Law Reforms: Consumer Credit and Tenancy

Law

New Credit Laws

Presentation for State Conference 2010

Katherine Lane and Susan Winfield

Consumer Credit Legal Centre (NSW) IncMay 2010

This presentation is for information only. You must seek legal advice in relation to any

particular circumstances.

Consumer Credit Legal Centre (NSW)

Credit and Debt Hotline

1800 808 488

Financial Counsellors line

Insurance Law Service (National) 1300 663 464

Mortgage Hardship Service – casework, intake via Credit and Debt

Hotline

Over 15,000 calls last financial year

About 4900 referrals to financial counsellors in the last financial year

Overview1. New Regulator – ASIC

2. Licensing and compulsory EDR

3. New legislation – The National Consumer Credit Protection Act 2009 (and regulations) (“NCCP Act”) commences 1 July 2010

4. Uniform Consumer Credit Code (“UCCC”) adopted as a schedule to the with substantial amendment and now called the National Credit Code (“NCC”)

Note: New caseworker manual under development – CCLC and NSW Legal Aid

What loans are covered by the NCCP and NCC?

• Loans for personal, domestic, household purposes such as home loans, credit cards, motor vehicles loans and personal loans (same as UCCC)

• Loans for investment in residential property and refinances of such loans (new)

• Consumer leases are covered under the NCC but treated differently to loans (same as UCCC)

• Pawnbroking is only covered by the unjust contract provisions (definition has been tightened)

NSW legislation

• The NSW credit legislation (applying the UCCC in this state) will be repealed 1 July 2010

• The finance broker provisions will remain in force until 1 January 2011

• The maximum interest rate provisions (interest rate ‘cap’ will remain in force until 30 June 2011 (Check)

National Credit Code

• Largely the same as the UCCC but with some significant amendments.

• Most section numbers have changed.• Some amendments were agreed to by the

states prior to the transfer to the Federal Government and the remainder were introduced by the Federal Government.

TOPICS

• Licensing• External Dispute Resolution (“EDR”)• Responsible Lending• Hardship Variations

Licensing

All industry participants who undertake “credit activities” must apply for an Australian Credit License (“ACL”) to continue in business, or be appointed as a Credit Representative of another licensee.

In effect this includes lenders, brokers (credit assistants), and mortgage managers, among others.

Exemptions from licensing

• Debt collectors licensed under a State regime and collecting as agents for an ACL holder (by contrast, debt collectors who purchase debts must be licensed)

• Financial counsellors

• Solicitors (in the ordinary course of legal business – not if lending/broking)

• Point of sale retailers (e.g. Harvey Norman, car yards)

• Debt agreement administrators

• Treasury are still considering the position of securitisation entities such as Perpetual Trustees and lenders who are no longer making new loans (e.g. RHG)

External Dispute Resolution

• All ACL holders and Credit Representatives will need to be members of an EDR scheme (in practice FOS or COSL)

• The underlying principle of the new regime is that the majority of disputes will go to EDR rather than Court

• Both schemes now allow disputes to be referred to them after legal proceedings have been commenced (up to filing of defence and cross-claim only)

• The CTTT will no longer have jurisdiction over credit matters.

External Dispute Resolution

Why EDR?

• Free alternative to court

• No possibility of a costs order

• Accessible – complaints can be made by unrepresented consumers or lay advocates

• No physical appearance necessary – largely paper & telephone based

There are limitations on the amount that can be claimed/disputed and the types of disputes that will be considered

Responsible Lending

• The NCCP has created “responsible lending” obligations.

• These obligations apply to brokers and lenders (and any other intermediary interfacing with the consumer or making lending decisions).

• They apply to loans and consumer leases.

• Timetable for compliance staggered (July 2010 for brokers and non-bank lenders, January 2011 for banks, mutuals and registered finance companies)

Responsible Lending

• ACL holders must make available to consumers a Credit Guide about the licensee;

• Credit service providers (brokers) must provide the consumer with a quote prior to providing credit assistance; and

• The requirement to assess whether a loan is “not unsuitable”.

Responsible Lending

Lenders and brokers must:

• Make reasonable enquiries about the borrower’s financial circumstances

• Make reasonable enquiries about the borrower’s needs and requirements

• Take reasonable steps to verify the above information

Responsible Lending

Brokers and lenders must not suggest, recommend or approve a loan or lease unless they have conducted the above assessment and concluded that the loan is “not unsuitable”.

A loan must be assessed as “unsuitable” if:

•The consumer will not be able to pay, or not without substantial hardship; and /or

•The loan does not meet the consumer’s needs and requirements.

Responsible LendingThere is a presumption that, if the consumer could only comply with the terms of a loan by selling their principle residence, then the consumer could only comply with substantial hardship.

Note: this must be foreseeable at the time of the assessment, not as a result of a later, unplanned occurrence such as illness or unemployment.

Responsible Lending

It is also an offence to suggest a borrower remains in an unsuitable loan.There is a defence if:1.There is no other suitable loan2.The licensee informs the consumer of their rights to apply for a hardship variation or postponement of enforcement

Responsible Lending• Meaning of reasonable enquiries,

reasonable verification, substantial hardship etc will be determined by the EDR schemes and ultimately the courts

• ASIC has given some guidance in Regulatory Guide 209 Credit licensing: Responsible lending conduct

• In reality, any complaint should plead both the responsible lending provisions and unjust contract under section 76 (UCCC s70)

RemediesA consumer can apply for compensation and other remedies for unlicensed conduct, including dealing with an unlicensed entity in the lending chain, breaches of the responsible lending provisions, and other breaches of the NCCP Act. Remedies include, for example:

•Compensation for loss or damage

•An order declaring the whole or part of any contract void

•An order varying the contract or refusing to enforce any or all of the terms

Hardship Variations

The Hardship variations of the NCC (UCCC sections 66-68) are now in sections 72-74.The options you can apply for remain unchanged from s66:

• reduce repayments and extend the term

• postpone repayment (with no extension)• postpone repayments and extend the

term

Hardship Variations

The changes include:• A new hardship threshold for contracts

entered 1 July 2010 or later of $500,000 (the old floating threshold will continue to apply for existing contracts)

• An obligation for credit providers to respond to applications for hardship or a postponement of enforcement within 21 days

Hardship Variations

The response must indicate whether or not the credit provider agrees to the change and if not-• The name of the EDR scheme to which the

credit provider belongs• The consumer’s rights in relation to

using the scheme, and• The credit provider’s reasons for rejecting

the application.

Hardship Variations

If the lender refuses an application for a hardship variation the borrower can complain to the lender’s EDR scheme. Both schemes now have the power to determine the substance of a hardship variation under the NCC (substitute the decision of the EDR scheme for the lender’s decision)

Hardship Variations

• The CTTT will no longer be available for hardship variation applications

• A hardship variation can be pleaded as a cross-claim in legal proceedings to enforce a debt (there are risks and costs implications)

• A hardship variation can be made using the new opt-in, “small claims procedure” in the Local Court or Federal Magistrates Court – this is a complete unknown – EDR is preferable

Hardship VariationsPractical tips• Must have a realistic plan to get back on track• Can ask for time to sell an asset with reduced

repayments in the interim as a hardship variation• Can ask for other solutions (not just section 72)

but may not be able to enforce• Can complain about failure to comply with a

relevant Code of Practice • EDR scheme will look at Code breaches – usually

looking at process as opposed to making final decision on arrangement

• Refunds of enforcement costs and default interest should be sought when inappropriately applied to a borrower who has requested hardship assistance.