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Credit law toolkit

Credit Law overview

Main Points

  • New national legislation being the National Consumer Credit Protection Act 2009 (NCCP) applies to consumer lending and consumer leases from 1 July 2010.      
  • All credit providers, brokers and other intermediaries must be registered or licensed with ASIC, or appointed as credit representatives by another licensee, and be members of an EDR scheme under the new law.      
  • The Credit Law, including the National Credit Code, covers lending for investment in residential property from 1 July 2010.      
  • Small Amount Credit Contracts (payday loans) and Medium Amount Credit Contracts are now subject to specific laws commencing 1 March 2013 and 1 July 2013      
  • There are new laws regulating reverse mortgages which commenced on 18 September 2012 and then 1 March 2013      
  • The specialist tribunals available for credit matters in some States and Territories will no longer have jurisdiction.      
  • If the loan is not covered by the Credit Law, your client still has a number of options.      

What is the National Consumer Credit Protection Act?

The National Consumer Credit Protection Act 2009 (“NCCP”) and Regulations make up the consumer protection law for credit in Australia (the “Credit Law”)1. It is Commonwealth legislation.

The objective of the Credit Law is:

  • To create a single, uniform national credit law      
  • To regulate credit industry participants in addition to credit contracts and transactions      
  • To protect consumers and the economy by encouraging responsible lending and some flexibility in response to financial hardship      

The Credit Law represents a transfer of the regulation of credit from the States and Territories of Australia to the Commonwealth Government. Previously, there was Uniform State and Territory legislation called the Uniform Consumer Credit Code (“the Code”).2

The Code has been transferred to the Commonwealth with some major changes. The amended Code is now called the National Credit Code (“NCC”) and forms Schedule 1 of the NCCP. The sole regulator for the Credit Law is the Australian Securities and Investments Commission (“ASIC”).

1 The Credit Law also includes the National Consumer Protection (Transitional and Consequential Provisions) Act 2009.  This Act sets out among other things, how contracts that are already in force prior to 1 July 2010 will be treated under the new Credit Law.

2 The Uniform Consumer Credit Code is also referred to as the “UCCC”. For the purposes of this toolkit it is referred to as “the Code”.

Why is the Credit Law important?

For consumer advocates, the Credit Law contains important rights and protections for consumers. It has six major purposes for advocates:

  1. The contract has to contain certain information      
  2. Credit providers must take certain steps before seizing goods/property and/or commencing court proceedings      
  3. Credit providers and other credit assistants must be in an external dispute resolution scheme (giving consumers free access to dispute resolution)      
  4. Consumers have the ability to request documents      
  5. Consumers can challenge unjust contracts or unsuitable loans      
  6. Consumers have rights in relation to financial hardship      

In what circumstances does the Credit Law apply?

The Credit Law applies when:

  • The debtor is a natural person (or strata corporation)      
  • The credit is provided or intended to be provided wholly or predominantly for–      
    • Personal, domestic or household purposes (or to refinance a loan taken out for these purposes)                  
    • To purchase renovate or improve residential property for investment purposes (or to refinance a loan taken out for these purposes)                  
    • A charge is or may be made for the credit
      and                  
    • The credit provider provides credit in the course of a business of providing credit in Australia or incidentally to a business in Australia.                  

The Credit Law is presumed to apply to a loan (s. 13(1) NCC) unless it is established that the Credit Law does not apply. This presumption does not apply if the debtor signs an effective declaration stating the loan is for a purpose not regulated by the Credit Law.

