Natural person or strata corporation

The debtor must be a natural person i.e. 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 does not apply [s 5 (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 section 13(2) of the 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. Section 13 of the 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 [NCC s 13(2)]). 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). It must also 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 [NCC s 5(1)(c)]. 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 instalments, 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 regional 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 for less than 62 days, the charge for the book-up is 5% or more of the amount, or more than 24% per annum.

For more information about book-up see Book-up on www.moneysmart.gov.au

Sale by instalments

The laws unambiguously apply to:

These types of contracts have commonly been used to provide high-cost credit to low-income and disadvantaged consumers on onerous terms and had 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. For more information refer to Consumer Leases.

In South Australia, there are laws to protect purchasers of land by instalments. Section 6 of the Land and Business (Sale and Conveyancing) Act 1994 (SA) 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.

Short-term credit

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 are designed 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 section 6(1) exception.

For more information about consumer protection in relation to pay-day lending, please refer to 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 [NCCP Regulations reg 51].

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.

Pawnbrokers

The NCC does not apply to credit provided by a pawnbroker in the ordinary course of a pawnbroker's business as long as:

However, pawnbroking transactions may be re-opened as unjust under sections 76 to 81 of the NCC. For more information, refer to Second-hand dealers and pawnbrokers.

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 clauses 76 to 81 of the NCC.

Employee loans

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:

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.

Margin loans

The NCC does not apply to margin loans within the meaning of section 761EA(1) of the Corporations Act 2001 (Cth). Margin loans are regulated as a financial product under Chapter 7 of that Act.

Exclusions in the Regulations

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 [regs 51-63]. Most notable of these provisions is the exclusion from regulation in certain circumstances of credit under $50 [reg 52].

A mortgage is void to the extent that it secures an amount exceeding the sum of the debtor's liabilities under the credit contract and any reasonable enforcement expenses associated with the mortgage [NCC s 49]. Similarly, a mortgage is void to the extent that it seeks to secure an amount in excess of the guarantor's liability under the guarantee and any reasonable enforcement expenses of the mortgage.

All-property mortgages

The NCC provides that a mortgage that does not describe or identify the property which is subject to the mortgage is void [s 44(1)]. A provision in the mortgage that charges all the property of the mortgagor (an all-property mortgage) is also void [cl 44(2)].

Section 45 of the NCC places a restriction on the ability of a credit provider to take a mortgage over future properties. This section provides that a provision in a mortgage that has the effect of creating a mortgage over property that is to be or may be acquired by the mortgagor after the mortgage is entered into, is void. There are three exceptions to the restriction of taking a mortgage over future property. They are:

The final restriction on property is that a mortgage cannot have the effect of securing goods supplied from time to time under a continuing credit contract, unless those goods are specifically identified [s 46].

All-accounts mortgages

All-accounts mortgage, that is, mortgages which cover all debt owed by a debtor to the credit provider, are allowed under the NCC, provided certain requirements are met [s 47]. Borrowers must agree in writing in advance to a mortgage covering all accounts (for example a separate future credit contract or related guarantee), otherwise the mortgage will be unenforceable. This is to prevent credit providers from retrospectively adding an unsecured loan to a mortgage without the borrower's prior agreement.

Third-party mortgages

The NCC prohibits a credit provider from entering into a mortgage to secure obligations under a credit contract unless the mortgagor is a debtor under the contract or a guarantor under a related guarantee [s 48(1) & (2)].

A third-party mortgage is unenforceable [cl 48(3)]. A party to the mortgage may apply to a court for an order that the credit provider take such steps as are necessary to discharge the mortgage [s 48(4)].

Blackmail securities

The NCC aims to stamp out the practice of taking security over low-value chattels that do not genuinely secure the obligations of the lender. Such securities are used only to enable the lender to threaten deprivation of those goods in the event of non-payment under the secured loan, even though seizure of sale of such goods would not significantly reduce the balance of the loan.

Section 50 of the NCC prohibits the creation of mortgage over essential household property, as defined in section 116(2)(b)(i) of the Bankruptcy Act 1966 (Cth). The prohibition does not apply, however, where the mortgagee supplied the goods to the mortgagor as part of a business carried on by the mortgagee of supplying goods and the mortgagor has not, as a previous owner of the goods, sold them to the mortgagee for the purposes of the supply, or where the mortgagee is a linked credit provider of the person who supplied the goods to the mortgagor.

