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Consumer credit lawChapter 14

Learning objectives At the end of this chapter you should understand: • the background to the development of the National Credit Code • the types of credit contract regulated by the National Credit Code • the types of credit excluded from the operation of the National Credit Code • the key requirements that must be disclosed under a consumer credit contract • how consumer credit contracts may be altered • the rights of the credit provider against a defaulting debtor, mortgagor or guarantor • the civil and criminal remedies available for breaches of the National Credit Code.

Introduction • Credit allows consumers to acquire goods and services, and pay for them at a later time. • Credit providers are numerous. • In July 2008 states and territories agreed to transfer power to regulate credit to the federal government. • National Consumer Credit Protection Act 2009 (Cwlth)passed Schedule 1 of which is the National Credit Code.

What is the National Credit Code? (NCC) • Applicable to credit contracts entered into from 1 July 2010 • Replaced the uniform Consumer Credit Code which had been in place since 1996 • A single national credit framework for consumers • ASIC is the sole regulator of the NCCC with enhanced enforcement powers. • All providers of consumer credit services to be members of an external dispute resolution body.

What is the National Credit Code? (NCC) (cont.) • Provides three essential obligations be met by credit providers: • Credit providers be licensed • Credit providers provide credit responsibly • Credit providers properly disclose a range of pertinent matters including rates and fees to consumers.

Definitions • Creditor: person providing credit • Debtor: person receiving credit • Credit provider: any person who provides credit, where a charge is made for the provision of the credit • Linked credit provider: credit provider who has an arrangement with a supplier of goods and services whereby: • prospective purchasers who require credit to finance their purchases are regularly referred to the credit provider by the supplier • the supplier supplies the credit provider’s credit application forms to purchasers • a purchaser can sign contracts or credit applications at the premises of the supplier.

Transactions to which the NCC applies • Where a charge is or may be made for the provision of the credit and the credit provider provides the credit in the course of a business • the debtor 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 • to purchase, renovate or improve residential property for investment purposes • to refinance credit that has been provided for such purposes.

Types of credit covered by the NCC • Continuing credit contracts: • e.g. revolving credit • Loan contracts: • home loans • personal loans • bank term loans, etc • Consumer leases: • e.g. hire of goods by a natural person (or strata corporation), where the lessee does not have a right or obligation to purchase the goods

Types of credit covered by the NCC (cont.) • Credit sales contracts: • Credit is provided to a buyer in the course of a sale of goods or services. • Mortgages and guarantees: • Related transactions providing security for the debt • Hire purchase agreements: • Sale of goods by instalments, where there is a right or obligation to purchase the goods, with the cash price being less than the ultimate combined amounts paid for the goods • Credit-related insurance contracts: • If credit provider requires customer to take out insurance

Transactions excluded from the NCC • Short term credit, less than 62 days (with some exceptions) • Provision of credit without prior agreement • Continuing credit where an account charge is paid instead of interest • Transactions with a pawnbroker • Transactions involving trustees and estates • Consumer lease for less than four months • Employee loans

Credit activities and the Australian credit licence • Generally, all people engaging in credit activities are now required to hold an Australian credit licence. • A person is engaged in a credit activity if the person: • is a credit provider under a regulated credit contract • carries on a business of providing regulated credit or regulated consumer leases • provides credit assistance • is a lessor under a regulated consumer lease • is a mortgagee under a regulated mortgage or is a beneficiary of a regulated guarantee.

Obligations of licence holders • To act efficiently, honestly and fairly in carrying out credit activities • Ensure representatives are competent and adequately trained • Have an internal dispute resolution procedure that complies with ASIC’s standards • Be a member of an approved external dispute resolution scheme such as the Financial Ombudsman Service • To fulfil responsible lending obligations

NCC—responsible lending obligations • A credit provider must: • give a consumer a credit guide and disclosure document that sets out the costs and the commission of the credit provider • give a quotebefore providing credit assistance • make an assessment to ensure that credit is suitable for the borrower and that the borrower has the capacity to repay the proposed debt • not recommend unsuitable credit contracts.