The Credit Law applies to the following types of loans:

  • Home loans      
  • Personal loans      
  • Credit cards      
  • Loans to purchase or refinance a residential investment property      
  • Consumer leases (for cars and goods)      
  • Pay day loans      
  • Promissory Notes and Bills of Exchange (not issued by Banks)      
  • Reverse mortgages      
  • Vendor Finance      
  • Loans with no interest for the purchase of overpriced goods      

The Credit Law does not apply to the following types of loans:

  • All business loans or loans mainly for business purposes      
  • Investment loans for the purchase of investments other than residential real estate (eg, shares or investment in commercial property)      
  • Margin loans (Margin loans are not regulated under the credit law but they are regulated under the Corporations Act).      
  • Loans where no interest or other charges are or may be made for the provision of credit      
  • Charge cards (eg, American Express and Diners where the whole balance must be repaid at the end of the month)      
  • Short–term credit under 62 days where the fees and charges are not more than 5% of the amount of credit and the maximum interest charges are 24% p.a.      
  • Unarranged credit      
  • Loans where only an account charge is payable      
  • Insurance premiums by instalments      
  • Pawnbrokers (except that ss. 76–81 of the NCC still apply)      
  • Trustees of Estates      
  • Employee loans and novated leases      

Credit contracts (including consumer leases) that are covered by the Credit Law will be referred to in this toolkit as “regulated credit contracts”.

What if the loan is partly for personal purposes and partly for business purposes?

The Credit Law applies if more than 50% of the credit is used for personal purposes or to buy a residential property for investment purposes.

Where the credit is used to purchase goods or property the relevant purpose is the use for which more than 50% of the goods are used for, or for which they are used more than 50% of the time.

What if the debtor has signed a declaration confirming the Credit Law does not apply?

This is only a problem if the Credit Law should have applied to the loan. Some credit providers misuse the Business/Investment Declaration to try to prevent the Credit Law from applying to the loan.

The Credit Law is presumed to apply unless an effective Declaration has been signed.

The Declaration is ineffective if the credit provider, or another person prescribed by the regulations, knew or had reason to believe that the purpose of the loan was mainly for personal purposes or a residential investment purpose (“a credit law purpose”). The Declaration is also ineffective  if the credit provider, or other relevant person, would have known or had reason to believe the loan was for a credit law purpose, if they had made reasonable enquiries as to the purpose of the loan. The Declaration is also ineffective if it is made after entering the contract or it is not in proper form.

When will the new Credit Law apply?

The new Credit Law commenced on 1 July 2010. All of the provisions did not commence immediately. There have also been further amendments to the Credit Law (see below under “A summary of the changes to the Credit Law introduced after it commenced (phase 2 changes)”). All provisions now apply.

The new Credit Law applies to any person or organisation in the business of conducting “credit activities” after 1 July 2010, unless the person or organisation is exempt.

The dates for compliance with the Responsible Lending obligations under the Credit Law have been staggered according to the type of entity:

  • Banks, other Authorised Deposit–Taking Institutions ( “ADIs”) such as Credit Unions, and Registered Finance Companies (“RFCs”) do not have to comply with the new responsible lending obligations until 1 January 2011.  
  • Brokers and other credit providers not included above (“non–bank credit providers”) must comply with–  
    • the obligation to assess whether a loan is “not unsuitable” from 1 July 2010;      
    • the obligation to give a Credit Guide and, in the case of brokers, a Quote signed by the consumer, from 1 January 2011.      

In some States and Territories, broker legislation requiring specific agreements and/or disclosures has been extended to remain in force until 31 December 2010 to prevent any gap in consumer protection because of the delayed commencement of the disclosure provisions under the new Credit Law. In many  States, no such legislation exists. You may need to get advice about the situation in your State or Territory if you are dealing with a dispute involving a broker between 1 July 2010 and 1 January 2011.

Credit providers have been given a two–year period in which to start using all the prescribed forms under the Credit Law. That two year period expired on 1 July 2012.

As of 1 July 2010, all credit contracts currently subject to the Code will be subject to the NCC instead, with the exception of some of the new provisions. These are also referred to as “regulated credit contracts”.

A loan that was not subject to the Code immediately before 1 July 2010 will not become regulated because of the new laws. For example, a loan for a residential investment property taken out before 1 July 2010 will not become regulated after that date.

Contracts that are refinanced after 1 July 2010 (or the relevant date for the commencement of a particular section of the law), including credit limit increases granted after the relevant date, will be subject to the new law in its entirety.

What’s different in the Credit Law compared to the Consumer Credit Code?