Section 50 also prohibits mortgages over goods that are used in earning income by personal exertion if the goods do not have a total value greater than the relevant limit set by the Bankruptcy Regulations 1966 (Cth).

Licensed activity

Chapter 2 of the NCCPA generally requires all persons engaging in "credit activities" to hold an Australian credit licence. An Australian Credit Licence carries with it onerous obligations which are set out more fully on the ASIC website. Professional assistance and advice must be obtained if an organisation wishes to obtain a licence.

"Credit activity" is defined comprehensively in section 6 of the NCCPA. In brief, a person is engaged in a credit activity if the person:

"Credit assistance"

Section 8 of the NCCPA defines the following activities as credit assistance:

The definition will capture the provision of finance brokering services.

"Acts as an intermediary"

Consumer credit regulation has historically had difficulty regulating conduct in multi-party credit arrangements such as those involving finance brokers, solicitors, mortgage originators and mortgage managers. Section 9 of the NCCPA defines the phrase "acts as an intermediary" with the intent of requiring persons engaged in such conduct to hold an Australian credit license and therefore be subject to regulation under the new national regime.

A person acts as an intermediary if, in the course of, as part of, or incidentally to, a business carried on in this jurisdiction by the person or another person, the person:

It does not matter whether the person does so on the person's own behalf or on behalf of another person.

Obligations of license holders

Australian credit licenses fall into different categories, depending upon the credit activity or activities in which the licensee engages. Under section 47 of the NCCPA, the obligations imposed on all licensees include:

The Australian Securities and Investments Commission (ASIC) has approved the external dispute resolution schemes operated by the Australian Financial Complaints Authority (AFCA) for the purposes of section 47.

ASIC has also adopted Australian Standard AS ISO 10002 on Complaints Handling as the relevant standard for internal dispute resolution procedures for the purposes of section 47.

Additionally, under sections 47(1)(j) and 48, and regulation 12 of the NCCP Regulations, licensees must have insurance cover that is adequate to compensate persons for loss or damage suffered because of a contravention of the NCCPA.

Chapter 3 of the NCCPA is a central part of the regulatory regime, imposing a series of obligations on credit providers and other licensees which are designed to reduce the instances of prejudicial or inappropriate loans being granted to consumers. Briefly the regime requires a lender to assess and verify a consumer’s financial situation and requirements before entering into a loan with that consumer. Failure to conduct a proper assessment is a breach of the responsible lending obligations, and has a number of consequences.

Section 128 of the NCCPA requires a lender to assess whether a credit contract will be unsuitable for a consumer not more than 90 days prior to entering or increasing the credit limit under that contract. Section 26 of the NCCP Regulations extends that period to 120 days in respect of secured credit used to purchase residential property.

A credit provider is also prohibited from making an unconditional representation before conducting a credit assessment to a consumer that the consumer is eligible to have the loan or enter into the consumer lease [NCCPA s 128].

In making an assessment under section 128, a lender is required to [s 130 NCCPA]:

NB Credit assistance providers (such as mortgage brokers) are also required to comply with responsible lending obligations as a condition of being licensed. They are required to make the same assessment of a consumer’s requirements and objectives and financial situation, and to take reasonable steps to verify the customer’s information. The assessment must be made prior to the credit assistance provider suggesting to a borrower or assisting that borrower enter into a particular loan or increase in credit limit. The responsible lending obligations for mortgage or lending brokers are set out in Part 3-2 of Chapter 3 of NCCPA.

ASIC's Regulatory Guide 209 "Credit licensing: Responsible lending conduct" provides some guidance to credit providers and credit assistance providers about how to fulfil these obligations. The Guide advises that the level of inquiries and steps taken to verify information will vary depending upon the circumstances (known as scaleability). Lenders can no longer simply rely upon information given to them by a borrower, but now must verify that information by independent inquiry.

Relevant factors will include:

Under section 131, a lender must assess that a credit contract will be unsuitable for a consumer if it is likely that:

Under section 131(3), where a consumer could only comply with the consumer's financial obligations under the contract by selling the consumer's principal place of residence, it is presumed that the consumer could only comply with those obligations with substantial hardship, unless the contrary is proved. This directly targets the practice of asset based lending, where there is no regard for the ability of the consumer to properly service (repay) the loan, and the lender finds safety in the fact that there is equity available should there be a default by the borrower.

Courts are increasingly frowning upon the practice of asset based lending where the lender has made no effort to enquire about the consumer’s ability to service a loan and based the decision to lend purely on the availability of the equity in an asset.

