Overview

Contributed by Ian Macdonald and current to 1 September 2005

CONSUMER CREDIT LAWS

The use of consumer credit has increased dramatically over the last few decades. Many consumers rely on credit rather than cash to purchase necessities such as groceries, as well as major items such as houses and cars.

Credit is almost always more expensive than cash, because the borrower pays for the use of the borrowed money by paying interest and other fees or charges.

Consumer credit law is basically contractual. That is, the credit provider and the consumer reach a legally binding agreement about the terms on which money will be lent. The contract records information such as the interest rate, the level of repayments, fees and charges, and what happens if the borrower defaults.

Consumers find it difficult to negotiate their loans on an equal footing with financial institutions. These large institutions tend to have much greater information and expertise than consumers, and can afford to set the terms on which loans will be offered.

To protect consumers, laws such as the Consumer Credit Code 1996 (WA) (“the Code”) have been introduced. This is part of a Queensland Act of Parliament, which has been adopted by Western Australia and all other States and Territories in almost identical form. This law provides that a minimum level of information must be provided in consumer credit contracts, and gives consumers certain rights which cannot be bargained away.

In Western Australia, most credit advanced to consumers for personal, domestic or household purposes is regulated by Code. In the past, some consumer credit contracts were regulated by the Hire-Purchase Act 1959, or the Credit Act 1984. As there are now very few consumer credit contracts regulated by those Acts, they are mentioned briefly later in this chapter.

Thus, in any consumer credit case, the legal rights of the consumer and the credit provider will be determined by examining the contract between the consumer and the credit provider together with any consumer credit legislation that applies to the contract.

SHOPPING AROUND FOR CREDIT

When considering entering into a credit contract, consumers need to carefully compare a range of loan products to find out which is the most suitable for their needs and to compare the costs of different loans.

Consumers do not have to arrange finance through the seller of goods or services that are being purchased, and are free to choose the credit provider.

Consumer Credit legislation is specifically designed to ensure that certain basic information is disclosed to consumers, to enable them to compare loan products. Consumers should always carefully read all documentation related to a loan and rely on what is written rather than what they are told by a salesperson or an employee of a credit provider. It is desirable to take loan documentation away from the point of sale so that there will be a proper opportunity to read it. Consumers should also seek independent legal or financial advice if they are unsure about any aspect of the loan transaction, or about their ability to make the loan repayments and the risks associated with the loan.

Finance Brokers and Mortgage Brokers have a role in arranging finance for consumers. These brokers can provide details of a wide range of loan products, and are usually paid a commission by credit providers for arranging loans. Consumers need to carefully check any fees to be charged by the finance broker if the services of a broker are engaged.

WHAT IS CREDIT?

Credit involves deferral of a debt. This generally means that:

• one party (the debtor) has received a benefit;
• the debtor is contractually bound to pay for the benefit in cash; and
• at the time the benefit was received, the duty to pay was postponed to a later date.

TYPES OF CREDIT

Continuing Credit

A continuing credit contract is a type of credit contract defined in the Code. Continuing credit contracts allow multiple advances of credit. Examples of continuing credit contracts are Bankcard, Visa, MasterCard, store credit cards and overdraft facilities.

Typically, the amount of credit available is limited. This amount is commonly known as the credit limit. The borrower is legally obliged not to exceed the credit limit. Exceeding the credit limit is generally a default under the contract. This may mean that the financial institution may ask the borrower to pay the whole amount owing under the credit card.

Borrowers often self impose a low credit limit to control their spending habits. Self imposed credit limits will not guarantee that the credit provider will not honour requests for payments above the credit limits. The liability for amounts spent above the credit limit generally lies with the borrower though in some cases the liability may lie with the credit provider. Legal advice should be sought if the credit limit is exceeded due to a physical or mental condition of which the credit provider was aware, or should have been aware.

Credit Contract

Under the Code, any loan that is regulated by the Code but is not a continuing credit contract is a credit contract.

Lease

A lease is essentially a hiring or rental contract. A lease is not usually considered to be a form of credit. However, the Code regulates the leasing of goods. Leases regulated by the Code are for some purposes treated in the same way as credit contracts.

Under a lease the lessor is the owner of the goods and the lessee (hirer) has no right to own the goods under the contract. Some lease arrangements allow lessees to purchase the goods at the end of the contract by paying the residual value, but there is no right or obligation to do so. If the lessee does not wish to purchase the goods, they will be sold, and if less than the residual value is obtained the lessee will be liable to pay the balance.

