The National Credit Code applies to all credit contracts entered into on or after 1 July 2010, where each of the following elements are met:
- the debtor (also called the borrower) 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 (including buying residential property); or- to purchase, renovate or improve residential property for investment purposes; or- to refinance credit that has been provided for such purposes;
- a charge is or may be made for providing the credit; AND
- the credit provider provides the credit in the course of a business of providing credit or as part of, or incidental to, any other business of the credit provider.
Note that the Uniform Consumer Credit Code (pre-1 July 2010) does not apply to credit provided for residential investment property.
Natural person or strata corporation
The debtor must be a flesh and blood human and not a corporation or trust, or alternatively it may be a strata corporation.
The purpose of the loan
The NCC applies to loans given for predominantly personal, domestic or household purposes, including residential property investment.
However, the NCC does not apply if the credit is provided wholly or predominantly for business purposes, or for investment other than residential property investment. That is, if more than half of the credit is intended to be used for business purposes, the NCC doesn't apply (S5 (4)). A common example to illustrate the difficulties of dividing up the purpose of the credit to determine its predominant purpose is the purchase of a motor vehicle which is intended to be used partly by a business and partly for private purposes. In those circumstances, a business purpose declaration under S13 (2) NCC will often assist a credit provider.
If in legal proceedings (whether brought under the NCC or not), a party (usually the borrower) claims that the NCC applies to a credit contract, S13 NCC creates that presumption, unless the contrary is established by the other party, usually the credit provider.
Business Purpose Declarations
A "business purpose declaration" may be signed by a borrower before entering into the credit contract, if the purpose of the credit (including a re-finance) is not for personal, domestic or household purposes or for a residential investment property (S13(2) NCC). Such a declaration is ineffective if a credit provider knew that it was not true - that is if a borrower's purpose was in fact personal, domestic or household.
Unscrupulous lenders may coax vulnerable consumers to sign a business purpose declaration when applying for credit, even though the borrower is borrowing purely for personal, domestic or household purposes. This is so that the credit provider can avoid having to comply with the NCC, which may have devastating effects on a borrower. If a person signs a business purpose declaration, and it is later proved that the credit was not for business purposes (that is the borrower was persuaded to sign it to get the loan), the credit provider may have committed an offence.
The declaration must be substantially in the form prescribed by regulation 68 of the National Consumer Credit Protection Regulations 2010 ("NCCP Regulations") (otherwise it will be ineffective), and must contain a warning that the protection of the NCC may be lost as a result of signing the declaration.
Charge for providing credit
The NCC applies only if a charge is or may be made for providing the credit. The charge is not limited to interest, and any charge will be sufficient (S5(1) (c) NCC). If a consumer buys goods or services on an instalment basis, with a discount offered for up-front payment, there may be an argument that a charge has been made for providing "credit".
If title and possession of the goods passes to the purchaser (compared to a lay-buy, where the goods are held by the supplier until payment is made in full, even though there might be a nominal charge) or if the services are provided, there is likely to be a conclusion that credit has been provided and the contract is regulated by the NCC.
The credit provider must provide credit in the course of a business
The NCC will only apply if the credit provider provides credit in the course of a business of providing credit or as part of, or incidental to, any other business. However, where credit is provided incidentally to another business, such as where a retailer allows a customer to pay by installments, there would appear to be no requirement that the retailer need be in the business of providing that type of credit. If the credit is provided incidentally to the retail business, that will be sufficient.
If a shopkeeper provides credit on only one occasion, then that transaction will probably fall within the NCC, provided the other jurisdictional factors are met. However, a one-off loan by a person to a friend would not be covered by the NCC, whether or not interest was charged on that loan.
Book-up, which is commonly used by store owners and traders in indigenous and remote communities is a form of credit which is regulated by the NCC. Store owners must be licensed to provide book-up if the term exceeds 62 days and there is a charge to the customer, or if its for a term of less than 62 days, the charge for the book-up is 5% or more of the amount, or an equivalent of more than 24% per annum.
For more information about book-up see Book-up on www.moneysmart.gov.au
Sale by instalments
The new laws unambiguously apply to:
- goods leases with a right or obligation to purchase the goods, where the total charge exceeds the cash price. The NCC regards this type of contract to be a sale of goods and property “in the goods passes under the contract to whom the goods are hired on delivery of the goods or the making of the contract, whichever occurs last” (S9 NCC);
- executory contracts for the sale of land by instalments, known as "vendor terms contracts" or "terms contracts" (S10 NCC); and
- certain contracts for the sale of goods by instalments (SS11-12 NCC).