Disclosure and the NCC • Credit guide—must be given when it appears credit contract will be entered into by consumer • Must be in writing and specify the credit provider’s name, contact details and Australian credit licence number • Include details regarding complaints handling and dispute resolution • Disclose the credit provider’s obligations to provide a copy of an assessment of the suitability of any proposed credit contract upon written request • Disclose obligation not to recommend unsuitable credit contracts • Disclose fees and charges the debtor must pay to receive credit assistance

Disclosure and the NCC (cont.) Credit proposal disclosure document • Imposes obligation on person giving credit assistance and must be given at the same time as providing credit assistance • This document must clearly state any commission or fees which will pass to the credit assistant/ representative in relation to the proposed credit contract.

Disclosure requirements by credit provider (before contract signed) • Pre-contractual statement: • Clearly understandable • Must contain ‘key requirements’—all relevant details such as fees and charges, how interest is calculated, etc. • NCC sections 16 & 17 • Information statement: • Form 5—legal rights and obligations in plain English • Written contract: • Signed by debtor and credit provider • Information as set out in s. 17 of the NCC • Debtor must receive a copy of contract within 14 days.

What must be disclosed prior to entry into a guarantee? Not enforceable unless: • in writing • signed by guarantor • contains warning to guarantor • guarantor advised to seek legal advice • warned of consequences should debtor fail to pay • guarantor has received copy of the credit contract.

Disclosure requirements (after contract signed) • Regular statement of accounts • Continuing credit card contracts—at least every 40 days • Continuing credit contracts—between 40 days to 3 months • Other credit contracts—at least every 6 months • Changes to the contract • Credit provider has unilateral rights—notified in writing • Credit provider and debtor mutually agree—notified in writing • Contract causes hardship or is unjust

Alteration on the grounds of hardship—NCC Sections 72–75 • A debtor can apply to the credit provider for a variation of a contract on the grounds of ‘hardship’. • Hardship includes illness, unemployment or ‘other reasonable’ cause. • Variation must assist debtor in being able to meet their future payment obligations. • Amount borrowed must be under $500 000.

Alteration on grounds that credit contract is unjust—NCC Section 76 • Debtor, mortgagor or guarantor may apply to the court for an order that the relevant transaction is unjust—no monetary limit involved. • A consumer credit contract will be unjust if it is found to be unconscionable, harsh or oppressive. • The court considers many factors—legibility of the terms, undue influence or pressure, debtor’s personal circumstances, independent advice, etc. • Remedies which may be granted by the court include discharge or variation of the consumer’s liability to pay, discharge of a mortgage or voiding a contract.

Default by the debtor • Processes must be properly followed by credit provider. • Enforcement proceedings cannot be taken unless default notice has been served on the debtor which provides 30 days for the debtor to address the default . • If mortgaged goods are to be repossessed: • permission to enter residential premises must be given to the credit provider or their agent • once repossessed notice as to amount owed must be given to the debtor and goods must be held for 21 days before sale.

When can a credit provider take action against a defaulting debtor? Credit provider gives default notice Debtor, guarantor, mortgagor 30 days to remedy Pay Not pay Mortgage reinstated Renegotiate Repossession Mortgage reinstated

Linked credit arrangements • Credit provider has a commercial relationship with a supplier of goods and services, to refer the credit provider to the prospective purchasers. • Credit provider and supplier jointly liable to debtor for loss or damage, e.g. from: • breach of contract • misrepresentation • failure to disclose relevant material under the terms of the contract.

Advertising • Regulated by the National Consumer Credit Protection Act 2009 (Cwlth) • If a credit provider places an advertisement referring to the cost of any credit available, it must contain: • the annual percentage rate or rates • a statement detailing any fees or charges that may apply . • Offences include false or misleading representations in a credit contract or when inducing people to enter a credit contract. • If loss occurs due to a false or misleading representation, the credit provider will be liable to compensate the debtor. • Contraventions carry criminal and civil consequences.

Civil penalties for breaching key requirements of code • Up to $500 000 for each separate civil breach, plus compensation for any loss suffered by debtor or guarantor. • Order can be applied for by: • debtor • guarantor • credit provider • ASIC.

Penalties for licence misconduct • Criminal penalties for licence misconduct can include imprisonment for up to 2 years. • ASIC has the power to suspend, cancel ban or disqualify a person from the credit industry or to make application to the court to do so.

This is the prescribed textbook for your course.