Hire Purchase

A hire purchase contract is similar to a lease, but at the end of the contract, the consumer owns or is entitled to purchase the goods. The hirer does not own the goods during the course of the contract; they remain the property of the owner. Generally, the amount payable under the hire purchase contract exceeds the cash price of the goods.

UNDERSTANDING WORDS USED IN CREDIT CONTRACTS

Amount Financed or Amount of Credit

The amount financed is the total amount that the borrower will have to repay, excluding interest. The amount financed can include fees, charges, and the cost of insurance policies as well as the money borrowed to buy the goods and services.

Credit Charge

The credit charge is the amount of interest that the borrower will have to pay over the life of the loan.

Fixed Interest

The interest rate will stay the same for the period set down in the contract.

Variable Interest

The interest rate charged on the loan may change over the period of the loan. The interest rate can go up and down.

Security

When a credit provider is not willing to rely solely on the borrower’s promise to pay, they may require additional security. Essentially, a security is a right given to the credit provider to recover the debt owed by the borrower from the sale of property or from another person. The security is used when the borrower fails to fulfil their obligations under the contract.

Caveat

A caveat is a notation placed on a registered owner’s certificate of title that gives notice that the person who has lodged the caveat has an interest in the land.

The caveat acts as a statutory injunction that prevents alteration of the title (for example, the sale of the property) until the rights of the parties have been decided in a court.

By itself, the caveat does not give the credit provider any rights over the property of a borrower. The credit provider must have legal interest in the borrower’s property before it can lodge a caveat. The right of the credit provider to an interest in the land can be created in several ways. One way is where the borrower has made an agreement with the credit provider to give a mortgage over their property if required to do so. This creates an equitable mortgage. The caveat is lodged to protect the credit provider’s interest in the land created by the equitable mortgage.

Consumer Credit Insurance

Consumer Credit Insurance insures the debtor for loan instalments if the debtor is unable to work because of accident, illness, and/or unemployment. In the case of injury the insurer will usually not pay the instalments unless the injury precludes the debtor from any type of work and not just the type of work for which the debtor is qualified. Salespeople are encouraged to sell this insurance, as the insurer will usually pay the amount of commission on the sale of the insurance policy. The commission paid increases the cost of the insurance. This insurance is not compulsory and cannot be required as a condition of loan approval for Credit Act and Consumer Credit Code contracts.

Mortgage Indemnity insurance

Mortgage indemnity Insurance is an insurance policy between the financial institution and the insurer. The borrower pays for the insurance premium.

Financial institutions typically require mortgage indemnity insurance where the amount financed is greater than 80% of the value of the mortgaged property.

When the borrower defaults, the property secured by the loan is sold and the proceeds of sale are applied in reduction of the amount outstanding under the loan. When the proceeds of sale are not sufficient to pay out the loan, the insurance company will pay the amount of the shortfall to the financial institution. The insurer then takes over the right to recover loan money from the borrower.

The insurance company pursues the borrower directly for the amount paid by the insurer to the financial institution.

Default

A credit contract imposes obligations on the borrower. When the borrower fails to meet those obligations, they are in default. Default can have serious consequences for the borrower. A credit provider may exercise rights under the contract if the borrower is in default.

The Code, the Credit Act, and the Hire-Purchase Act restrict the credit provider’s rights when an event of default occurs. Commonly events of default may include failure to make payments when they fall due, failure to keep mortgaged goods insured, and bankruptcy.

Enforcement Expense

An enforcement expense is a charge made by the credit provider to the debtor in relation to action taken in enforcing the contract, when there has been a default by the borrower.

The Credit Act and the Code limit the liability of the borrower to pay enforcement expenses. Typical enforcement action includes repossession of mortgaged goods and the commencement of legal action.

Early Termination Fee

An early termination fee is a charge that is made by a financial institution if the loan is paid out earlier than the period specified in the loan contract. Early termination fees are often charged when borrowers pay out their loans during a fixed interest period. The formula for the calculation of an early termination fee is often found in the contract.

Establishment Fees

This fee is charged by financial institutions for the cost of setting up the loan. The establishment fee can vary from financial institution to financial institution depending on how much is borrowed, who the lender is, and the particular features of the loan.