REPOSSESSION AND THE NATIONAL CREDIT CODE

Transcription

1 REPOSSESSION AND THE NATIONAL CREDIT CODE Ian Macdonald January

2 REPOSSESSION AND THE NATIONAL CREDIT CODE CONTENTS Paragraph Code Contracts 1.1 Terms Used in This Paper 1.2 Mortgage of Goods and Land Under the Credit Code 1.3 Repossession 2.1 What Is A Mortgage? 2.2 Requirements For A Default Notice 3.1 Service of A Default Notice 3.2 When Service Of A Default Notice Is Not Required 3.3 Joint Debts and Default Notices 3.4 Non-Remediable Defaults 3.5 If The Default Is Remedied 3.6 If The Default Is Not Remedied 3.7 The 25% Rule 4 Entry To Residential Property 5 Information As To Location Of Mortgaged Goods 6 Order For Possession 7 Procedure After Repossession 8.1 Notice After Repossession Day Holding Period 8.3 Payment by Debtor During 21 Day Holding Period 8.4 Introducing A Purchaser 8.5 Sale of Repossessed Goods By Credit Provider 9.1 Statement of Proceeds of Sale of Mortgaged Goods 9.2 Voluntary Surrender 10 Repossession Check List 11 2

3 It is quite common for clients to come to a financial counsellor in a panic, because they expect a vehicle or other property to be repossessed. It is very useful for such a situation to have a resource at hand to refer to. If you have a list of the requirements for a default notice under the Code, it may be that you can identify a flaw or omission in the documents, which may give the client some much needed time. 1.1 Code Contracts This paper only relates to the repossession of goods which were financed by a Code-regulated credit contract which is secured on the goods. If the contract is between a lender in business and a borrower who is borrowing for personal, domestic or household purposes, and a charge is made for providing the credit (for example interest) then it is likely the contract is covered by the Code. If it was entered into between 1 November 1996 and 30 June 2010 it was initially covered by the Uniform Consumer Credit Code. If the contract continued after 1 July 2010 then for most purposes it is covered by the National Credit Code (1). Detail of Credit Code coverage and the transitional arrangements between the old Code and the new are set out in the paper Keeping the House 3 on the Project website. 1.2 Terms Used in This Paper Throughout this paper there are references such as: s.88 (2). These are references to sections of the National Credit Code. This is referred to in this paper as the Code. It is Schedule 1 to the National Consumer Credit Protection Act 2009 (Commonwealth). In this paper the term credit provider is normally used to refer to the lender. The reason for this is that the Code uses that term. The Code uses the term debtor to refer to the borrower, and the term mortgagor when the borrower has entered a mortgage to secure the loan. For simplicity s sake I normally use the term debtor to include mortgagor. 3

4 1.3 Mortgage of Goods and Land Under the Credit Code Consumer loans to buy a house or car can both be secured by a mortgage under the Code. Most of the Code provisions about mortgages are the same, whether it be land or a car which is the security. However a number of provisions, such as the 25% rule (s. 91) and section 98 to 106 of the Code relate to mortgages of goods, such as a car, but do not relate to a mortgage of land. This paper relates mainly to repossession of goods. The paper Keeping the House 3 sets out a borrower s options relating to a mortgage of a house or land. 2.1 Repossession Before a repossession can occur under the provisions of the Code, three preconditions must normally be present. a) The first is that the debtor must be in default under the contract: s.88 (2) and b) The credit provider has given the debtor a default notice: s. 88 (2) (a) and the default has not been remedied: s. 88 (2) (b). and c) There is a mortgage of the relevant goods: s. 88 (2) 2.2 What Is A Mortgage? The word mortgage means a credit provider s interest in, or power over, property securing the obligations of a debtor or a guarantor: s The idea of a mortgage is that the credit provider is given two advantages which it would not otherwise have: the first is that if the debtor fails to pay, or otherwise fails to comply with the contract, the credit provider can take the goods without having the delay, expense and uncertainty of suing the debtor, getting a judgement, and then getting a bailiff to seize the goods under a property (seizure and sale) order. 4