Obtaining the written credit assessment

Another important feature of the responsible lending regime is that consumers are permitted to obtain a copy of the written assessment done by the lender prior to entering into the loan. Under S S132 provides that if a consumer requests it, a lender must provide a written copy:

A lender is prohibited from requesting or demanding payment for providing a copy of the assessment [s 132(4)].

Section 133 prohibits a lender from entering or increasing a credit limit under a credit contract that is unsuitable. Subsections 133(2) and (3) provide guidance on when a credit contract will be unsuitable; these replicate the relevant provisions of section 131.

Consumers affected by the failure to meet responsible lending obligations may be entitled to compensation [NCCPA s 178], and may also be entitled to other remedies, but it is important to obtain advice from a lawyer first.

The NCC has added to the disclosure obligations originally imposed under the UCCC.

Credit Guide

Section 126 of the NCCPA requires lenders to give consumers a credit guide as soon as practicable after it becomes apparent to the credit provider that it is likely to enter into a credit contract with the consumer. The credit guide must:

A credit provider is required to undertake an assessment of the unsuitability of a loan, as part of the credit provider's responsible lending obligations. For more information about how this is done, see Responsible Lending Obligations.

Copy of assessment on request

A credit provider is required to provide a copy of the written preliminary assessement (if undertaken by the credit assistance provider) [NCCPA s 120], or the written assessment (if undertaken by the credit provider) [NCCPA s 132] as to the unsuitability of the loan. There is no mandatory form of the assessment, but at the minimum it should show whether the lender has in fact complied with responsible lending obligations. For more detail about these obligations see above.

Pre-contractual statement

Prior to the debtor either entering into a credit contract or making an offer to enter into a credit contract (whichever occurs first), the credit provider must give to the debtor a statement disclosing the information set out in section 17 of the NCC (set out in more detail below). The disclosure required by section 17 are required to be included in a credit contract, so the credit provider can simply provide a copy of that proposed credit contract to the debtor.

An alternative is for the credit provider to separately provide the disclosures required by section 17 in a pre-contractual statement, separate from the contract [s 16].

Information Statement

Prior to the debtor either entering into a credit contract or making an offer to enter into a credit contract (whichever occurs first), the credit provider must give the debtor a copy of an information statement in the form required by the NCCP Regulations setting out the debtor's statutory rights and obligations (Form 5: Things you should know about your proposed credit contract).

Form of credit contract

Section 17 of the NCC sets out information that must be included in a credit contract, as follows:

Of these matters, those in italic text are deemed "key requirements" under section 111 of the NCC. Key requirements are slightly different for continuing credit contracts [s 111(2)] and consumer leases [s 111(2A)].

These requirements have not been modified from the UCCC provisions.

After signing the contract

A debtor may, by written notice to the credit provider, terminate a credit contract at any time up until credit has been obtained under the contract [NCC s 11].

Under section 17 of the NCC, credit contracts must contain certain information as set out above under Formalities before entering a contract. Much of the information that must be provided is designated as "key requirement" under section 111 of the NCC. There are other key requirements, such as that a credit contract must not include prohibited fees and charges, a small amount credit contract must not require or accept payment of an unexpired monthly fee and a credit contract must not cost more than a rate of 48 per cent annually. In relation to consumer leases, key requirements include that:

For more information about these requirements in relation to consumer leases, please refer to Consumer leases. The full list of key requirements under the NCC is set out in section 111.

Part 6 of the NCC holds credit providers liable to make payment of a civil penalty to the debtor, or to a government fund, in respect of a failure to comply with a key requirements (set out generally above).

The payments are penalties because they are punitive, not compensatory, in nature, and Part 6 does not require that any loss be suffered by a debtor in respect of a contravention of a key requirement. However, unlike most penalties, they may be paid to an individual, i.e. the debtor under the credit contract.

Section 112 of the NCC grants standing to apply to a court for an order under Part 6 to:

Seeking orders under Part 6 is a two-stage process. The court will be required to determine:

Section 114(1) provides that the amount of a penalty payable to a debtor or guarantor is limited to the total amount of interest charges payable under the credit contract. However, section 114(2) provides that, if the debtor has suffered a loss, the court may impose a greater penalty that shall be not less than the amount of the loss.

