Obligations before entering into credit contracts

Contributed by Elizabeth Samra, Consumer Law Centre of the ACT and current to May 2018

Responsible lending

From 1 July 2010 (or 1 January 2011 for banks and registered finance companies), credit licensees must comply with the responsible lending conduct obligations in Chapter 3 of the NCCP Act.

The purpose of the responsible lending obligations is to ensure that credit providers, lessors and credit assistance providers do not suggest, assist with or provide a credit contract or consumer lease which is unsuitable. This obligation also applies to increases in the limit of credit contracts. It is one of the key changes to the consumer credit regime.

Before entering into a credit contract, a credit provider must assess whether a credit contract will be unsuitable (s 129 NCCP Act). The assessment must be made no more than 90 days prior to entering or increasing the credit limit under that contract (s 128 NCCP Act). In the case of credit assistance providers, the obligation is to undertake a preliminary assessment. The preliminary assessment does not relieve the credit provider of its obligations to assess whether a particular credit contract is ‘not unsuitable’ (see ASIC v The Cash Store Pty Ltd (in liq) [2014] FCA 926 [68]) (“ASIC v The Cash Store”).

In making an assessment, s 130 of the NCCP Act requires a credit provider to:

• make reasonable enquiries about the consumer’s requirements and objectives for obtaining credit;
• make reasonable enquiries about the consumer’s financial situation; and
• take reasonable steps to verify the consumer’s financial situation.

ASIC has given guidance on its expectations for meeting the responsible lending obligations in Regulatory Guide 209 Credit licensing: Responsible lending conduct (“ASIC Guide 209”). ASIC Guide 209 highlights that the obligation to make reasonable inquiries involves obtaining information about the consumers actual income, expenses and other circumstances likely to impact their ability to meet their financial obligations under the contract. This generally includes information about the consumer’s current amount and source of income, the extent of the consumer’s fixed expenses (such as rent, repayment of existing debts, child support and recurring expenses) and the consumer’s variable living expenses and drivers of variable expenses (such as dependants and any particular unusual circumstances).

In ASIC v The Cash Store, Davis J explained the obligation required ‘a sufficient understanding of the person’s income and expenditure’ and at a minimum this necessitated inquiries about the consumers’ income and living expenses. In ASIC v Channic (No 4) [2016] FCA 1174 [1752-53], the failure to consider the expense of owning, maintaining, insuring and operating a vehicle that consumers with limited income were to purchase, was found to constitute a failure to make reasonable inquiries about the consumers’ financial situation. Moreover, it was found that the “adoption of the notional figure is not conduct of “making” reasonable inquiries about the consumer’s financial situation or conduct of “verifying” the consumer’s financial situation” (at [1736]).

In relation to what constitutes reasonable inquiries about the consumer’s requirements and objectives, ASIC Guide 209 recommends obtaining information about:

• the amount of credit needed;
• the timeframe for which it is required;
• the purpose and benefit sought;
• the features of the credit product that are important to the consumer; and
• any additional expenses to be financed by the consumer.

ASIC Guide 209 provides that the extent of the obligation to make inquiries and verify information is scalable – that is, it will vary depending the circumstances of the consumer. Some considerations include:

• the potential impact upon the consumer of entering into an unsuitable credit contract;
• the complexity of the credit contract;
• the capacity of the consumer to understand the credit contract; and
• whether the consumer is an existing customer of a credit provider or a new customer.

Under s 131 of the NCCP Act, a credit provider must assess a credit contract to be unsuitable if it is likely that, at the time of the assessment:

• the consumer will be unable to comply with the financial obligations under the contract, or could only comply with substantial hardship; or
• the contract will not meet the consumer’s requirements or objectives.

The consumer is presumed to be in substantial hardship if the only way they could comply with their financial obligations under the contract would be by selling their principal place of residence (s131(3) NCCP Act). Upon being asked, and within the time frames prescribed, a credit provider must free of charge provide a consumer with a written copy of the suitability assessment (s 132 NCCP Act).

Contraventions of the responsible lending obligations under the NCCP Act give rise to civil penalties. Consumers who have suffered loss or damage as a result of the contravention can seek orders from the court for compensation (ss 178, 179, 180, 180A NCCP Act). The time limit for taking action for breaches of responsible lending is six years from the date of the breach.

Unsuitable leases

A lessor is prohibited from entering into unsuitable lease contracts (s156(1) NCCP Act).

A consumer lease is unsuitable if, at the time it is entered:

• It is likely the consumer will be unable to meet the lease repayments or only with substantial hardship; or
• The lease does not meet the consumer’s requirements and objectives (s156(2) NCCP Act).

Unsuitable leases could include where a consumer was provided a lease when they wanted to own the goods or when they could not afford the repayments.