5 The second advantage is that the debtor cannot lawfully sell the goods: s 51. If goods are not secured, the debtor can sell them, and if the debtor later becomes bankrupt, the credit provider cannot sue the debtor for the debt: Bankruptcy Act s. 58 (3). A Code mortgage must be in the form of a written mortgage document signed by the mortgagor: (s. 42). 3.1 Requirements for a Default Notice A default notice must have a prominent heading stating that it is a default notice and: a) Specify the default; b) Specify the action the debtor must take to remedy the default; c) Specify the period for remedying the default; d) Specify the date after which enforcement proceedings and, if relevant, repossession of mortgaged property may begin, if the default is not remedied: e) Say that repossession and sale of the mortgaged property may not extinguish the debtor s liability under the mortgage - (that is, there may be a shortfall left); f) Give the information required by regulation 86 and Form 12 (2) about the debtor s rights to make a hardship application (s. 72), negotiate a postponement (s. 94), and to make an application to a court relating to these possibilities; g) Give the information required by regulation 86 and Form 12 about the external dispute resolution (EDR) scheme of which the credit provider is a member, the debtor s rights under the EDR scheme, and contact details for the scheme; h) Say that if another default of the same type occurs within the period of time that the debtor has to rectify the first default, the credit provider can take enforcement action without further notice; 5

6 i) Say that the debt may be included in the debtor s credit information file if the debt is overdue for 60 days or more and the credit provider as taken steps to recover the debt; j) Say that the debtor is entitled to receive a reply within 21 days and can complain to ASIC on if the credit provider fails to do this, and k) Advise the debtor they may wish to get legal advice from a community legal centre or legal aid, and advise there are other people such as financial counsellors who may be able to help: Regulation 86 and Form 12. Form 12 sets out some of the requirements for a default notice, and is interesting to read. It can be seen, with regulation 86, on the Comlaw website, which is It is very useful to keep a copy handy, so you can check a default notice against it. Default notices relating to a credit contract and a mortgage may be combined in one document: s. 88 (4). A default notice must be in writing; s. 183 (3), and must be easily legible and clearly expressed: s. 184 (1). Other than that, no form is prescribed. The notice may be in the form of a letter, provided that it has a heading stating that it is a default notice, and setting out the information listed above from (a) to (k). 3.2 Service of a Default Notice A default notice can be served on a debtor by sending it to the address the debtor has nominated as their address. If the debtor has not nominated an address the lender can send the default notice to the last known residential address of the debtor: (s. 195 (1)). Notices can be sent electronically: (s.187). The nominated or last known address, be it a house or an electronic destination, is referred to as the appropriate address : (s. 195 (1)). This appropriate address 6

7 is commonly used by credit providers, and may lead to a situation in which the credit provider has complied with the requirement to give notices in the way specified in the Code, but the debtor does not receive them. 3.3 When Service of a Default Notice is Not Required A credit provider is relieved from the obligation to serve a default notice on a debtor: a) If the credit provider has previously but unsuccessfully attempted to give a notice or other document to the debtor at an appropriate address, and the credit provider has reasonable grounds for believing the debtor can no longer be contacted at that address: s. 194 (2); b) If the credit provider believes on reasonable grounds that it was induced by fraud on the part of the debtor or mortgagor to enter into the credit contract or mortgage: s. 88 (5) (a); c) If the credit provider has made reasonable attempts to locate the debtor or mortgagor but without success. This provision may relate to inquiries of various sorts as to the debtor s whereabouts: s. 88 (5) (b). d) If the Court authorizes the credit provider to begin the enforcement proceeding: s. 88 (5) (c); or e) If the credit provider believes on reasonable grounds that the debtor or mortgagor has removed or disposed of the goods, or intends to do so, without the credit provider s permission: or that urgent action is necessary to protect the mortgaged property: s. 88 (5) (d). 7