The credit contract may allow the credit provider to vary essential terms of the credit contract, such as the interest rate and level of repayments. Under Division 1 of Part 4 of the NCC, the credit provider must give notice to the debtor of these changes so that the debtor can decide whether or not to terminate the facility and obtain credit elsewhere. However, there is no such requirement to give notice regarding:

A contract for the hire of goods by a person for a specified time at a specified rental is treated by the NCC as a "consumer lease". However, the NCC does not apply to leases for a fixed period of four months or less [s 171].

From 12 June 2023, consumer leases for an indefinite period are also regulated. This includes where the lessor is a corporation, the lease is entered into in constitutional trade or commerce or the lease is entered into using postal, telegraphic, telephonic or other like services within the meaning of the Constitution [ NCC 171 (1A)]. There is a prohibition on any lessor entering into a consumer lease for an indefinite period unless they are a corporation [NCC s 179VC]. Nor can any lessor use postal or the like services to enter into any consumer lease unless they are a corporation [NCC s 179VB].

A lessee under a consumer lease for an indefinite period may at any time end the lease by returning the goods hired under the lease to the lessor during ordinary business hours or as otherwise agreed with the lessor [NCC s 179(1)].

Cap on fees and charges

From 12 June 2023, there is also a cap on the fees and charges for consumer leases. A lessor must not enter into or vary a consumer lease for an indefinite period so that the total amount payable for any month is no more than 1/48 of the permitted cap [s 175AA (2)]. A lessor also must not enter into or vary a consumer lease so that the total amount payable for the lease is more than the permitted cap, as follows [NCC s 175AA]:

The permitted cap for a consumer lease is the sum of the following amounts:

(a) the base price of the goods hired under the consumer lease;

(b) the amount worked out by multiplying the base price of the goods hired under the consumer lease by:

(i) in the case of a consumer lease for a fixed term—0.04 multiplied by the number of whole months of the consumer lease, up to a maximum of 48 months; or

(ii) in the case of a consumer lease for an indefinite period—1.92;

(c) the permitted delivery fee (if any) for the consumer lease;

(d) the permitted installation fees (if any) for the consumer lease;

(e) the permitted add‑on fees (if any) for the consumer lease.

Fees and charges payable in the event the lessee defaults on the lease and enforcement expenses within a set amount do not count against the cap [NCC s 175AA(4)]. It is a criminal offence for a lessor to impose fees and charges for a consumer lease that exceed the permitted cap [NCC s 175AB]. A lessee may recover any amount paid in excess as a debt against the lessor [NCC s 175AC].There is also a limit on the amount that may be recovered if a lessee is in default under a consumer lease [NCC s 179GA]. Any provision in excess is void and a lessee may recover any amount recovered in excess of the limit [s 179GA(2)].

Pursuant to section 172 of the NCC, the same presumptions and declarations as to the purpose for which a consumer lease is entered into apply as those in relation to other credit contracts. For more information, please refer to Preliminary requirements for NCC regulation.

Contents of consumer lease

Under section 174 of the NCC, a consumer lease must be in writing and disclose, at a minimum, the following:

From 12 June 2023, a consumer lease for household goods must also contain [NCC s 174(1A)]:

Copies of lease, other prescribed documents and statements

The lessee must get a copy of the lease within 14 days with an explanatory statement in the statutory form [NCCPA Regulations Form 17] which sets out a consumer’s rights relation to the lease [NCC s 175].

Lessors are also required to give lessees periodic statements of account (not more than 12 months apart) which must include prescribed information as provided in regulation 105A [NCC s 175D]:

Section 175H of the NCC provides that a lessor must provide an end of lease statement within 90 days before the end of a fixed term consumer lease, or within 7 days of the lessee requesting the statement in relation to a indefinite consumer lease, or the day it ends. Regulation 105C provides that the following information must be set out in the end of lease statement:

Under Part 3-4 of NCCPA (in particular, ss 151 - 155), a lessor under a consumer lease is required to comply with provisions that are largely equivalent to the responsible lending provisions imposed upon credit providers. This includes carrying out an assessment (which must be provided to a lessee upon request) as to the unsuitability of the lease, including taking into account the lessee’s objectives. For more information, please refer to Responsible lending obligations. The lessee has the same rights as a borrower to obtain a copy of the written assessment on request pursuant to section 132 of the NCCPA.

From 12 June 2023 additional responsible lending obligations have applied in relation to consumer leases for household goods.