Most of the numbering under the Code has changed in the transition to the NCC. Where there was a corresponding section in the Code, that section is mentioned in the first column of the table below along with the corresponding new section under the NCC in the second column.

The third column of the table below indicates to which contracts a new provision or Chapter of the Credit Law will apply.

Consumer Credit Code       New Credit Law       To which Credit Contracts does the new law apply?      
No regulation of finance brokers.

Finance brokers now regulated.        

(ch. 2 and 3–1 NCCP)        

Any assistance given in relation to regulated contracts entered into from 1 July 2010 only.
Regulator is State or Territory Fair Trading/Consumer Affairs Offices. Regulated by ASIC. All regulated contracts from 1 July 2010 regardless of when they were entered into.
No licensing regime.

All credit providers, finance brokers and other credit intermediaries must be licensed.        

(ch. 2 NCCP)        

All industry players who are lending or assisting consumers to obtain credit from 1 July 2010.
Credit providers and finance brokers not required to be in an EDR.

Credit providers and finance brokers (and all other credit intermediaries) must be in EDR as a condition of their license.        

(Ch 2–2 Div 5 s. 47(i) NCCP)        

All industry players who are lending or assisting consumers to obtain credit from 1 July 2010.
Some States and Territories had specialist credit tribunals for dealing with credit law matters. In some cases, these tribunals had exclusive jurisdiction over all or some credit matters.

State based specialist tribunals will no longer have any jurisdiction over credit matters. All State and Federal courts have jurisdiction under the credit law. For some types of matters there is a low cost "small claims procedure" that can be used in the Federal Magistrates Court (or the lower tier state courts such as the Local or Circuit Courts).        

(Part 4–3 NCCP)        

The tribunals will no longer be available from 1 July 2010, except in relation to proceedings commenced before that date.
Only loans for personal purposes covered (s. 6 NCC). Loans to purchase, renovate or improve (or refinance loans for) residential investment properties are covered. (s. 5 NCC) Contracts signed from 1 July 2010 only.
Some jurisdictions (NSW, QLD, & the ACT) capped interest, fees, and charges at 48%. Victoria capped interest at 48% for unsecured loans and 30% for secured loans, but did not cap fees and charges. South Australia had undertaken to introduce a cap but had not done so when the agreement to transfer jurisdiction to the Commonwealth occurred. An interest cap applies (excluding consumer leases). General interest rate cap of 48% p.a. applies from 1/7/13. Different caps apply to SACCs and MACCs (see Payday lending/Fringe lending).
No positive obligation to assess whether a loan is suitable, or affordable. Consumers could, however, seek the re–opening of unjust contracts (ss. 70 & 71 Code).

Credit providers, brokers and lessors under consumer leases, are required to comply with responsible lending obligations including:        

  • additional disclosure          
  • assessing that a loan is "not unsuitable"          
  • Consumers can seek compensation and other remedies for failure to comply with these obligations.          

(Ch 3 NCCP)        

  • Consumers can still seek the re–opening of unjust contracts          

(ss. 76 & 77 NCC)        

Banks, mutuals, and registered finance companies must comply from 1/1/11.        

Brokers and other non-bank credit providers must comply with responsible lending from 1/7/10. The other disclosures commence 1/1/11.        

Unjust contract provisions apply to all regulated credit contracts regardless of when they were entered into.        

Individuals could seek relief from unjust contracts, unconscionable changes in interest rate, and some unconscionable fees (s. 72 Code). Individual rights remain unchanged (s. 78 NCC), but ASIC can also take class actions on behalf of a group of affected individuals. (s. 79 NCC). Applies to all regulated credit contracts (Code and NCC) from 1 July 2010 regardless of when they were entered into.
No obligation to respond to a hardship variation (s. 66 Code). Credit providers and lessor must respond to requests for financial hardship within 21 days of the request, give reasons if they refuse and inform the consumer of their right to complain to EDR (s. 72 NCC). All regulated credit contracts from 1 July 2010 regardless of when they were entered into.
Only minimal information was required in default notices (s. 80 Code).

