NCCP ENHANCEMENT ACT AMENDMENTS Updated 24 August 2012 This report reflects the final form of the Consumer Credit Legislation Amendment (Enhancements) Bill 2012 as passed by the House of Representatives on 26 June 2012, and then passed by the Senate on 20 August 2012. It is now law. The Senate did not make any amendments to the Bill. The draft regulations were issued by Treasury on 8 August 2012 and submissions close on 31 August 2012. This summary of the Bill includes a summary of the draft regulations, but these may change following feedback during the submission process. The initiatives contained in the Bill commence on different days as specified below. The key features of the Bill are as follows. A more detailed summary follows on later pages. Summary of change Commencement date Provisions about hardship and default New hardship provisions to make it easier for borrowers to apply for 1 March 2013 hardship relief. Currently hardship applications apply when the credit amount is $500K or less, but that limit will no longer apply to credit contracts made on or after 1 March 2013. A prohibition on beginning enforcement action while a hardship 1 March 2013 application is being heard and for 14 days after responding to a postponement of enforcement application. Currently postponement applications apply when the credit amount is $500K or less, but that limit will no longer apply to credit contracts made on or after 1 March 2013. Prescribed notices to be given to borrowers seven days before a 1 March 2013 notice (also prescribed) is given to employers to collect payments. Extend the time for giving direct debit default notices from 10 1 March 2013 business days to 14 days Minor amendments to s88 (default notices) 1 March 2013 Provisions about brokers Courts can make orders to address unfair or dishonest conduct by 1 March 2013 finance brokers. Prohibition on the use of independent, impartial, unbiased unless 1 March 2013 no commission or other benefits from lender. Prohibition on use of financial counsellor, and financial 1 March 2013 counselling and similar expressions Provisions about reverse mortgages New requirements for reverse mortgages Partly the day after Royal Assent, partly 1 March 2013 No negative equity guarantee for reverse mortgages and extra The day after Royal Assent requirements for enforcement Provisions about small amount loans and interest rate caps Create a new regime for brokers and lenders in relation to small 1 March 2013 amount credit contracts being unsecured loans of $2,000 or less for terms of two years or less. SACC lenders and brokers must review ADI accounts for the last 90 days. Rebuttable presumption for SACCs that a loan is unsuitable if the borrower is in default under another SACC or the consumer has been a debtor under two or more SACCs during the last 90 days. Loans for less than 15 days prohibited except by ADIs and continuing credit contracts. Impose an interest rate cap for all credit contracts of 48% pa 1 July 2013
2 including fees and charges). Medium amount credit contracts (MACCs) are loans of $2,001 to $5,000 for terms of two years or less excluding loans by ADIs and continuing credit contracts. MACCs can charge an establishment fee of $400 in addition to the 48% pa interest and fees cap. SACCs can only charge an establishment fee of 20% and a credit fee of 4% per month in each case calculated on the adjusted credit amount being the initial amount lent (ie the loan amount excluding any advance to pay these fees upfront). Provisions about consumer leases Amend the NCC so that consumer leases are regulated more like regulated loans 1 March 2013 Summary of proposed amendments to NCCP Act and NCC. This summary does not list all sections. Comments are in italics. Some amendments are to the NCCP Act and some to the NCC. Some provisions only apply to credit contracts made on or after the relevant commencement date as shown in the more detailed summary. (Of course new provisions regarding small amount loans, reverse mortgages, and consumer leases only apply from the commencement date). Hardship applications NCC amendments [Commences 1 March 2013 but amendments to s72, 73, and 74 apply only to contracts entered after commencement, so the old provisions will apply to contracts entered before that date] 72(1) Borrowers may give lenders a hardship notice, orally or in writing, if unable to meet the obligations. There is no need for borrowers to provide details of their hardship or be able to demonstrate that they could make repayments if the contract is varied. This right is no longer confined to loans of $500,000 or less. It extends to regulated residential investment loans. 72(2) Within 21 days of receiving the hardship notice, the lender may give the debtor a notice requiring the debtor to provide within 21 days specified information relevant to the application. 72(4) The lender must within the time specified in (5) below give the debtor a notice in the form (if any) prescribed by the regulations: recording the agreed change to the contract; or stating that there has been no agreed change, the reasons for no agreement, EDR details, and the debtor s EDR rights. 72(5) The notice in (4) must be given within: if no further information was required under 72(2): 21 days from the application if further information was required under 72(2), but all the requested information was not received: 28 days after making the requirement if further information was required under 72(2),and all the requested information was received: 21 days after receiving the information. 73 Minor consequential change. 74(2) A court may vary a contract, but not so as to reduce the amount ultimately payable. Extensions of term can be ordered, an option not available under the previous law.
