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PPTs to accompany Barron, Fundamentals of Business Law 7Rev

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Consumer credit law

Chapter 14



Learning objectivesAt 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 quote before 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, mortgagor30 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.

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