Consumer leases for household goods

There is now a prohibition on credit providers making unsolicited communications to a consumer inducing them to enter into a consumer lease for household goods when they are in the physical presence of the lessor and in a public place that is not the business premises of the lessor [NCC s 179VA]. It is a criminal offence for a lessor engage in conduct contravening the prohibition. Further, a lessee who enters into a consumer lease for household goods within 30 days of an unsolicited communication, cannot be held liable to pay any amount that exceeds the base price of the goods under the consumer lease, and may recover any amount paid in excess as a debt against the lessor [NCC s 179VA(4)].

Lenders who represent that they enter into consumer leases for household goods with consumers must display information and give information in accordance with any determination made by the Australian Securities and Investment Commission [ss 147A and 156A]. This may include set information that must be displayed in certain places or at certain times in certain ways [NCCPA ss 147A(2) and 156A(2)].

The NCCPA [s 156B] and the NCCP Regulations [reg 28LCB] also prohibit consumer leases for household goods that do not meet income and repayment requirements. Any repayment or other amount due in a repayment period must now be less than or equal to 10 per cent of the consumer’s available income during the repayment period.

Lenders proposing to enter into a consumer lease for household goods must obtain and review information about each transaction on a prospective borrower’s bank statements, and the balances of the account for the previous 90 days, even if the borrower’s income is paid into a joint account [NCCPA s 140 (1A)].

Before entering into a consumer lease for household goods or representing that a consumer is eligible to enter a lease, a lender must document their preliminary assessment that a consumer lease for household goods is not unsuitable for a consumer, together with their inquiries and the verification of information [NCCPA s 156C].

The rules that apply to variation, reopening and enforcement of credit contracts apply, in general, to consumer leases. Under section 178 of the NCC, a lessee must be given 30 days notice of repossession except:

Section 179A of the NCC provides that a consumer is entitled to a written statement of the amount required to terminate a consumer lease, as well as certain other information, as long as the request by the consumer is in writing.

Finally, section 177F of the NCC extends to lessees under a consumer lease the right to apply to a Court to re-open transactions on the grounds of injustice. The wording of ss 177F – 177K of the NCC is largely similar to section 76 of the NCC, including the matters which the Court will take into account when looking at whether a lease contract is unjust.

Warning: Some traders, car dealers, finance brokers and lenders sign people up for consumer leases when in fact the consumer intended to enter into a loan contract. It is crucial that consumers check a finance contract before signing to see if the goods will be owned at the end of the agreement. If a lease is entered into in such circumstances advice should be obtained about having the transaction reopened as unjust.

A Novated Lease is not covered by the NCC, by virtue of section 171(2), which provides that it does not apply to goods hired by an employee in connection with their remuneration or other employee benefits.

A Novated lease is one under which an employee will lease (or more accurately, "hire purchase") a car from a seller, but the employer will be responsible for the lease repayments. The employer then deducts the repayments from the employee’s pre-tax income. Usually, a novated lease comes to an end when an employee ceases to work for the particular employer, in which case the employee is then liable for the lease payments. The lease may be assigned to another employer to tak over, but if the employee cannot find work, the car may have to be surrendered to the seller.

The lease may also come to an end when all payments are made, and the ownership of the vehicle then passes to the employee.

Under section 88 of the NCC, the credit provider cannot issue legal proceedings or repossess or take any other enforcement action unless and until:

The notice must specify:

These pre-conditions do not apply if the credit provider proves that there are reasonable grounds for believing:

In South Australia, a notice is also required under section 55A of the Law of Property Act 1936 (SA) to commence any enforcement proceedings in relation to real property that is subject to a registered mortgage, and where the mortgagor is a natural person and the land is appropriated for domestic or agricultural use. It is the usual practice of lenders to combine the two notices into one to avoid duplication. A mortgagee in possession must certify that the requirements of section 55A have been complied with prior to registering the transfer of real property.

Direct debit default notice

Section 87 of the NCC requires a credit provider to issue the debtor with a special notice within 14 days of the first occasion of default under a direct debit payment system using Form 11A. The notice does not replace or modify any other preconditions for enforcement action under the NCC.

Such a notice may alert a consumer to any deficiency in information provided to the credit provider about direct debit arrangements.

Sections 76 and 77 contain the NCC's version of statutory unconscionable conduct. These sections allow a court to grant relief to debtorfrom the consequences of entering into "unjust transactions". The provisions set out a two-step test.

STEP 1

Was the contract, mortgage or guarantee unjust at the time it was entered into or changed?