Additional provisions for small amount credit contracts and reverse mortgages

A small amount credit contract (“SACC”), also known as a payday loan, is defined at s 5 of the NCCP Act as a loan of $2,000 and under, for a term of 16 days to 12 months, that is not secured by a mortgage. There are additional responsible lending requirements for credit providers of SACCs. These include:

• A presumption that the contract will be unsuitable if the consumer is in default under another SACC at the time of the application unless otherwise proven (s 123(3A) NCCP Act);
• A presumption that the contract will be unsuitable if in the 90-day period before the loan application the consumer already had two other SACCs unless otherwise proven (s 123(3A) NCCP Act);
• Consumer bank accounts must be obtained and examined for 3 months preceding the loan application (s 117(1A) NCCP Act);
• If 50% of the consumer’s income is from Centrelink, a loan must not be entered into if the repayments exceed 20% of the consumer’s gross income;
• Warnings about the SACCs must also be given to consumers.

In 2017 there was a review of the regulation of SACCs. At the time of writing (April 2018), the government has not introduced legislation to amend the NCCP Act, although a private members Bill has been tabled in Parliament - National Consumer Credit Protection Amendment (Small Amount Credit Contract and Consumer Lease Reforms) Bill 2017.

This Bill seeks to amend the NCCP Act to:

• impose a cap on the total payments that can be made under a consumer lease;
• require SACCs to have equal repayments and payment intervals;
• remove the ability for SACC providers to charge monthly fees in respect of the residual term of a loan where a consumer fully repays the loan early;
• prevent lessors and credit assistance providers from undertaking door-to-door selling of leases at residential homes;
• introduce anti-avoidance protections; and
• increase penalties.

Credit Cards

Parliament recently passed the Treasury Laws Amendment (Banking Measures No. 1) Bill (2017) which introduced, among other things, tougher responsible lending measures for credit card contracts. Credit cards and credit limit increases for a consumer are to be assessed according to whether the consumer will be able to repay an amount equal to the credit limit within a specified period (to be determined by ASIC). This requirement will apply to licensees that provide credit assistance, and licensees that are credit providers, in relation to both new and existing credit card contracts from 1 January 2019.

There are also separate responsible lending conduct obligations for reverse mortgages.

Pre-contractual disclosure obligations

The purpose of the disclosure requirements is to ensure prospective debtors receive all relevant information prior to entering into a credit contract. The following documents must be disclosed throughout the credit application process, depending on who is providing the credit or credit assistance:

• A credit guide;
• A pre-contractual statement setting out the matters required to be included in a contract and an information statement;
• A quote for credit assistance, if relevant;
• Key Fact Sheets (for standard home loans and credit cards).

Credit Guide

A credit provider must provide a consumer with 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 (s 126(1) NCCP Act).

The credit guide must:

• be in writing;
• specify the credit provider’s name, contact details and ACL number;
• include information about complaint handling procedures, including contact details for a consumer to access internal dispute resolution processes and the AFCA scheme;
• disclose the credit provider’s obligations to provide upon request a written copy of an assessment of the suitability of any proposed credit contract;
• advise that the credit provider is prohibited from entering, or increasing the credit limit under a credit contract that is unsuitable for the consumer (s 126(2) NCCP Act).

Section 149 of the NCCP Act sets out similar requirements for consumer leases.

Pre-contractual statement and information statement

A credit provider must not enter into a credit contract unless it has given the debtor a pre-contractual statement setting out the matters required by s 17 of the NCC to be included in the contract document (s 16(1)(a) NCC). This assists a consumer to identify the main terms of the credit contract.

Contravention of the disclosure obligations give rise to liability for civil penalties. Consumers who have suffered loss or damage as a result of the contravention can seek orders from the court for compensation (ss 178, 179, 180, 180A NCCP Act, ss 118, 124 NCC). In the case of key requirements, the credit provider could be penalised and the maximum penalty is usually all interest charges under the contract plus any other loss interest refunded to the consumer (s 114 NCC). The key requirements have the letters “KR” in parenthesis below.

Section 17 lists the following matters the contract document must contain:

• the credit provider's name;
• the amount of credit or credit limit (KR);
• annual percentage rate or rates of interest (KR);
• method of calculation of interest charges (KR);
• total amount of interest charges payable (KR);
• repayment details;
• credit fees and charges (KR);
• if the interest rate or fees can be changed, as statement to this effect (KR);
• details relating to the frequency of statements of account;
• circumstances of default rates of interest to applied (KR);
• a statement that enforcement expenses may become payable in the event of a breach;
• if there is a mortgage or guarantee, a statement that a mortgage has been taken out and a description of the property;
• details of any commissions paid;
• details of related insurance contracts (KR);
• provisions for person other than debtor to occupy reverse mortgaged property.

In addition to a pre-contractual statement, the credit provider must provide a prospective debtor with an information statement outlining their statutory rights and obligations (s 16(1)(b) NCC).

There are different key requirements for consumer leases (ss 174 and 175 NCC) and continuing credit contracts, such as credit cards (s 111(2) NCC).

Quote for credit assistance

A credit assistance provider must, before providing credit services:

• first provide a quote to a consumer;
• ensure the consumer has signed and dated that quote or otherwise indicated its acceptance of it; and
• given a copy of the quote to the consumer (s 114(1) NCCP Act).

Section 114(2) of the NCCP Act details what should be contained in the quote.

Key fact sheets

Credit providers are also required to provide potential borrowers with key facts sheets for new credit cards and standard home loans (ss 133AA – 133AF NCCP Act).