avoid repossession of goods that are subject to security for a debt, a debtor can:

  • bring the account up to date;
  • seek the credit provider's permission to sell the goods privately (this may allow for the goods to be sold at a better price than would be obtained at auction;
  • seek a postponement of enforcement proceedings (see above) under s 94 NCC;
  • seek a hardship variation (see above) under s 72 NCC; or
  • pay out the net balance due under the contract.

What happens after repossession?

Within 14 days after repossession of the goods the credit provider must give to the debtor, or post to the debtor's last known address, a written notice setting out the estimated value of the goods, the enforcement expenses that have and will accrue, and a statement of rights and obligations as required under the NCCP Regulations (Form 14). The credit provider cannot sell the goods until 21 days after this notice has been given.

Section 103 allows the debtor to nominate in writing a purchaser for the goods within the 21 day period of the Form 14 notice. The purchaser must offer at least the estimated value of the goods. During this period the debtor may also explore other options, including seeking a hardship variation.

Sale of repossessed goods

Goods must be sold:

  • as soon as is reasonable and practicable in the circumstances; and
  • so as to receive the best price reasonably obtainable.

It is possible for goods to be sold at a fraction of their real value and for the credit provider to sue the debtor for money still owing after the sale. The debtor can apply to a court for a determination as to whether the power of sale has been properly exercised and the onus falls on the credit provider to prove that it has in fact followed the procedure. If it has not, the debtor can be awarded compensation but it is important to seek legal advice as soon as possible if the credit provider demands money after repossessed goods have been sold.

If the price received for the goods is less than the balance due to the credit provider, the debtor can be sued for the difference as an unsecured debt. It has been held, however, that sale by public auction will in most cases constitute a sufficient attempt by the credit provider to receive the best price reasonably obtainable.

Mortgagor's remedies

Division 6 of Part 5 of the NCC allows a debtor to apply to a court for orders that the credit provider return repossessed goods, even where the secured credit contract remains in default. However, neither the legislation nor the explanatory memorandum states what factors a court would consider in making such an order.

Insurance

What insurance must be taken out?

Consumers do not have to take any insurance unless they have given a mortgage. If they have given a mortgage, the credit provider can require them to insure the mortgaged property.

If the credit provider or supplier has led the consumer to believe that he or she must take some other type of insurance, an offence has been committed and the offender can be required to refund the consumer the premium (price of the insurance). The consumer may also apply to a court to have the credit contractreopened as unjust and be relieved from paying the premium and some or all of the credit charges.

The consumer cannot be required to insure with a particular insurer.

The Insurance Contracts Act 1984 (Cth) and the Corporations Act 2001 (Cth) provide further protection and remedies for consumers who have taken out policies of insurance. In particular, part 7.6 of the Corporations Act requires insurers that have retail customer bases to be registered as financial services licensees, and includes provisions that render an insurer liable for the conduct of its agent, if the insured relied on that conduct in good faith. Intermediaries who arrange insurance may often be agents of the insurer, not the insured, but a broker is usually the agent of the insured.

Note: Information given here on insurance does not include information concerning the above Acts, and readers who are seeking remedies under a contract of insurance should seek legal advice.

For a general coverage of the law of insurance, see INSURANCE AND SUPERANNUATION.

What will it cost the consumer?

It is usually cheaper to find your own insurer. If the consumer lets the supplier or credit provider arrange the insurance, the consumer may be paying extra because the supplier or credit provider may receive a commission from the insurer. If this is the case, it will be stated in the credit contract, perhaps in the "fine print".

Credit Ratings

Privacy and Credit Reporting

Part IIIA of the Privacy Act 1988 (Cth) and the Credit Reporting Code of Conduct regulate the conduct of credit providers and credit reporting bodies and the ways in which a consumer’s credit history may be recorded, accessed by third parties, and corrected if inaccurate. There is also some protection in Part 4 of the Fair Trading Act 1987 (SA) .

The main credit reporting bodies in Australia are Equifax, Experian Credit Report and Dun & Bradstreet. Credit reporting bodies collate data about individuals including personal and financial information which is then made available to lenders and other businesses to assess a person’s creditworthiness. A person can be refused credit on the basis of the content of their credit report.

Credit reports should not be confused with a credit score, which is a number allocated by a credit reporting body based on that organisation’s criteria.

Credit providers

Under the Act, a credit provider is a bank, or another organisation that provides credit as a substantial part of their normal course of business (for example a credit union).

A business that supplies goods or services, or is in the business of leasing goods, and provides credit for a period of at least seven days is also considered to be a credit provider under the Act.

An important protection for consumers is that in order for a credit provider to record a payment default, the credit provider must be a member of an approved external dispute resolution scheme.

The types of credit providers that are members of external dispute resolution schemes include banks and credit unions and utilities providers. Any other type of credit provider cannot record a payment default (even if they fit within the legislative definition of credit provider).

For the list of approved external dispute resolution schemes see the Office of the Information Commissioner's website.