These types of contracts have commonly been used to provide high-cost credit to low-income and disadvantaged consumers on onerous terms and have previously avoided regulation under consumer credit protection laws. The important characteristic is whether the charge for providing the credit is an amount that exceeds the cash price for the goods.
In South Australia, there are laws to protect purchasers of land by instalments. S6 of the Land and Business (Sale and Conveyancing) Act abolishes instalment purchase or rental purchases of land and entitles a purchaser to recover monies paid under such a contract from any court of competent jurisdiction.
Section 6 of the NCC exempts from regulation certain categories of contracts that would otherwise be covered under section 5.
Generally, the NCC will not apply to a credit contract that limits the period for which credit will be provided to 62 days or less.
However, the NCC does apply to a loan of less than 62 days if fees and charges exceed 5% of the amount of the loan or if the interest rate exceeds 24% p.a. Additional anti-avoidance provisions have been included in the NCC that ensure the definition of fees and charges for the purposes of this exemption will cover:
a. a fee or charge payable by the debtor to any person for an introduction to the credit provider;
b. a fee or charge payable by the debtor to any person for any service if the person has been introduced to the debtor by the credit provider; and
c. a fee or charge payable by the debtor to the credit provider for any service related to the provision of credit, other than a service mentioned in paragraph (b).
These provisions have been drafted in an attempt to ensure that short-term high-cost lenders such as pay-day lenders are unable to avail themselves of the exemption. Because the interest rate is low, very few payday lenders are likely to fall into the category set out in the S6 (1) exception.
From March 2013, the NCCPA and NCC were amended to enhance consumer protection in relation to pay-day lending. Some new definitions of small amount loans have been introduced. For more information see section on Short Term and Small Amount Credit Contracts, below.
Credit without prior arrangement
The NCC will not apply to credit that is provided without prior agreement between the credit provider and the debtor (s 6(4)). An example is where a cheque account becomes overdrawn but there is no agreed overdraft facility, or when a savings account falls into debit.
Credit contracts where only an account charge is payable
Continuing credit contracts are excluded from the NCC if the only charge that is made with respect to the provision of credit under that contract is a periodic or other fixed charge that does not vary according to the amount of credit provided and the charge is $200 or less for the first 12 months and $125 or less for each 12-month period after that (r.51 NCCP Regulations).
Joint credit and debit facilities
A number of products offered by banks and other financial institutions now allow a consumer to use the account as both a savings and a credit facility. Under such a facility, a consumer who has funds to his or her credit in the account will receive interest on that amount, while the facility also allows the consumer to run the balance below zero to an agreed credit limit, upon which the consumer will pay interest. Section 6(6) of the NCC provides that these products will be regulated, but only in respect of the aspect of the arrangement that represents the credit facility.
Therefore, a consumer could not use the NCC to challenge the validity of a new fee which was imposed only when the consumer had funds in the account. On the other hand, a consumer could challenge a fee, such as a monthly account charge, which applied to the account irrespective of whether the account was in credit or debit.
Bills of exchange and promissory notes
Section 6(7) ensures that bills of exchange and promissory notes are regulated under the NCC, except for where such bill facilities are provided by an authorised deposit-taking institution, or where otherwise exempted under the NCCP Regulations.
Insurance premiums payable by instalments
Many insurers now allow annual insurance premiums to be paid by monthly instalments. Often the combined amount of the monthly premiums exceeds the annual premium by an amount equivalent to a finance company interest rate, e.g. 20%. However, these agreements are not regulated by the NCC.
The NCC does not apply to credit provided by a pawnbroker in the ordinary course of a pawnbroker's business as long as:
- the pawnbroker is lawfully conducting business; and
- if the debtor is in default, the pawnbroker's only recourse is against the goods provided as security.
However, pawnbroking transactions may be re-opened as unjust under sections 76 to 81 of the NCC. See also: "Pawnbrokers", below.
Trustees of estates
The NCC will not apply where credit is provided by a trustee of the estate of a deceased person to a beneficiary or prospective beneficiary of the deceased's estate. However, such arrangements are subject to the unjust transactions provisions of sections 76 to 81 of the NCC.