A definition of the term "unjust" is provided in section 76(8) of the NCC, which states that "unjust includes unconscionable, harsh or oppressive". This phrase, derived from the Contracts Review Act 1980 (NSW), has been dubbed the "tautological trinity": see West v AGC (Advances) Ltd(1986) 5 NSWLR 610 at 621 per McHugh JA.

The definition of unjust is wider than that of unconscionable conduct at common lawand includes unconscionability: Maisano v Car and Home Finance Pty Ltd [2005] VCAT 1755 (the Maisano case). The concept also includes both:

Further, the fact that a contract favours one party's rights over another (West v AGC (Advances) Ltd (1986) 5 NSWLR 610; Esanda Finance Corporation Ltd v Murphy(1989) ASC 55-703; Custom Credit Corporation Ltd v Lupi [1992] 1 VR 99; Custom Credit Corporation Ltd v Gray [1992] 1 VR 540), or that a contract fails to comply with the NCC (Custom Credit Corporation Ltd v Gray [1992] 1 VR 540; Morlend Finance Corporation (Vic) Pty Ltd v Westendorp [1993] 2 VR 284; Custom Credit Corporation Ltd v Lynch [1993] 2 VR 469; McKenzie v Smith (1998) ASC 155-025) will not, on their own, amount to unjust conduct.

Under section 76(2), when considering this question a court must have regard to:

Note the two competing public interests of consumer protection and upholding bargains.

Further, under section 76(2), a court may have regard to the following matters when deciding whether or not a contract is unjust:

a. the consequences of compliance, or non-compliance, with all or any of the provisions of the contract, mortgage or guarantee;

b. the relative bargaining power of the parties;

c. whether or not, at the time the contract, mortgage or guarantee was entered into or changed, its provisions were the subject of negotiation;

d. whether or not it was reasonably practicable for the applicant to negotiate for the alteration of, or to reject, any of the provisions of the contract, mortgage or guarantee or the change;

e. whether or not any of the provisions of the contract, mortgage or guarantee impose conditions that are unreasonably difficult to comply with, or not reasonably necessary for the protection of the legitimate interests of a party to the contract, mortgage or guarantee;

f. whether or not the debtor, mortgagor or guarantor, or a person who represented the debtor, mortgagor or guarantor, was reasonably able to protect the interests of the debtor, mortgagor or guarantor because of his or her age or physical or mental condition;

g. the form of the contract, mortgage or guarantee and the intelligibility of the language in which it is expressed;

h. whether or not, and if so when, independent legal or other expert advice was obtained by the debtor, mortgagor or guarantor;

i. the extent to which the provisions of the contract, mortgage or guarantee or change and their legal and practical effect were accurately explained to the debtor, mortgagor or guarantor and whether or not the debtor, mortgagor or guarantor understood those provisions and their effect;

j. whether the credit provider or any other person exerted or used unfair pressure, undue influence or unfair tactics on the debtor, mortgagor or guarantor and, if so, the nature and extent of that unfair pressure, undue influence or unfair tactics;

k. whether the credit provider took measures to ensure that the debtor, mortgagor or guarantor understood the nature and implications of the transaction and, if so, the adequacy of those measures;

l. whether at the time the contract, mortgage or guarantee was entered into or changed, the credit provider knew, or could have ascertained by reasonable inquiry of the debtor at the time, that the debtor could not pay in accordance with its terms or not without substantial hardship;

m. whether the terms of the transaction or the conduct of the credit provider is justified in the light of the risks undertaken by the credit provider;

n. for any mortgage – any relevant purported provision of the mortgage that is void under section 50;

o. the terms of other comparable transactions involving other credit providers and, if the injustice is alleged to result from excessive interest charges, the annual percentage rate or rates payable in comparable cases; or

p. any other relevant factor.

Just because a transaction exhibitone of the above factors does not render that transaction unjust. See: Esanda Finance Corporation Ltd v Murphy (1989) ASC 55-703; Custom Credit Corporation Ltd v Lupi [1992] 1 VR 99; Australian Guarantee Corporation Ltd v McClelland (1993) ASC 56-230; Morlend Finance Corporation (Vic) Pty Ltd v Westendorp [1993] 2 VR 284.

STEP 2

If the transaction is reopened as unjust, what remedy should a court grant the debtor?

