Credit Contracts

Contributed by SigourneyDrane and current to 27 July 2018

What is a credit contract?

For the purposes of the National Credit Act and the NCC, a credit contract is a contract under which credit is or may be provided, being the provision of credit to which the National Credit Act and the NCC apply.

The NCC is applicable to all credit contracts which commenced on or after 1 July 2010 under the following circumstances (see section 5(1) of the NCC):

• the debtor is a natural person or strata corporation;
• the credit is (or intended to be) provided wholly or predominantly:
  • for personal, domestic or household purposes (including buying residential property);
  • to purchase, renovate or improve residential property for investment purposes; or
  • to refinance credit previously provided for these purposes;
  • a charge is made for providing the credit; and
  • the lender is involved in the business of providing credit or as a party of, or incidental to, any other business of the credit provider.

A credit contract must be in the form of a written contract document signed by the debtor and the credit provider or a written contract document signed by the credit provider and constituting an offer to the debtor that is accepted by the debtor in accordance with the terms of the offer (see section 14(1) of the NCC).

The Regulations may authorise other ways of making a credit contract that do not involve a written document.

What disclosure requirements apply?

A credit provider must not enter into a credit contract unless the credit provider has given the debtor:

• a pre-contractual statement setting out the matters required to be included in the credit contract (see section 17 of the NCC); and
• an information statement in the form required by the Regulations of the debtor's statutory rights and statutory obligations.

The statements must be given before the contract is entered into or before the debtor makes an offer to enter into the contract, whichever occurs first (see section 16(2) of the NCC).

Credit providers are required by the NCC to specify a comparison rate when advertising fixed-term credit for domestic purposes (see section 16(3) of the NCC). The advertising material must specify the interest rate and applicable fees and charges but may not include government fees and charges or one-off fees.

The pre-contractual statement provides the debtor with information about the provision of the credit (see section 17 of the NCC). The information must include:

• credit provider's name;
• amount of the credit;
• annual percentage rate or rates;
• calculation of interest charges;
• total amount of interest charges payable;
• repayments;
• credit fees and charges;
• changes affecting interest and credit fees and charges;
• statements of account;
• default rate;
• enforcement expenses;
• details of any mortgage or guarantee to be taken;
• commission;
• insurance financed by contract;
• if applicable, provisions for a person other than the debtor to occupy a reverse mortgaged property; and
• any other information required by the Regulations.

If the disclosure requirements are not satisfied then a credit provider may face criminal or civil penalties.

The credit provider must provide the debtor with a copy of the signed credit contract within 14 days of the date the credit contract is made (see section 20 of the NCC).

During the term of the credit contract, the credit provider must provide the debtor with periodical statements of account (see section 33 of the NCC).

The statements of account must cover the following (see section 34 of the NCC):

• statement period;
• balance(s);
• amount of credit provided;
• identity of supplier where the credit was provided for cash, goods or services supplied by another person;
• interest charges;
• fees and charges;
• payments to or from accounts;
• if applicable, the minimum amount payable by the debtor under the continuing credit contract;
• insurance payments;
• any alterations where a correction has been made to a previous statement of account; and
• any other information required by the Regulations.

Responsible lending

The National Credit Act contains requirements for persons engaged in consumers obtaining credit contracts or consumer leases to be licensed and to comply with responsible lending requirements.

Any person who engages in credit activities must be licensed with ASIC or be a representative of someone who is licensed with ASIC.

Examples of persons engaged in credit activities include credit providers and lessors, including assignees, credit assistance providers, like mortgage and finance brokers, but also including product designers, mortgage managers, and franchisees, credit representatives, including some franchisees, and debt collectors.

Credit licensees must engage in credit activities efficiently, honestly, fairly, maintain organisational competence and manage conflicts of interest (see section 47(1) of the National Credit Act).

Credit licensees are responsible for determining how to comply with the general conduct obligations.

Credit licensees must also comply with the responsible lending conduct obligations in Chapter 3 of the National Credit Act.

Credit licensees are responsible for determining how to comply with the responsible lending obligations and depending upon what credit activities a credit licensee engages in, it may need to provide some or all of the following documents:

• Credit guide: preliminary information about the credit licensee. The time at which the credit licensee has to provide a credit guide will depend on what type of entity it is and what credit activities it engages in, but will generally be prior to engaging in credit activities with the debtor.
• Quote: the estimated cost to the debtor of using the credit licensee's services if the credit licensee charges the consumer a fee. Before the credit licensee provides credit assistance, it must give a quote to the debtor, the debtor must have accepted the quote by signing and dating the quote and the credit licensee must give the debtor a copy of the accepted quote.
• Proposal document: sets out the cost to the debtor of using the credit licensee's services, including any commissions. The credit licensee must give a proposal document at the same time it provides credit assistance to the debtor.
• Written assessment: preliminary or final written assessment that a credit contract or consumer lease is 'not unsuitable' for the debtor. The credit licensee must provide a free copy of the written assessment to the debtor if asked within seven years of entering into the credit contract (for a credit providers) or of the date of the quote (for credit assistance providers). A credit licensee is not required to give a written assessment to a debtor if the credit contract or consumer lease is not entered into or the credit limit is not increased (for credit providers) or credit assistance is not provided (for credit assistance providers).

Note that some businesses providing credit are currently exempt from licensing, such as retail stores and car yards. However, whilst the store or car yard may be exempt, the actual credit provider must be licensed.

Search the ASIC Connect Professional Registers to check whether your credit provider or credit assistance provider is licensed. Alternatively, you can phone ASIC's Infoline on 1300 300 630.