A detailed list of information must be included in a default notice including information about EDR and hardship variation rights. (s. 88 NCC).        

All regulated credit contracts regardless of when they were entered into.
A floating threshold applied to applications for hardship variations and postponement of enforcement in court ($350,240 as at 12/4/10) (ss. 66 (3) and 86(2) Code). No threshold applies after 1/3/13. Between 1/7/10 and 28/2/13 a threshold of $500,000 applies for applications for hardship variations and postponement of enforcement (s. 72(5) NCC). (including loans refinanced after 1/7/10, or where additional credit is granted after 1/7/10). The old floating threshold still applies to loan contracts entered before this date.

No threshold applies to contracts entered into after 1/3/13. The $500,000 threshold applies to regulated credit contracts entered into or refinanced between 1/7/10 and 28/2/13.        

The old floating threshold continues to apply to loans entered before 1 July 2010.        

Pawnbroking exempt from all but the unjust contracts ss. 70 and 72 provisions of the Code. The pawnbroking exemption could be used to avoid the law by asking the consumer to pawn a very low value item as security for the loan. (s. 7 (7) Code).

Pawnbroking still exempt from all but ss. 76–81 of the NCC (unjust contracts and unconscionable fees).        

Capacity to avoid the law using the pawnbroking exemption reduced by confining pawnbroking to those loans where there is no recourse against the consumers beyond the retention and sale of the pawned item(s) (s. 6(9) NCC).        

All regulated credit contracts entered into from 1 July 2010 only.
Minimum charges for the Code to apply to credit contracts under 62 days did not expressly include brokers’ fees (s. 7 Code). Brokers’ fees and other fees payable to third parties in association with the credit contract included for the purposes of calculating whether the NCC applies to credit contracts under 62 days (s. 6(2) NCC). All regulated credit contracts entered into from 1July 2010 only.
Where a car or other goods were repossessed in contravention of the Code there was no clear remedy for the consumer. Consumers can apply for the return of their vehicle or other goods if they are repossessed in contravention of the NCC (ss. 108–110 NCC). Applies to all regulated credit contracts (Code and NCC) from 1 July 2010 regardless of when they were entered into.
No requirement for the credit provider to do anything when a direct debit was dishonoured. Credit providers required to give a prescribed notice to consumers the first time a direct debit fails, unless the default is rectified within 10 days (s. 87 NCC). Applies to all regulated credit contracts (Code and NCC) from 1 July 2010 regardless of when they were entered into.
There are a range of prescribed forms required to be given to consumers.

The prescribed forms have been amended to include information about hardship, EDR, financial counselling and legal assistance.        

(Regulations Schedule 1 NCC)        

Applies to all regulated credit contracts (Code and NCC) from 1 July 2010, regardless of when they were entered into, however the equivalent form under the Code can be used for 2 more years.

A summary of the changes to the Credit Law introduced after it commenced (phase 2 changes)

The recent changes to the Credit Law are summarised in the table below:

Recent amendments       Details       Commencement date      
Key Fact Sheet (home loans and credit cards)

For home loans: It must be made available on the credit provider’s website or on request        