8 3.4 Joint Debts and Default Notices A copy of a default notice, subject to the matters mentioned above, must be given to each debtor: (s. 194 (3)). 3.5 Non-Remediable Default If the credit provider believes on reasonable grounds that a default is not capable of being remedied, the default notice need only specify the default, and the credit provider can begin enforcement proceedings 30 days after the debtor is given the default notice: (s. 88 (6)). 3.6 If The Default Is Remedied If the default specified in the notice is rectified within the thirty days given in the notice, and any other default of the same kind occurring within that thirty days is also rectified within the same thirty days, then the notice is satisfied and no enforcement proceedings can be taken under it: s. 89 (1). 3.7 If The Default Is Not Remedied If the default notice is not complied with, the credit provider can go ahead with enforcement proceedings either straight after the expiry of the notice, or at any time later on, before the contract is finally complied with. It is important for a debtor to know that if a default notice is not complied with during the thirty days, but the debtor later on gets the contract back on foot by making payments, that the default notice is still alive, and can found enforcement action without further notice: s. 89 (2). If a debtor is in this situation, it is wise for the debtor to raise the issue in writing with the credit provider, and obtain the credit provider s written 8

9 assurance that it will not act on that default notice. If the credit provider refuses to do this, the debtor knows that further payments may be made in vain. 4. The 25% Rule If the debtor has repaid most of the amount borrowed, and less than 25% of the amount borrowed, (or $10,000 whichever is the lesser) is outstanding, the credit provider cannot repossess the goods without the Courts permission: s. 91 (1). It is important to note that this relates to the amount of the credit provided under the contract, rather than the total amount payable under the contract, which includes interest. This 25% rule does not apply to a continuing credit contract: s.91 (2) (a); or if the credit provider believes on reasonable grounds that the debtor has removed or disposed of the goods, or intends to do so, without the credit provider s permission, or that urgent action is necessary to protect the goods; s. 91 (2) (b). 5. Entry to Residential Property The credit provider, and the credit provider s agents such as a repossession agent or tow truck driver are not allowed to enter any part of residential premises for the purpose of repossessing goods unless: a) The Court has authorized them to do this: s. 99 (1) (a), or b) the occupier of the premises has given written consent to the entry after being given written information about the provisions of section 99 of the Code: s. 99 (1) (b). The occupier and the premises referred to are not specified to be the debtor or the debtor s property. Regulation 24 sets out conditions relating to consent by the occupier of premises to entry for the purpose of repossession. The conditions are: 9

10 a) A request to the occupier to allow entry must be made by the credit provider or its agent either in writing, or by calling at the premises concerned; b) A personal request may only be made between the hours of 8.00am to 8.00 pm on any day other than a Sunday or a public holiday; c) A consent in writing must be in Form13, and signed by the occupier; d) Form 13 cannot be presented to the occupier for signature with, or as part of, any other document unless the other material is section 99 of the Code: Regulation 87. It is a criminal offence for a credit provider or its agent to enter premises contrary to these provisions: s. 99 (3). If the credit provider is entitled to repossess goods, and it is experiencing difficulty in getting access to premises, it can go to the Court and seek an authorization to enter the premises in order to effect the repossession: s Information As To Location Of Mortgaged Goods A credit provider wishing to find mortgaged goods can give a notice to the debtor requiring the debtor to tell the credit provider within seven days where the goods are. If the goods are not in the debtor s possession, the debtor must give the credit provider all the information the debtor has that might assist the credit provider to trace the goods: s. 98 (1). Failure by the debtor to provide information is an offence. S. 98 (2). 10

11 7. Order For Possession Another possibility for a credit provider trying to recover mortgaged goods is to ask the Court to make an order that a person in possession of the goods deliver them to the credit provider at a specified time and place: s.101. Failure to comply with such an order is an offence: s. 101 (3). 8.1 Procedure After Repossession 8.2 Notice After Repossession After a credit provider has taken possession of mortgaged goods, it must give the debtor (mortgagor) a written notice within fourteen days setting out: a) The estimated value of the goods: b) The enforcement expenses incurred by the credit provider up to the date of the repossession. If enforcement expenses are continuing to accrue while the goods are in the credit provider s possession, the rate of accrual must be set out. Enforcement expenses include expenses incurred by the credit provider (mortgagee) in preserving or maintaining the goods, including insurance, rates and taxes. The principal limitation is that only expenses incurred after the breach of the contract, and only enforcement expenses authorized by the mortgage documents to be debited to the debtor, can be included: (s. 204) definition of enforcement expenses.) c) A statement of the debtor s rights and obligations in Form 14: (s. 102 (1) (c). 11

