Changes to credit contracts

Contributed by Ian Macdonald and current to 1 September 2005

UNILATERAL CHANGES TO THE CREDIT CONTRACT BY THE CREDIT PROVIDER

Under the Code some changes to a credit contract can be made by the credit provider unilaterally, that is, without the agreement of the debtor (ss. 58,64).

For a credit provider or debtor to unilaterally change the credit contract, the contract must allow for the change. The credit provider can unilaterally make changes to:

• interest rates;
• repayments;
• credit fees and charges; and
• other terms of the credit contract (with some exceptions).

The Code requires that the borrower be notified of unilateral changes. In most cases the notification must be given by post within a period of time before the change comes into effect. In some cases, debtors can be notified by a combination of newspaper advertisements and subsequent notification in a statement of account (s.59).

CHANGES THAT CANNOT BE MADE UNILATERALLY

If the annual percentage rate under a credit contract is currently fixed for a specified term (including the whole term) of the contract, the contract cannot be changed unilaterally by a credit provider so as to increase or change the method of calculation of a fee or charge:

• payable by the debtor on early termination of the credit contract; or
• payable on pre-payment of an amount under the credit contract (s.64).

CHANGES TO CREDIT LIMITS AND OTHER CHANGES UNDER CONTINUING CREDIT CONTRACTS

A credit provider must give the debtor a written notice if the credit provider decides not to provide any further credit or to reduce the credit limit. The notice must be given “as soon as practicable” after the change is made.

However, this does not apply where the debtor is in default under the contract, in which case the credit provider will be required to follow a different process under the provisions of the Code relating to enforcement.

The credit provider cannot increase a credit limit under a continuing credit contract if the debtor does not request this or does not provide written consent (s.62).

CHANGES BY AGREEMENT

Documentation to be given to the debtor

If the parties under a credit contract, mortgage or guarantee agree to change its terms, the credit provider must, within 30 days after the date of the agreement, give to the other party under the agreement a written notice setting out particulars of the change.

However this notice does not have to be given where:

• a change defers or reduces the obligations of the debtor for a period not exceeding 90 days; or
• the parties agree to increase the amount of credit under the credit contract.

However if the parties do agree to increase the amount of credit, the credit provider must give to the debtor written notice containing information required by the regulations before the change is made (s.65).

DIFFICULTIES IN MAKING REPAYMENTS – APPLYING FOR A “HARDSHIP VARIATION” UNDER THE CODE

Where the debtor is unable to meet his or her obligation to make repayments under a credit contract, an application may be made for a “hardship variation” to reduce or postpone the payments.

However, even if the debtor does not fall within the hardship variation provisions, the debtor can always negotiate with the credit provider to reduce repayments or to increase the length of time for repayments.

Who can get a hardship variation?

To be eligible for a hardship variation, the debtor’s application should meet the following criteria:

• the maximum amount of credit that is or may be provided under the contract is $316,800 or less. This does not mean that an application for a variation cannot be made to the credit provider, but the application will not have the statutory backing of the Code;
• the debtor is unable to pay because of some kind of “reasonable cause”. The examples given by the Code are illness and unemployment. Other causes of an inability to pay (such as gambling) are unlikely to be considered to be “reasonable”; and
• the debtor “reasonably expects” to be able to discharge the debtor’s obligations if the terms of the contract are changed. If the debtor has no reasonable expectation of being able to make repayments even if the repayments are reduced or postponed, the application should not be made. If, for example, the debtor has suffered a dramatic reduction in income as a result of unemployment, and has no short or medium term prospects of a return to work, there may be no benefit in a hardship variation. The potential costs and the long term benefits for the debtor need to be taken into account (s.66).

How is the application for the hardship variation made?

The application must initially be made to the credit provider. The Code does not state that the application must be in writing, but from a practical point of view this is desirable.

Where the credit provider does not change the credit contract, the debtor may apply to the SAT to change the terms of the contract. Information as to how to apply to the SAT is available from its website: www.sat.justice.wa.gov.au. See also CHALLENGING GOVERNMENT DECISIONS for general information about the SAT’s processes and procedure.

The SAT must allow the applicant, the credit provider and the guarantor a reasonable opportunity to be heard. The SAT can change the contract or refuse to make any change (s.68).

The SAT can stay (that is, put on hold) any enforcement proceedings under the credit contract until the application has been determined (s.68(3)). This is significant, as any enforcement proceedings taken by the credit provider could make the hardship variation application redundant.

A credit provider may apply to the SAT for an order varying or revoking an order previously made by the SAT. The credit provider may also seek a variation or revocation of a stay of enforcement proceedings (s.69).

In Western Australia only, rather than going direct to the SAT the debtor may apply to DoCEP for assistance to negotiate changing the terms of the credit contract (s.66(1a)).

What kind of changes can be made under a hardship variation?

To fit within the provisions of the Code, the debtor must seek to change the terms of the credit contract in one of the following ways:

• extending the period of the contract and reducing the amount of each payment due under the contract accordingly (without a change being made to the annual percentage rate(s));
• postponing during a specified period the dates on which payments are due under the contract (without a change being made to the annual percentage rate(s));
• extending the period of the contract and postponing during a specified period the dates on which payments are due under the contract (without a change being made to the annual percentage rate or rates) (s.66(2)).

What written information has to be given to the debtor about the change?

A credit provider that enters into an agreement with the debtor under the hardship variation provisions must, within 30 days after the date of the agreement, give to the debtor and any guarantor under a guarantee related to the contract a written notice setting out particulars of the change in the terms of the credit contract (s.67).