3 89A If: a credit provider is required to give a s88 default notice before beginning default proceedings [the usual situation]; and a hardship notice is given to a lender before to or after issuing a s88 default notice; and either: (i) (ii) no other hardship notice has been given in the last four months; or another hardship notice has been given in the last four months, but the credit provider reasonably believes the grounds are materially different; the lender must not begin enforcement proceedings until 14 days after the lender has notified the debtor that the lender does not agree to change the contract. Postponement applications NCC amendment [Commences 1 March 2013, but applies only to contracts entered after commencement, so the old provisions will apply to contracts entered before that date] 94(3) If a lender receives a postponement application, the lender must not begin enforcement proceedings until 14 days after giving the response to the postponement application (either agreeing to negotiate or not). Under s94(1) borrowers can make a postponement application before the end of the period of a default notice, and the lender must respond within 21 days either agreeing or giving the reasons for not agreeing, the name of its EDR scheme, and debtor s rights under the scheme. [Section 204 defines enforcement proceedings as: commencing court proceedings; taking possession of property; or taking any other action to enforce a mortgage] Currently postponement applications apply when the credit amount is $500K or less, but that limit will no longer apply. Unfairness and dishonesty NCCP amendment [Commences 1 March 2013] 180A Courts can make orders to address any unfair or dishonest conduct by finance brokers. The order is made against the person who acted unfairly. The section does not apply to lenders and lessors and orders cannot affect a related credit contract or consumer lease. Orders under other legislation or the common law could affect the loan or lease. Restriction on use of terms and representations NCCP amendments [Commences 1 March 2013] 160B The words independent, impartial, unbiased or words (whether or not in English) having a similar meaning must not be used by licensees unless the licensee (directly or indirectly): does not receive any commissions (apart from commissions that are rebated in full to the borrower);
4 does not receive other gifts or benefits from lenders or lessors that may reasonably be expected to influence the licensee; and is not subject to any restraint on product offerings; and is not subject to any conflict of interest. 160C The words financial counsellor, financial counselling or words (whether or not in English) having a similar meaning must not be used by licensees, unless exempted by regulations. Giving authorisation for deductions by employer NCCP amendments [Commences 1 March 2013] 160E (1) These provisions apply if a credit provider or lessor proposes to give to a customer s employer an authority to deduct amounts from payments for work. (2) If the credit contract or consumer lease is of a prescribed kind, the financier must give a prescribed notice with the authority. (3) If the customer is in default, the financier must give the customer at least seven days notice in the prescribed form of the intention to give the authority (but only if a form has been prescribed). [Reg 28XXC (draft) provides that s160e applies if the first deduction is to be made within one month after the debtor or lessee signs the direction. It is unclear how this regime is intended to operate. Is it intended to apply to loans in default only? The prescribed notice to employers provides that the debtor may cancel the direction at any time.] Sundry NCC amendments [Commences 1 March 2013] 87(2) Direct debit default notices must be issued within 14 days rather than 10 business days. Reverse mortgages NCCP amendments [Commences 1 March 2013 and applies only to credit contracts made on or after commencement except for s88] 133DB Before making a credit assessment lenders and brokers must: show the borrower in person (or give the consumer in a way prescribed by the regulations) projections (calculated using an ASIC approved website) and give the borrower a copy tell the borrower prescribed things (TBA in regulations) give the borrower a Reverse Mortgage Information Statement (TBA in regulations) A licensee need not give projections again if they have been given by someone else. 133DC 133DC Lenders and brokers marketing reverse mortgages who have a web site that provides information about reverse mortgages must display on the web site a Reverse Mortgage Information Statement. Lenders and brokers marketing reverse mortgages must give the borrower a Reverse Mortgage Information Statement if requested.