Recording a payment default

Before recording a consumer credit payment default, the credit provider must follow the procedure set out in Part IIIA of the Privacy Act 1988 (Cth) and the Credit Reporting Code of Conduct.

The credit provider must issue two separate written notices sent to the debtor’s last known address.

The first notice is issued under s 6Q Privacy Act 1988 (Cth), informing the debtor of the overdue payment and requesting payment. The credit provider can only issue a notice if the debt is:

  • at least 60 days overdue; and
  • not statute-barred (the credit provider is not prevented from recovering the debt under any limitations of actions legislation)

The second notice is issued under s 21D(3)(d) of the Act. The credit provider must wait at least 30 days before sending the second notice to the debtor. After a further 14 days, the credit provider can provide the information to the credit reporting body.

A credit provider is not permitted to issue any notices against a debtor or provide information about a payment default if the debtor:

  • has asked for a hardship variation
  • is negotiating a payment arrangement
  • disputes the debt and the dispute is being considered by the creditor or an external dispute resolution scheme.

Debts under $150 cannot be recorded as a payment default.

If the provision of credit relates to a business, there are few protections for debtors and the credit provider does not need to be a member of an external dispute resolution scheme.

Accessing and changing information on credit report

Information listed on a credit information file

The type of information that is listed on a credit report is limited to:

  • Personal details including a persons full name, date of birth, drivers licence number and employment information;
  • Names of credit providers who have provided credit, and details about that credit
  • Listing of any loan applications and enquiries by credit providers regarding the provision of credit
  • Defaults in consumer credit payments of $150 or more, overdue by 60 days or more. The report will also show if the debt is paid, or any arrangements made in relation to the debt
  • Any court judgments that remain unsatisfied
  • Other publicly available information that relates to creditworthiness
  • Any information that is recorded on the National Personal Insolvency Index
  • The opinion of a credit provider that there has been a serious credit infringement
  • Repayment history information – which is information about the timely payment of loan repayments

Information about defaults in consumer credit payments, court judgments and loan applications remain on a credit report for 5 years. Information about serious credit infringements remains for 7 years.

If a judgment debt is paid, and the proceedings are discontinued as required by the court rules, the judgment is set aside and the credit report updated.

Bankruptcy information remains for 5 years from the date a person is made bankrupt, or if the person's bankruptcy discharge is delayed, 2 years from the date of discharge whichever is the later date. Bankruptcy information is also recorded on the National Personal Insolvency Index, and remains there for life.

Commercial credit information is also included on a credit report if applicable. This information refers to business related credit, including applications for credit and payment defaults. There are fewer protections for business related credit compared to consumer credit, including limited notice requirements.

Accessing a credit report

Consumers are entitled to a free copy of their credit report to check their credit history and the accuracy of the information contained on the report.

The credit reporting body must provide the report to the consumer within 10 days of the request without charge unless the consumer requires the report urgently, in which case a charge may be made for the information. Be very careful of organisations that offer credit scores for free because consumers may unwittingly agree to unwanted marketing for loans or credit.

Consumers applying for credit are asked to provide an authority for the proposed credit provider to access the credit report. Any updated information, such as an address, may be notified to other creditors.

A consumer is also entitled to have entries on a credit report amended, so check the report for accuracy. Be careful of companies that offer to correct inaccurate information on a credit report (also known as 'credit washing' or 'credit repair') for a fee, because this can easily be done by the consumer without cost if the information is incorrect. View the fact sheets on the Office of the Information Commissioner's website.

Ensuring information on a credit report is accurate

Credit reporting bodies must ensure that all of the information held about a consumer is accurate, up-to-date, complete, relevant and not misleading.

A consumer can ask for information held by a credit reporting body to be corrected because mistakes occur. Correct the information by either asking the credit reporting body to correct it, or asking the credit provider to correct it (if it relates to the accuracy of default information). If the credit reporting body is satisfied that the information is incorrect, it must be updated.

If incorrect, the information must be updated within 30 days. A consumer cannot be charged by either the credit reporting body or the credit provider for correcting the information.

If payment of the debt is made by the consumer, it will show as paid but will not be removed from the report. Unless the credit provider agrees to remove it earlier, the information will remain on the report for 5 years even if it is paid in full.

If there is a dispute about the accuracy of any information held on a credit report, a consumer has the right to take the dispute to an external dispute resolution scheme, at no cost to the consumer. The credit reporting body or credit provider should provide information about its membership of the participating external dispute resolution schemes.

For more information about the approved schemes see the Office of the Information Commissioner's website.

Guarantees

The following introduction applies to all guarantees, whether or not they are regulated by the NCC. The provisions of the Code of Banking Practice regarding guarantees may also apply to protect guarantors who are not covered by the NCC. The Code of Banking Practice requires credit providers who have subscribed to the Code to give a proposed guarantor Notice that legal and financial advice is sought before entering into the guarantee, to give a person the opportunity to understand the nature and implications of the guarantee.

What is a guarantee?