For credit cards: Must be provided with the credit card application form        

01/01/2012 (for Home loans        

1 July 2012 (for credit cards)        

Credit Limit increase invitation (credit cards) Credit providers must not invite the debtor to increase their credit limit unless the debtor has expressly consented 1 July 2012
Exceeding Credit Limit (credit cards) Credit Providers may be required to notify consumers of over the limit use of their credit card. Feed for over limit use cannot be imposed 1 July 2012
48% interest rate cap (excluding small amount credit contracts, bridging finance and all finance provided by an ADI) The annual interest rate (credit cost) cannot exceed 48% p.a. 1 July 2013
Enforcement of credit contract A credit provider must not bring enforcement proceedings against a debtor unless the debtor is in default, notice has been given under section 88 of the NCC and the default has not been remedied within 30 days from the date of the notice 1 March 2013
Unfair/dishonest conduct by Credit service providers When a person (other than a credit provider, lessor or a beneficiary of a guarantee) engages in conduct that is unfair or dishonest, an order may be made by the court to recover an amount as a debt due to the person who was subjected to the conduct 1 March 2013
Representations about eligibility for credit A credit provider must not make representations to consumers about their eligibility to either enter a credit contract or increase their credit limit unless the credit provider has assessed whether the credit contract is unsuitable 1 March 2013
Prohibition on using certain words A credit provider or any other licensee must not use the words “independent”, “impartial”, “unbiased”, “financial counsellor” or “financial counselling”. 1 March 2013
Reverse mortgages (equity mortgages) Credit providers must provide projections of the debtor’s equity in the property. The information statements must be available on the credit provider’s website or on request. 1 March 2013
Reverse mortgage as remedy If a credit provider approves (or increases the credit limit) of a credit contract that is unsuitable for the debtor but a court is satisfied that a reverse mortgage would be suitable, the court can make orders that the debtor can reside in the property 1 March 2013
Reverse mortgages- occupying the property The credit contract may make provision for the debtor to nominate a person to be allowed to occupy the reverse mortgaged property 1 March 2013
Reverse mortgages – excluded provisions

The credit contract must not provide for a basis to begin enforcement proceedings against the debtor because the debtor failed to:        

  • prove occupation          
  • comply with unclear terms          
  • defaulted on other separate liabilities          
1 March 2013
Reverse mortgages – statements of account The debtor must be provided with account statements at least yearly 1 March 2013
Reverse mortgages – Early repayment A debtor can end a reverse mortgage early. The debtor’s maximum liability is the adjusted market value of the home 18 September 2012

Reverse Mortgages – enforcement        

A credit provider must not begin enforcement proceedings unless:        

  • the debtor is in default          
  • default notice has been sent          
  • the credit provider has spoken directly to the debtor and confirmed the default notice has been received and explained the consequences          
  • and the default notice is not remedied within 30 days.          
1 March 2013
Small amount credit contracts See Payday lending/Fringe lending 1 March 2013
Small amount credit contracts – cap on costs See Payday lending/Fringe lending 1 July 2013
Consumer leases See Consumer leases 1 March 2013
Financial hardship See Financial hardship 1 March 2013

Licensing and External Dispute Resolution

Licensing

All credit providers, finance brokers, mortgage managers, and mortgage originators who participate in credit activities regulated by the Credit Law from 1 July 2010 must be licensed with ASIC or appointed as a credit representative by another licensee. Licensees are responsible for the credit representatives  they appoint. The applicable licence is an Australian Credit Licence (“ACL”). You can check whether a particular person or organisation is registered, licensed or has been duly appointed as a credit representative at www.moneysmart.gov.au (check ASIC lists).

Credit activities include any of the following in relation to a regulated credit contract or consumer lease (ss. 6–10 NCCP):

  • Being the credit provider or lessor (whether as the original party or as an assignee)  
  • Exercising the rights of a credit provider or lessor  
  • Being the mortgagee or beneficiary of a guarantee or exercising the rights of either  
  • Providing a credit service including–  
    • Suggesting that a consumer apply for a particular loan, an increase to a particular loan, or a particular lease      
    • Suggesting that a consumer stay with an existing credit provider or lessor      
    • Assisting the consumer to apply for a loan, an increase to a loan, or a lease      
  • Being an intermediary between any of the above parties, or the consumer and any of the above parties  

Credit representatives can be appointed by any licensee, for example, a broker or a credit provider can appoint one or many credit representatives (Chapter 2, Part 2–3 NCCP). Credit representatives can be appointed by more than one licensee at any one time, as long as each licensee consents to  the appointment. If it is not clear who a licensee is acting for in relation to a particular consumer complaint, then all licensees who have appointed that credit representative are jointly and severally liable for his or her conduct. In practice, appointments by multiple licensees will be rare as a  result.