5 133DE Brokers and lenders must not use the term reverse mortgage unless the loan meets the statutory requirements of a reverse mortgage. 179(7) If a lender provides an unsuitable loan when a reverse mortgage would have been suitable and available from the lender or another lender, the borrower can apply to court for an order to allow the borrower to remain in their principal place of residence. NCC provisions NCC amendments [Commence 1 March 2013 except for 13A, 86A, and 93A which commence the day after the Royal Assent]. 13A 17(15A) 18A A reverse mortgage is a loan (other than a bridging loan) under which the debt increases without any obligation on the borrower to reduce that liability. Other criteria may be stipulated by regulation. [A bridging finance contract is for a contract for two years of less under which the borrower expects to receive a lump sum to repay the loan. This means that a loan for more than two years under which interest is capitalised will be a reverse mortgage unless the regulations set additional criteria. This may impact on product development eg nil or reduced repayments for three years would comprise a reverse mortgage and be subject to these rules.] If the lender s credit policy allows a person other than the borrower to occupy the property, the borrower may nominate that the other occupant has the same rights as the borrower eg right to occupy. The credit contract can limit the type of cohabitants. The following cannot be a default event in reverse mortgages: failure to advise another person is occupying the property failure to provide evidence about who occupies the property leaving the property unoccupied [An empty property could lose value quickly. This should be limited so that default only occurs if the property is left vacant without the lender s approval for more than 60 days.] (d) failure to pay rates and taxes and other costs within three years of due date (e) borrower failing to comply with an unclear loan term (f) cross default (g) an event or omission prescribed by the regulations. 18B 18C 86A If the lender s credit policy does not allow a person other than the borrower to occupy the property, brokers must notify the borrower in writing that the contract does not contain a tenancy protection provision before providing a credit service (ie providing credit assistance or acting as an intermediary). Lenders must not enter into a credit contract until the lender has told the borrower in writing that the contract does not contain a tenancy protection provision. Regulations may require borrowers to obtain legal advice prior to entering into a credit contract. A borrower can terminate at any time by paying the adjusted market value of the property even if that amount is less than the amount owing. The adjusted market value is to be worked out as prescribed in the regulations (yet to come). This makes reverse mortgages much riskier for lenders as borrowers could play the market and repay when values are low. Hopefully the regulations will provide some protection for lenders, especially when the market value is reduced by deliberate damage caused by the borrower. 88(1) In addition to a s88 notice, before beginning enforcement proceedings in respect of a reverse mortgage, the lender must speak by phone or in person to the borrower,
6 borrower s lawyer, or borrower s attorney to confirm receipt and understanding of the default notice. [ Unlike most other provisions, this provision will apply to credit contracts entered prior to commencement. 93A 185A Extra requirements for enforcing reverse mortgages in the limited circumstances when a borrower can be pursued for any shortfall. If the lender s credit policy allows a person other than the borrower to occupy the property, the lender must keep records of occupants as specified in the regulations. Small amount contracts and interest rate caps Schedule 3 provisions commencing 1 March 2013 General provisions - NCCP 5(1) A short-term credit contract (STCC) is a credit contract for $2,000 or less for a term of 15 days or less, excluding loans by ADIs and continuing credit contracts. These loans are prohibited see sections 124A (re brokers) and s133ca (re lenders). [However, borrowers may repay loans early ie within 15 days]. 5(1) A small amount credit contract (SACC) is a credit contract for an unsecured loan for $2,000 or less for a term of at least 16 days but not longer than one year, excluding loans by ADIs, and continuing credit contracts. 335A An independent review of how these provisions are working is to be undertaken as soon as practical after 1 July 2015 (ie two years after the interest rate cap commences). Rules applying to brokers NCCP re SACCs 117(1A) 118(3A) If any of the borrowers have an ADI into which income is paid, brokers arranging a SACC must obtain and consider account statements for at least the immediately preceding 90 days as part of the broker s preliminary assessment. There is a rebuttable presumption in relation to SACCs that a loan is unsuitable if the consumer: is in default under another SACC; [not necessarily with the same lender] or the consumer has been a debtor under two or more SACCs during the last 90 day period. 124B Licensees who provide credit assistance for SACCs must display information as prescribed by the regulations including web sites. Rules applying to lenders NCCP re SACCs 130(1A) 131(3A) 133CB 133CC As 117(1A) concerning review of bank account statements As 118(3A) re other SACCs As 124B re displaying information Regulations may prescribe rules re SACCs. [Reg28S (draft) provides that if a borrower has 50% or more of their income from Centrelink, no more than 20% of their income must be required to meet repayments under all SACCs. A complex formula is proposed.]
