Introduction of the new National Credit Code by TurksLegal

Introduction of the new National Credit Code By Ratnadeep Hor | July 2010 Area of Expertise | Business & Property

Summary The Federal Government has introduced a new National Credit Code (NCC) as part of its National Credit Reform Package.

Who Does This Impact? Banks, lending institutions and other credit providers.

What Action Should Be Taken? Credit providers should take note of the changes imposed by the new National Credit Code and ensure the necessary protocols and documentations are put in place to ensure compliance with the National Credit Code.

On 25 June 2009, the Federal Government introduced the National Credit Reform Package which amongst other things saw the enactment of the National Consumer Credit Protection Act 2009. Schedule 1 of the Act contains the new National Credit Code which replaces the existing state-based Uniform Consumer Credit Code (UCCC) which is found in the appendix to the Consumer Credit (Queensland) Act 1994. The provisions of the NCC came into effect on 1 July 2010. The NCC largely replicates the previous UCCC, with only a handful of signiﬁcant changes.

Key Changes INCREASED THRESHOLD FOR ACCESS TO HARDSHIP VARIATIONS AND STAYS OF ENFORCEMENT The Federal Government has increased the threshold under which a debtor can request a change to certain terms of their credit contracts on the grounds of hardship to $500,000 from $125,000. Section 72 of the NCC sets out the changes to a credit contract that a debtor can request to be made on the grounds of hardship. These are identical to the changes permitted under section 66 of the UCCC. Pursuant to Section 72(3) of the NCC, a credit provider must provide a response to a debtor’s application for a change to the terms of his credit contract on the grounds of hardship within 21 days of receiving the application. In the event that a credit provider does not agree to an application for a hardship variation, the credit provider must give reasons to the debtor for refusing the request. The credit provider must also provide details of the external dispute resolution scheme it is a member of, and the debtor’s rights under that scheme. Credit providers should also note that breaching the above section is an offence of strict liability, with a criminal penalty of 30 penalty units (i.e. a ﬁne of $3,300).

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Where the credit provider agrees to the debtor’s application, it must provide a notice of the change to the debtor and any guarantors no later than 30 days after the date of the agreement. One issue of signiﬁcance – given the new time limits – is where the credit provider, such as a bank, requests further information from a customer in respect of a hardship application and the customer fails to provide the requested information within the time limit. At present, it is unknown when the application would be interpreted to be received: at the initial contact or when all relevant information has been provided. It may be prudent for credit providers when requesting further information from debtors to give notice to the debtor that if it is not received within the time limit, the application will be rejected. This amendment to the code signiﬁcantly increases the number of debtors who may now apply for hardship variations. As a result, credit providers and in particular banks would be well advised to set up hardship teams to deal with the increase in the number of applications that may be made.

EXTENSION OF THE NCC TO CREDIT PROVIDED FOR RESIDENTIAL INVESTMENT PROPERTY The Federal Government has also extended the code to apply to credit provided to purchase, renovate, improve or refinance residential property for investment purposes. The UCCC expressly excluded the application of the code to credit provided for investment purposes pursuant to section 6(4) of the Act. For the NCC to apply, the property must be wholly or predominantly used as residential property which is broadly defined in Section 204 of the NCC. The NCC will not apply to credit provided for the purchase of commercial premises, offices, farms, factories etc. The definition of residential property refers to such property being ‘land on which a dwelling is or will be affixed predominantly for residential purposes’. One obstacle for credit providers is deciding whether vacant land in a residential zone, where the debtor does not intend to immediately build a dwelling, would be regulated by the NCC. Having regard to the NCC as a whole, one would think that the NCC would apply in these circumstances. This amendment to the UCCC means that credit providers will need to amend their documentation and procedures for investment property loans to ensure that such documentation and procedures comply with the NCC. At the very least, credit providers should make prudent enquiries at the time the credit is being obtained as to whether the credit being provided is to purchase land that falls within the meaning of residential property under the NCC.

BUSINESS PURPOSE DECLARATIONS Section 11 of the UCCC provided that where a debtor, before entering into a credit contract, declared that the credit was to be applied wholly or predominantly for business or investment purposes, then it was presumed conclusively that the credit was not provided wholly or predominantly for personal, domestic or household purposes and such provision of credit would not be regulated by the code. To address abuses of the declaration that allowed some credit providers to avoid the application of the code, the existing section under the UCCC is amended by Section 13 of the NCC, which makes the declaration a rebuttable presumption rather than conclusive. Speciﬁcally, the amendment addresses the situation where credit is being provided wholly or predominantly for personal, domestic or household use, or in relation to a residential investment property and the credit provider fails to enquire as to the proper purpose of the credit as an avoidance mechanism with regard to the application of the code.

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Credit providers will still be able to have the benefit of the presumption in situations where the purpose of the credit is ambiguous. The onus will be on the debtor to rebut the presumption by showing that the credit provider ‘knew or had reason to believe’, or ‘would have known or have reason to believe if it made reasonable enquiries,’ that the purpose of the credit being provided was wholly or predominantly for personal, domestic or household purposes. These changes will have a significant impact on credit providers, especially where the credit being provided is for the purpose of purchasing goods which can be used for both a personal or business purpose, such as a motor vehicle. Credit providers will need to consider what enquiries as to the purpose of the credit are reasonable in the relevant circumstances and ensure that these enquiries are made. Credit providers will also need to be confident about what their representatives, agents and other intermediaries who take declarations have knowledge of in relation to a credit’s purpose and what enquiries are made by those entities. Section 13(6) of the NCC further provides that it is an offence for a person to induce a debtor to make a business purpose declaration that is misleading or false. Such an offence carries with it a criminal penalty of 100 penalty units (i.e. a fine of $1,100) or 2 years imprisonment, or both. In short, credit providers must make appropriate enquiry as to the purpose of the credit to be provided to the extent that it can be reasonably satisfied as to the purpose of the credit, rather than simply relying on a business purpose declaration, as credit providers previously could under the UCCC.