A partial exemption from the NCC applies where credit is provided by an employer, or a related corporation of an employer, to an employee or former employee if:
- credit is provided on the condition that the debtor is either an employee or a former employee of either the employer or the related corporation; or
- where the employer or related corporation provides the credit in the course of a business of providing credit, the credit is provided on more favourable terms to the debtor than the credit provider would grant to other debtors who were not employees or former employees.
Nevertheless, Part 1, Part 4, Division 3 of Part 5, Division 4 and 5 of Part 7 and Parts 12, 13 and 14 of the NCC do apply to employee loans.
Exclusions in the Regulations
Regulations 51 to 63 of the NCCP Regulations provide for a number of further exemptions relating to various government schemes, the provision of credit by particular credit providers and other limited circumstances. Most notable of these provisions is the exclusion from regulation in certain circumstances of credit under $50 (r.52).
From March 2013, the NCCPA and NCC offers borrowers additional protections in relation to short-term lending and small amount credit contracts (also known as pay-day lending). The definitions set out below are new.
Section 5 (1) of the NCCPA defines a “short term credit contract” (STCC) as follows:
- The credit is part of a continuing credit contract
- The credit provider is not an ADI (Authorised Deposit-taking Institution)
- The limit of the contract is $2000 (or other amount set under the regulations)
- The term of the contract is 15 days or less.
Credit providers who hold an Australian Credit Licence (with the exception of an ADI) are prohibited from offering STCCs. An Authorised Deposit-taking Institution is a Bank, a Building Society or a Credit Union.
Section 5 (1) also defines a “small amount credit contract” (SACC) as follows:
- The credit is not continuing
- The credit provider is not an ADI
- The limit of the contract is $2000 (or other amount set under the regulations)
- The term of the contract is between 16 days and 1 year.
- The loan is not or will not be secured
From March 2013, providers of small amount credit contracts will have additional obligations in relation to responsible lending and disclosure which are described in more detail below. These additional obligations are intended to further protect borrowers who are most vulnerable in terms of their lack of ability to repay debts.
The borrower’s total liability under the credit contract or mortgage may exceed the maximum amount of credit that may be provided under the contract, with no requirement to reduce the amount owing (S13A NCC). There may be other conditions prescribed by regulation.
In other words, a reverse mortgage allows a borrower to access the equity on his or her own property (secured by a mortgage), without being required to make any repayments on the debt whilst still living in the home.
Depending on the terms of the credit contract, the debt usually becomes repayable (with interest) once the property is sold, either because the borrower dies or moves into other accommodation.
Even though no repayments are required during the life of the reverse mortgage, lenders are required to comply with the responsible lending regime set out in Chapter 3 of the NCCPA. This includes an assessment as to whether or not the reverse mortgage suits the needs and objectives of the borrower.
In addition, prior to undertaking any assessment as to whether or not the loan is unsuitable, the lender must give the borrower certain information, as follows:
- A projection of the potential effect a reverse mortgage will have on the equity in the borrower’s home (S133DB NCCPA); and
- Provide the borrower with a copy of a 'reverse mortgage information statement' which includes information about the loan, how interest is calculated, and questions a borrower should consider before entering into the loan (S133DC NCCPA).
Borrowers are also protected against negative equity, which means that the amount repayable to the lender will never exceed the market value of the property (at the time the property is sold) SS86A – 86F NCC.
The interests of a non-title holding resident may be protected in the credit contract. This means that a person who is not an owner of the property can, if nominated by the borrower, remain in the property once the borrower leaves. If the credit contract does not have this provision, the credit provider must give the borrower a notice to that effect prior to entry into the contract - S18B NCC.
The NCC does not require a person to seek independent legal advice before entry into a reverse mortgage. However, the Regulations may require it, and it is highly recommended given the complexity of reverse mortgages. Members of the Senior Australian Equity Release Association (SEQUAL) subscribe to a Code of Conduct that requires lenders to ensure that prospective borrowers to obtain legal advice first. In addition, borrowers also need to check with the Financial Information Service of the Department of Human Services to see how entering into a reverse mortgage might affect benefits received from Centrelink.
More information can be found on ASIC’s Moneysmart website.
The content of the Law Handbook is made available as a public service for information purposes only and should not be relied upon as a substitute for legal advice. See Disclaimer for details. For free and confidential legal advice in South Australia call 1300 366 424.