There are certain exemptions (National Consumer Credit Protection Regulations 2010):

  • Debt collectors licensed under a State or Territory law who collect debts as agents of the credit provider (Regulation 21). Assignees that purchase debt must, however, must be licensed as credit providers.  
  • Point of sale credit assistants (for example interest free loans through a retail store to enable consumers to buy goods, or the sales persons at the car dealership). The credit provider, on the other hand, (eg, GE Money or Toyota Finance) must be licensed (Regulation 23 & 23A).  
  • Lawyers in their usual business (provided they are not lending or brokering loans) (Regulation 24).  
  • Part IX Debt Agreement Administrators & Trustees/Receivers under the Bankruptcy Act 1966 (Regulation 20).  
  • Financial counsellors (Regulation 20).

Tip

Credit providers and mortgage managers who are no longer offering new loans after 1 July 2010 but are still managing and collecting existing loans are subject to different rules. Get advice if the credit provider or mortgage manager of a contract from prior to 1 July 2010 is not in EDR.

Unlicensed conduct

Consumers can apply for compensation if they can demonstrate a loss caused by unlicensed conduct. Further, where a licensee deals with another entity (such as a broker) that is not licensed, the licensee can also be responsible for any loss. However, the loan contract will not be automatically void or otherwise changed because the lender or broker was unlicensed. Unlicensed conduct should be reported to ASIC, whether or not the consumer has suffered a loss, because penalties apply.

External Dispute Resolution (“EDR”)

All credit providers, finance brokers, mortgage managers, and mortgage originators who participate in credit activities regulated by the Credit Law from 1 July 2010 must be members of an ASIC–approved EDR scheme as a condition of the licence (or registration). Credit representatives must also be members of an EDR scheme.

EDR is a free service for resolving disputes between consumers and members of the EDR Scheme. EDR is the main way to access justice for credit disputes in Australia. it is vitally important to understand the uses and benefits of EDR. See External dispute resolution for an overview.

What about court?

The specialist credit tribunals that existed in some States and Territories under the Code will no longer have jurisdiction in credit matters. Instead there is an “opt–in”, small claims procedure available in the lower tier courts (such as the Local or Magistrates courts) and the Federal Circuit Court, with limited costs and risks for some types of matter. For example, the following matters could be taken to court using this procedure:

  • An application for a hardship variation
  • An order for the return of a vehicle
  • An application for compensation for a breach of the responsible lending obligations where the amount sought is under $40,000
  • An unjust contract application where the contract value (loan amount) is under $40,000

This is not an exhaustive list.

All of the State and Territory courts have also been vested with jurisdiction under the law so that it can be pleaded in a defence and cross–claim in any enforcement proceedings for a contract covered by the law.

However, as stated above, we do not recommend consumers opt for commencing or remaining in court proceedings where EDR is available. If a consumer is already in court proceedings, get legal advice. It may still be possible and preferable for the consumer to lodge the dispute in EDR.

Some matters under the Credit Law can only be dealt with by a court. Specifically, an application for a civil or criminal penalty under the law could only be dealt with by a court. If an ACL license holder has repeatedly breached provisions of the Credit Law, you should seek permission from your clients to make a complaint to ASIC on their behalf.

What if the Credit Law does not apply?

The Credit Law does not apply to a range of loans, particularly, loans for business purposes or for investment in anything other than residential property.

  1. You can still negotiate.
  2. You can request a hardship variation (but you cannot use the Credit Law to get a determination in EDR or enforce this request in court).
  3. If it is a small business or investment loan, a dispute or request for financial hardship can be lodged in EDR provided the broker or credit provider is a member.
  4. The credit provider, finance broker or other credit intermediary may subscribe to a Code of Practice where they promise to keep to certain levels of conduct (including considering financial hardship).

The relevant Codes are:

  • Code of Banking Practice – membership list (banks) and Code available at www.codecompliance.org.au (Covers small business and some investment lending by individuals)
  • Customer Owned Banking Code of Practice – membership list (Credit unions and Building Societies) and Code available at www.customerownedbanking.asn.au.
  • Mortgage & Finance Association of Australia Code of Practice – membership list (non–bank credit providers, mortgage managers, and finance brokers) and Code available at www.mfaa.com.au (Covers some small business and investment lending)