REPLACEMENT OF DEBTOR’S RESIDENCY REQUIREMENT For the UCCC to regulate a credit contract, the debtor needed to be a resident of the jurisdiction in which the code operated. The residency requirement in the UCCC was primarily used to determine which State or Territory had jurisdiction. As the NCC is governed by the Commonwealth jurisdiction, this residency requirement has not been retained in the NCC. Rather, the debtor’s residency requirement has been replaced with a jurisdictional test that examines whether the credit provider carries on business in Australia as set out in Section 12 of the Act.

PROVISIONS OF CREDIT TO WHICH THE CODE DOES NOT APPLY As was the case in UCCC, the NCC does not apply to the provision of short term credit. However, the NCC has included subsections 6(2) and (3) to address fee structures aimed at avoiding the fees and charges limit for exempt short term credit by capturing fees and charges paid to parties other than the credit provider. This was not the case under the previous UCCC. The Commonwealth Government has also amended the exemption for pawnbroking in subsection 6(9) (contained in Clause 7(7) of UCCC). The exemption is now limited to persons genuinely conducting a pawnbroking business by ensuring that where a debtor is in default the pawnbroker’s only recourse is against the pawned goods. Section 6(7) also extends the application of the code to bill facilities and promissory notes unless such credit is provided by an authorised deposit taking institution, i.e. a bank. Under the existing UCCC, all bill facilities and promissory notes were excluded.

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PROHIBITED SECURITIES Section 50 of the NCC amends the former section 46 of the UCCC to additionally prohibit the taking of security over essential household goods or certain property used by the mortgagor in earning income by personal exertion. Essential household property and property used by the mortgagor in earning income are taken to have the same meaning as contained in the Bankruptcy Act 1966. Credit providers will still be able to take security over antique items which are speciﬁcally excluded from the deﬁnition of goods. As discussed below, mortgagors will be able to apply to the Court to regain possession of such goods taken in contravention of the section.

DEFAULT NOTICE AMENDMENTS In respect of customers making repayments via direct debt, Section 87 provides for a one off notice to be provided the ﬁrst time a direct debit default occurs. Notice under the section must be provided to the customer within 10 business days from the date of the default. Failure to do so will amount to a strict liability offence. It is likely that the form of the notice will be prescribed in the regulations. Section 88 imposes new default notice requirements before a credit provider can enforce a credit contract or a mortgage against a defaulting debtor or mortgagor. Under the NCC, a default notice must contain a prominent heading at its top stating that it is a default notice and specify: (a) the default; (b) the action necessary to remedy the default; (c) a period for remedying the default; (d) 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; (e) that repossession and sale of mortgaged property may not extinguish the debtor’s liability; (f ) the information prescribed by the regulations about the debtor’s right to: (i)

make an application to the credit provider under section 72 (hardship application); or

(ii)

negotiate with the credit provider under section 94 (postponement of enforcement proceedings); or

(iii)

make an application to the court under sections 74 (apply to Court for hardship variation) and 96 (apply to the Court for postponement);

(g) the information prescribed by the regulations about:

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(i)

the approved external dispute resolution scheme of which the credit provider is a member; or

(ii)

the debtor’s rights under that scheme;

(h) 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; and (i) that, under the Privacy Act 1988, the debt may be included in a credit reporting agency’s credit information ﬁle about the debtor if: (i)

the debt remains overdue for 60 days or more; and

(ii)

the credit provider has taken steps to recover all or part of the debt; and

(j) any other information prescribed by the regulations. In the event that a credit provider fails to provide the requisite notices required under Section 88(1) and 88(2), such a breach shall be an offence of strict liability with a criminal penalty of 50 units (i.e. a ﬁne of $5,500).

MORTGAGOR’S REMEDIES The Code inserts new provisions in sections 108 to 110 dealing with a mortgagor’s remedies. In the event the credit provider takes possession of the mortgaged goods in contravention of Division 2 or Division 4 of the NCC, the new sections will enable a mortgagor to apply to the Court to: (a) regain possession of mortgaged goods from the credit provider, at the cost of the credit provider; (b) where the goods are in possession of a person other than the credit provider, obtain an order for possession to have such a person deliver the goods to the mortgagor, at the credit provider’s costs; (c) obtain other ancillary or consequential orders, for example an order to restore the parties to the position they were in before taking of possession in contravention of Division 2 or Division 4.

OTHER AMENDMENTS The other amendments to the NCC are primarily formatting and technical amendments to bring the Code within the style of Commonwealth Legislation and amendments so that the Code can operate under the Commonwealth Jurisdiction as opposed to the individual jurisdictions of the states.

Conclusion Banks and other ﬁnancial institutions should take note of the changes imposed by the new NCC and ensure the necessary protocols and documentations are put in place to ensure compliance with the NCC.

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Introduction of the new National Credit Code by Ratnadeep Hor

For more information, please contact:

Ratnadeep Hor Lawyer T: 02 8257 5706 ratnadeep.hor@turkslegal.com.au

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