7 [Reg 28XXD (draft) provides that if there are two or more contracts which could have been comprised in a single credit contract, the cap for a single contract will apply. For example, splitting a MACC into two SACCs to derive the higher yield under SACCs.] Schedule 4 provisions commencing 1 July 2013 The special rules relating to SACCs specified above are in addition to the requirements below. Amendments to the NCC re SACCs 17(4) to (6) SACC credit contracts are not required to show the annual percentage rate, method of calculation of interest charges, or the total interest charges (disclosures otherwise required by s 17(4) to (6). 23A 24A 31A(1) SACCs must not breach the interest and fees cap Brokers must not provide credit assistance in respect of SACCs which breach the cap. SACCs may only impose: a permitted establishment fee a permitted monthly fee a default fee (but see 39B below) (d) government charges and duties. 31A(1A) 31A(2) No establishment fee can be charged for SACCs which refinance another SACC. The permitted establishment fee cannot exceed 20% of the adjusted credit amount see 204 below. 31A(3) The permitted monthly fee cannot exceed 4% of the adjusted credit amount see 204 below. 31B 39A 39B 39C A credit provider (or a person prescribed by the regulations) must not accept a fee or charge in relation to a SACC, or a thing that is connected with a SACC except for fees authorised by s31a. [Reg79AB (draft) provides that fees paid to a person introduced to the debtor by the credit provider for any mind of service is taken into account in calculating whether the cap has been exceeded.] No part of the loan may be paid to the lender (or a person prescribed by the regulations) except for a 31A amount or an amount to pay out an existing SACC. The maximum that can be recovered on default is twice the adjusted credit amount, plus enforcement expenses. If there is default under a direct debit, the lender must do the prescribed things [yet to be prescribed]. 204(1) Adjusted credit amount means the first amount provided under the contract, excluding any advance for fees (ie establishment fee and monthly fee) so it is the net loan. Reg 79C (draft) provides that a lender must not use a DDR if the DDR has been dishonoured twice, unless the lender has not told the debtor that the requests have been unsuccessful or made reasonable attempts to contact the debtor. Amendment to NCC re contracts other than SACCs, bridging finance contracts, or loans by ADIs
8 32A(1) Interest rate cap 48%pa which applies to all regulated credit (calculated excluding an establishment fee of $400 for medium amount contracts per 32B). This restriction does not apply to ADIs, SACCs, or bridging finance contracts. In testing whether the cap is breached, the credit cost amount is taken into account as distinct from simply interest and fees. The credit cost amount includes in addition to normal interest and fees paid to the lender, the amount of a fee or charge payable by the debtor (whether or not payable under the contract) to: (d) any person (whether or not associated with the credit provider) for an introduction to the credit provider; or any person (whether or not associated with the credit provider) for any service if the person has been introduced to the debtor by the credit provider; or the credit provider for any service relating to the provision of credit, other than a service referred to in subparagraph (ii); or any other amount prescribed by the regulations. - s32b(3) 204 Bridging finance contract means a contract under which: when the contract is made the debtor reasonably expects to receive a lump sum before the term of the contact ends, and intends to repay the loan so far as possible with that sum; and the term is two years or less. 32AA A loan (including MACCs) must not be varied to increase the interest rate to exceed 48%pa (ADIs and SACCs excepted). [Reg 79AC (draft) provides that any DEF or other fee payable is taken into account in determining whether the cap is breached if the fee arises from the lender requesting within one month of the contract being entered that the debtor to increase 50% or more their repayments. Although SACCs are not mentioned here, any payments under a SACC are subject to the cap.] 204(1) A medium amount credit contract is: not a continuing credit contract; the lender is not an ADI; the credit limit is at least $2,001 and not more than $5000; and (d) the term is at least 16 days but not longer than 2 years. 32A(2) 32B Brokers must not provide credit assistance in respect of loans that breach this cap. Provides the method that must be used to calculate interest. Consumer leases [Commences 1 March 2013] These amendments are to make the regulation of consumer leases more like the regulation of NCC loans. The sections in brackets refer to the corresponding section for loans. The provisions apply to leases entered into before and after commencement. 175B Fees to recoup third party costs must not exceed those costs 175C Lessors must provide periodic statements of account at least annually and on request (s33)
9 175G 175H 177A Process for lessees to obtain written explanation of disputed amounts. No default action may be taken until at least 30 days after providing the explanation. Lessees can refer disputed amounts to a court during the 30 days, and if so no default action may be taken in relation to the disputed liability (s38) At least 90 days prior to lease expiry, the lessor must give the lessee prescribed information called the end of lease statement Give notice within 30 days of changes by agreement (s71) 177B Hardship provisions (new s72) 177F 178A 179A 179C 179D 179F 179G 179H 179M s179n 179R 179S 179U 179V Courts may re-open unjust leases (s75) Lessee may terminate before goods provided Provide payout figures (s83) Direct debit default notice (s87) 30 day default notice (s88) No enforcement until at least 14 days after deciding a hardship or postponement application (new s89a) Acceleration clause notice (s92) Postponement applications (s94) Lessor can require lessee to disclose location of goods (s98) Restrictions on entry to residential premises (s99) Default costs limited to reasonable costs (s107) Linked suppliers (s129) Not make false or misleading representations (s154) No harassment (s155). This document does not comprise legal advice and Gadens Lawyers accept no responsibility for it.