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Focus: Proposed changes to Consumer Credit Code

13 May 2009

In brief: The proposed national regulation of consumer credit involves changes to the existing Uniform Consumer Credit Code that will have important implications for lenders. Partner Catherine Parr and Senior Associate Cameron Ball look at what will change.

• Background
• Key changes
• Conclusion

Background

As described in our Client Update of 28 April 2009, the Federal Government has recently released its National Consumer Credit Reform package. If the proposed reforms are implemented, the current state-based Uniform Consumer Credit Code (UCCC) will be replaced with a new National Credit Code (NCC). The NCC largely replicates the content of the UCCC but there are some important differences. This article focuses on some of the key differences between the UCCC and the NCC, and the impact they will have on lenders. We will analyse other aspects of national consumer credit regulation, such as licensing and responsible lending, in a separate publication shortly.

Key changes

Residential property investment loans

The UCCC only applies where credit is provided or intended to be provided wholly or predominantly for personal, domestic or household purposes. Investment is currently expressly excluded from these purposes. The NCC, however, will apply to credit provided to purchase, renovate or improve residential property for investment purposes. This means lenders will need to amend their documentation and procedures for investment property loans to ensure that loans to individuals for investment in residential property comply with the NCC.

Interestingly, as the new provision is drafted, a loan that refinances a loan which was for purchasing a residential investment property would not be regulated by the NCC. This appears to be a drafting oversight.

The term 'residential property' is defined very broadly and includes land on which a residential dwelling will be built. It is not clear whether this means there must be an immediate plan to build a residential dwelling for the loan to be regulated or whether it is enough that a residential dwelling will be built on the land at some time in the future. For example, it is not clear whether a loan would be regulated where it is used to purchased an empty lot which is zoned residential but the purchaser has no current plan to build a residential dwelling on it.

Purpose declarations

The NCC makes a number of important changes to the purpose declaration provisions of the UCCC. The first key change is that a declaration will be ineffective if, when it was made, the credit provider or a relevant person:

• knew or had reason to believe; or
• would have known, or had reason to believe, if they had made reasonable enquiries about the loan's purpose,

that the credit was in fact to be applied for a Code purpose.

The NCC also provides that a purpose declaration is presumptive rather than conclusive. This means that even if neither the credit provider nor any relevant person would have known or had reason to believe, on the basis of reasonable enquiries, that a purpose declaration was incorrect, the NCC can still apply if the debtor establishes that the credit was in fact for a regulated purpose.

Relevant persons will include a person associated with the lender who obtained the purpose declaration and a finance broker or other intermediary who obtained the purpose declaration.

These changes will have a significant impact on lenders. Lenders will need to determine what enquiries as to the loan's purpose are reasonable in the relevant circumstances and ensure that these enquiries are made. Lenders will also need to be confident about what their representatives, finance brokers and other intermediaries who take declarations know in relation to a loan's purpose and what enquiries are made by those entities.

Even having made all the enquiries they believe are reasonable, lenders will still be exposed to a risk that the NCC applies. If a court finds that it does, not only will the borrower have available to him or her the full range of NCC remedies including hardship applications and access to the unjust transaction reopening provisions, but the lender will be exposed to penalties.

Given that investment property loans will be regulated by the NCC, these changes will have most impact on unsecured lending, credit for the purchase of goods which can be used for personal or business purposes (such as motor vehicles) and lending secured on other investment assets such as shares where the loan proceeds are not automatically applied in purchase of the relevant asset.

It is also important to note that because investment property loans will be regulated by the NCC, the prescribed text for purpose declarations will also change. Lenders will need to update their application forms to ensure the new text is used.

Notices

The NCC contains some additional notice requirements which will require lenders to make changes to their notice documentation and procedures.

The NCC provides that:

• if a debtor makes payments under a credit contract by direct debit and a default occurs because a direct debit payment is not made, then the credit provider must give the debtor a direct debit default notice (containing prescribed information) within 10 days of the default occurring;
• a credit provider must respond within 21 days to a hardship application or a request for postponement of enforcement proceedings with a notice which:
  • states whether or not the credit provider agrees to the application or request; and
  • if the credit provider does not agree, states:
    • the name of the external dispute resolution (EDR) scheme of which the credit provider is a member; and
    • the person's rights under that scheme;
• in addition to the existing content requirements under the UCCC, a default notice will also have to specify:
  • a period for remedying the default;
  • the date after which enforcement proceedings (or repossession) may begin if the default is not remedied;
  • that repossession and sale of mortgaged property may not extinguish the debtor's liability;
  • prescribed information about the debtor's right to:
    • make a hardship application;
    • request to negotiate with the credit provider for postponement of enforcement proceedings; and
    • apply to a court for a postponement of enforcement proceedings;
  • prescribed information about:
    • the EDR scheme of which the credit provider is a member; and
    • the debtor's rights under that scheme; and
• that certain information may be included in a credit reporting agency's information file about the debtor.