12 Day Holding Period After the credit provider has repossessed goods, it must not dispose of them within 21 days after the date of the Notice After Repossession, described above. The Court can authorize the credit provider to dispose of the goods within that time: (s.102 (2)). The Court also has power to stay any enforcement proceedings: s. 96 (3). Similarly, if an application under section 76 of the Code to re-open an unjust transaction is under way the credit provider cannot dispose of the goods: (s 102 (3)). 8.4 Payment By Debtor During 21 Day Holding Period If the debtor pays the arrears and the credit provider s enforcement expenses, and no further defaults occur, within the 21 day holding period the credit provider must return the goods to the debtor: (s.102 (4) (a)). Similarly, the debtor could pay out the contract in full, whereupon the goods must be returned: (s. 102 (4) (b)). 8.5 Introducing a Purchaser During the 21 day holding period the debtor can introduce a buyer of the goods willing to pay the amount which the credit provider has estimated the goods to be worth. If the credit provider has obtained a written offer from another person which is higher, then the buyer the debtor introduces can buy the goods at that higher figure. The credit provider must sell the goods to the buyer at the higher figure: (s. 103). In many cases debtors are dismayed by the low price at which repossessed goods are sold, and this offers a way for the debtor to ensure a realistic price is obtained for the goods. 12

13 9.1 Sale of Repossessed Goods by Credit Provider If the debtor does not pay the arrears and enforcement expenses, or obtain a stay, or pay out the contract in full, or introduce a buyer, then the credit provider must sell the goods * as soon as reasonably practicable, and * for the best price reasonably obtainable: (s. 104 (1)). This is a matter of fact in each case: Henry and Henry v AGC and Others: 1985 WAR Statement of Sale of Proceeds of Mortgaged Goods After a credit provider sells the goods, it must give the debtor a statement setting out: * the gross amount received on the sale of the goods; * an itemized account of each deduction made from the gross amount; * the net proceeds of sale; * the amount required to pay out the credit contract; and * any further recovery action which the credit provider proposes to take against the debtor: ( s. 104 (3) and Regulation 89). 10 Voluntary Surrender A debtor who is experiencing difficulty in meeting repayments under a contract may decide to return the goods to the credit provider. The debtor can give a written notice of this intention to the credit provider, and can return the goods to the credit provider s place of business during ordinary office hours, or such other return arrangements as the debtor and credit provider may agree upon. This 13

14 course of action has the advantage, from the debtor s point of view, of saving some of the expenses involved in a repossession. It is wise, if a debtor plans to do this, to work out the arrangements in advance, in writing. After a voluntary surrender of goods by the debtor to the credit provider, the debtor s rights are similar to those applying following a repossession: (s. 85). NOTES: 1. Division 2 of Part 2 of Schedule 1 of the National Consumer Credit Protection (Transitional and Consequential Provisions) Act Regulation 86 and Form 12 of the National Consumer Credit Protection Regulations REPOSSESSION CHECK LIST 1. Is the loan contract covered by the National Credit Code (Code s. 5 & 6 ) 2. Is the loan secured on the goods (or land) (Code s. 42) 3. Has a valid s. 88 notice been served (Code s s. 194 & 195) 4. Do any exceptions apply (Code s. 194 & s. 88) 5. Has the s. 88 notice been complied with? 6. Compare repossession and voluntary surrender (Code s. 85) 7. Check the 25% rule (Code s. 91) 8. No entry to residential premises to repossess unless informed written consent (Code s. 99) 9. Notice after repossession introducing a cash purchaser (Code s. 102 & 103) 10. Lender must get the best price reasonably obtainable (Code s. 104) 14

15 11. Borrower must provide information about location of mortgaged goods (Code s. 98) 12. Service of notices last known address of borrower (Code s. 195) Ian Macdonald January