Under section 77 of the NCC, a court has a discretionary power to make any one or more of the following orders upon reopening a transaction under section 76:

a. reopen an account already taken between the parties;

b. relieve the debtor and any guarantor from payment of any amount in excess of such amount as the court, having regard to the risk involved and all other circumstances, considers to be reasonably payable;

c. set aside either wholly or in part or revise or alter an agreement made or mortgage given in connection with the transaction;

d. order that the mortgagee takes such steps as are necessary to discharge the mortgage;

e. give judgment for or make an order in favour of a party of such amount as, having regard to the relief (if any) which the court thinks fit to grant, is justly due to that party under the contract, mortgage or guarantee;

f. give judgment or make an order against a person for delivery of goods to which the contract, mortgage or guarantee relates and which are in the possession of that person; or

g. make ancillary or consequential orders.

An application under section 76 must be made within two years of the relevant credit contract being rescinded, discharged or otherwise brought to an end.

The decision of the Supreme Court of NSW in Permanent Mortgages Pty Ltd v Cook [2006] NSWSC 1104, in which a credit contract was set aside against a debtor on the basis that it was unjust, is a good example of the operation of the unjust transaction provisions of the old Credit Code.

UNCONSCIONABLE CHANGES AND CHARGES

Under section 78 of the NCC, a court can also annulor reduce any change in the annual percentage rate, any establishment fee or charge or fee payable on early termination of a contract. This can occur if the change or charge is unconscionable. A change is unconscionable if:

A court has to decide if a charge is unconscionable taking into account the credit provider's reasonable costs.

Please note this section applies to goods only. The procedure most commonly applies to the enforcement of car loans. Information about the repossession of real property that is subject to a mortgage (for example, a home loan) can be found in the Mortgage Stress Handbook (PDF, 1, 568 KB), published by Legal Aid NSW and the Consumer Credit Legal Centre NSW (now known as the Financial Rights Legal Centre).

When can the credit provider repossess?

The credit provider may be entitled to repossess mortgaged (secured) goods if the period specified in the default notice has expired and the default has not been remedied. The following procedure only applies if the borrower agreed at the time of entering into the loan that the goods would be secured. If a borrower is unsure, legal advice should be sought urgently.

Restrictions on the right to repossess

In most cases, the amount owing must be more than 25% of the amount of credit provided under the contract, or $10,000 (whichever is the lesser), unless a court otherwise consents [NCC s 91].

The credit provider or its agent cannot enter onto residential premises to repossess mortgaged goods unless a court has authorised entry, or the occupier of the premises has consented in writing, after being informed in writing of the provisions of the NCC [s 99]. (Note: the NCCP Regulations set out the form of the written consent (Form 13) and permitted hours of contact).

The credit provider can seek an order from a court to enter onto residential premises and take possession of mortgaged goods [cl 100], or an order that the goods be delivered to the credit provider at a specified time and place [NCC s 101].

What can the debtor do to avoid repossession?

To avoid repossession of goods that are subject to security for a debt, a debtor can:

What happens after repossession?

Within 14 days after repossession of the goods the credit provider must give to the debtor, or post to the debtor's last known address, a written notice setting out the estimated value of the goods, the enforcement expenses that have and will accrue, and a statement of rights and obligations as required under the NCCP Regulations (Form 14). The credit provider cannot sell the goods until 21 days after this notice has been given.

Section 103 allows the debtor to nominate in writing a purchaser for the goods within the 21 day period of the Form 14 notice. The purchaser must offer at least the estimated value of the goods. During this period the debtor may also explore other options, including seeking a hardship variation.

Sale of repossessed goods

Goods must be sold:

It is possible for goods to be sold at a fraction of their real value and for the credit provider to sue the debtor for money still owing after the sale. The debtor can apply to a court for a determination as to whether the power of sale has been properly exercised and the onus falls on the credit provider to prove that it has in fact followed the procedure. If it has not, the debtor can be awarded compensation but it is important to seek legal advice as soon as possible if the credit provider demands money after repossessed goods have been sold.

If the price received for the goods is less than the balance due to the credit provider, the debtor can be sued for the difference as an unsecured debt. It has been held, however, that sale by public auction will in most cases constitute a sufficient attempt by the credit provider to receive the best price reasonably obtainable.

Mortgagor's remedies

Division 6 of Part 5 of the NCC allows a debtor to apply to a court for orders that the credit provider return repossessed goods, even where the secured credit contract remains in default. However, neither the legislation nor the explanatory memorandum states what factors a court would consider in making such an order.