Guarantees are binding agreements that involve three parties:

1. the credit provider (lender);

2. the debtor (borrower); and

3. the guarantor.

Guarantees are sometimes required by credit providers before they agree to lend money if they suspect the debtor may not be able to make all repayments. A "guarantor" promises the credit provider to pay the loan if the debtor refuses or is unable to do so. Agreeing to become a guarantor may cause financial hardship. It involves more than helping out a friend or relative who needs money or wants to buy goods on credit, because if the debtor stops making repayments the guarantor will have to pay.

Think very carefully before you agree to guarantee anyone's debts, even the debts of family members. If the credit provider won't take the risk, can you afford to?

Rights of a guarantor

A guarantee involves a promise by the guarantor that the debt owing to the credit provider will be paid if the debtor is unable to do so. Unless the guarantee document is a deed, meaning that the document contains the words "signed, sealed and delivered", the guarantee must be given before or at the time the creditor lends to the debtor. So if the debtor has already borrowed money, it may be that the guarantee was not given in exchange for the loan. This would make the guarantee unenforceable.

Also, if the credit provider used any force, fraud, illegality, duress, undue influence or allowed the guarantor to be mistaken as to rights and liabilities under the guarantee, the guarantee may be avoided.

A guarantee may also be avoided if the credit provider countenanced any fraud, illegality, duress, undue influence or mistake being used by the debtor against a potential guarantor.

What if the guarantor pays?

The guarantor is entitled to recover any money paid from the debtor, if that is possible. Also, the guarantor is entitled to any securities held by the creditor.

Other ways a person can escape liability under the guarantee

A guarantor may be freed from their obligations if:

  • the guarantee is altered by the creditor, e.g. the name of one co-guarantor is struck out;
  • the creditor changes;
  • the guarantor is called on to pay but the creditor cannot hand over securities it has taken;
  • the creditor fails to protect the guarantor, e.g. fails to insure when there is an obligation to do so; or
  • the creditor alters the guaranteed contract, e.g. by giving the borrower more time to pay than the original contract provides for, so long as this alteration is by a binding contract.

However, the terms of the guarantee may be framed so as to make the guarantor still liable even if one of the matters listed above has occurred.

THE NCC AND GUARANTEES

Formalities of guarantees

The NCC provides a number of additional requirements where a guarantee is entered into in relation to a credit contractregulated by the Code. A guarantee must be in writing and signed by the guarantor, although it is sufficient compliance if a guarantee is contained within a mortgagesigned by the guarantor (s.55). The guarantee will not be enforceable unless these requirements are complied with.

A copy of the credit contract must be given to the guarantor before the obligations under the credit contract are secured by the guarantee (s.56(1)(a)). A failure to do so renders the guarantee unenforceable (s 56(2)).

The credit provider must also give the prospective guarantor a copy of a booklet entitled Things You Should Know About Your Guarantee (s.56(1)(b)).

The credit provider must, within 14 days after the guarantee is signed, give the guarantor a copy of the guarantee and any related credit contract or proposed credit contract (if a copy of the related contract has not previously been given to the guarantor) (s.57).

Can a guarantee be cancelled?

Section 58 of the NCC allows a guarantor to withdraw from a guarantee although the guarantee has been made, where either:

  • the guarantor withdraws from the guarantee before credit is first provided under the credit contract; or
  • the guarantor withdraws from the guarantee even though credit has been provided under the contract if the credit contract as finally entered into differs in some materialrespect from the proposed credit contract or pre-contractual statement given to the guarantor before the guarantee is signed.

All-accounts guarantees

Under section 59 of the NCC, a guarantee may provide that the guarantor guarantees the debtor's obligations under a particular credit contract, and also all obligations arising between that particular debtor and credit provider. These obligations may not only be those obligations existing at the time the guarantee is signed, but can include obligations yet to be created under a future credit contract. The guarantee will only be enforceable in relation to guaranteeing a future credit contract if the credit provider has given the guarantor a copy of the contract document of that future credit contract, and subsequently obtained from the guarantor a written acceptance of the extension of the guarantee.

Increasing the guarantor's liabilities

Under section 61, a guarantor's obligations under a guarantee can be significantly increased in a variety of ways. For instance the credit contract subject to the guarantee may allow the debtor and credit provider to agree to vary the contract by providing further amounts of credit under that contract to the debtor. That increase in liability will have no effect unless:

  • the credit provider gives to the guarantor a written notice setting out the particulars of the change in the terms of the credit contract that will allow an increase in the guarantor's liabilities; and
  • the credit provider subsequently obtains from the guarantor an acceptance of the extension of the guarantee to that increased liability.

Certain exceptions to these requirements are set out under section 61(2).

More information about guarantees can be found on Money Smart - under Loans involving Family and Friends.

    Consumer Credit  :  Last Revised: Wed Apr 17th 2013
    The content of the Law Handbook is made available as a public service for information purposes only and should not be relied upon as a substitute for legal advice. See Disclaimer for details. For free and confidential legal advice in South Australia call 1300 366 424.