The Form 2, Form 5 (now Form 6) and Form 11 (now Form 14) information statements will change, in particular to include references to external dispute resolution schemes. Similarly, the forms prescribed for use in relation to enforcing security over mortgaged goods will change and there will be minor changes to some other forms.

Comparison rate schedules no longer required

While the requirements to display a comparison rate in certain advertisements will be retained, the current UCCC requirements for comparison rate schedules will be removed.

Applications to reopen unjust transactions and challenge unconscionable fees and charges

Under the UCCC, only a debtor, mortgagor or guarantor could make an application to a court to reopen an unjust transaction or to review unconscionable interest rate changes, fees or charges. In practice, very few of these applications have been made under the UCCC. Under the NCC, the Australian Securities and Investments Commission (ASIC) will have the power to make these applications if it considers that it is in the public interest to do so. This means lenders will be exposed to a greater risk of transactions being reopened or fees and charges being challenged. We expect that there will be a particular focus by ASIC on early termination or deferred establishment fees. These may also be challenged in the future under the proposed national unfair contracts legislation. However, it is interesting to note that no attempt has been made to align the unconscionability test under the NCC with the proposed unfairness test under national unfair contracts legislation.

Security over essential household goods

The NCC prohibits, subject to certain exemptions, taking a regulated mortgage over goods that are essential household property or goods used by the mortgagor to earn income. The term 'essential household property' has the meaning given in the Bankruptcy Act 1966 (Cth) so it includes household property which is reasonably necessary for the domestic use of the bankrupt's household, having regard to current social standards.

Mortgagor's remedies

The NCC gives mortgagors additional rights against a credit provider who takes possession of mortgaged goods in breach of other provisions of the NCC. This means a mortgagor can apply to a court to regain possession of goods, even though the relevant default under the credit contract has not been remedied.

Residence of the debtor no longer the determining factor

The UCCC currently operates to protect debtors who are ordinarily resident in an Australian state or territory at the time they enter into their credit contract. That test will be removed and the NCC will apply to credit provided in the course of a business carried on in Australia (whether the business is the business of providing credit or the provision of credit is part of or incidental to any other business carried on in Australia). If a credit provider carries on business both within and outside Australia, it is not clear whether the NCC will apply to that part of the business conducted outside Australia.

Transitional arrangements

There are very limited transitional arrangements in the NCC. Regulation 61 of the NCC Regulations provides for a two-year transition period but this is limited to stating that a person will not contravene a provision of the Regulations by using a document which refers to a UCCC provision which has the same effect as, or is the same in substance, as the provision in the NCC Regulations. This means that a lender:

• can use a UCCC compliant joint debtor nomination for up to two years from the commencement of the NCC Regulations (as the NCC and UCCC forms of nomination are in substance the same); but
• cannot use a UCCC compliant purpose declaration after commencement of the NCC Regulations (as the NCC and UCCC purpose declarations are different in substance); and
• cannot use UCCC compliant information statements (as the NCC equivalents contain additional text).

In the material which has been released there is no transitional period for the changes to the NCC itself. We understand that further transitional provisions will be drafted and released. However it is not clear whether these will relate only to credit contracts (and related guarantees and mortgages) entered into before commencement of the NCC, or whether they will also include some transitional period for compliance with NCC requirements which are not in the UCCC in relation to new arrangements entered into after commencement. Unless there are transitional arrangements for the new NCC requirements credit providers will need to move very quickly to accommodate the new NCC requirements (for example, they will need to ensure that investment property loans are treated as regulated immediately the NCC commences).

Other changes

Some of the other changes in the NCC are:

• the threshold for hardship applications will be increased to $500,000;
• the pawnbroker's exemption will be limited to those carrying on a pawnbroking business and to loans where the only recourse is to the goods provided as security; and
• the application of the NCC to contracts for the sale of land or goods by instalments will be clarified. A number of cases have struggled with the question of whether a contract for the sale of land by instalments involved 'credit' as defined in the UCCC (ie payment of a debt being deferred or incurring a deferred debt). The new provisions in the NCC clarify that that credit will be provided in sales of land or goods by instalments which meet certain criteria. The same changes were made to the UCCC under the Justice Legislation Amendment Act 2008 (Qld) but the commencement date for those changes has not been proclaimed.

Conclusion

Lenders will need carefully to consider the impact of these changes. They and the intermediaries with which they deal will also need to obtain an Australian credit licence and, as an interim step before licensing, to register with ASIC. Registration and licensing will attract a number of significant obligations including responsible lending requirements. We will address the registration and licensing regime in a separate publication shortly. In the meantime, for assistance with understanding the new national credit regime contact one of our experts.

Published 13 May 2009

For further information, please contact:

• John GallimorePartner, Brisbane
  Ph: +61 7 3334 3135
  John.Gallimore@aar.com.au
• Stephen SpargoPartner, Melbourne
  Ph: +61 3 9613 8861
  Stephen.Spargo@aar.com.au