Sara Pearson Roberta Grealish Solicitor Senior Solicitor Georgia Turco Solicitor
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1. What is credit & credit laws. 2. Responsible lending, SACCs and Consumer Leases 3. Hardship including defaulting, IDR & EDR
Responsible Lending Chapter 3 of NCCPA sets out obligations for credit licensees Credit Assistance Providers (Part 3 -1) Credit Providers (Part 3 -2) Obligation to assess unsuitability (s. 128)
Assessment of Unsuitability Provider must not suggest or provide credit unless within 90 days, has made an assessment that the credit contract will not be unsuitable for the consumer.
Reasonable inquiries about the consumer 1. Make reasonable inquiries about the consumer’s financial situation ; (s 117(1)(b) and s 130(1)(b) NCCPA) 2. Make reasonable inquiries about the consumer’s requirements and/or objectives ; (s 117(1)(a) and s 130(1)(a) NCCPA) 3. Take reasonable steps to verify the consumer’s financial situation; and (s 117(1)(c) and s 130(1)(c) NCCPA) 4. Make an assessment : Is the loan “unsuitable”?
Credit contract must be assessed as unsuitable if it is likely that: • The consumer will not be able to comply with their financial obligations under the contract; or • The consumer could only comply with substantial hardship; or • The contract will not meet the consumer’s requirements and objectives. (s 118 and 131 NCCPA)
Substantial Hardship Substantial hardship is presumed if the consumer could only comply with their obligations by selling their principal residence (ss 118(3) & 133(3) NCCPA)
HEMS and declared expenses
Responsible Lending 10
“In fact, the only way that one or more declared living expenses can be shown to be necessarily relevant to the issue of whether the consumer can afford to make the repayments is by identifying some living expenses which simply cannot be foregone or reduced beyond a certain point… I may eat Wagyu beef everyday washed down with the finest shiraz but, if I really want my new home, I can make do on much more modest fare. Knowing the amount I actually expend on food tells one nothing about what that conceptual minimum is. But it is that conceptual minimum which drives the question of whether I can afford to make the repayments on the loan.” Australian Securities and Investments Commission v Westpac Banking Corporation (Liability Trial) [2019] FCA 1244, Perram J at [76].
Remedies - Legislation • Compensation (s178(1)) • Declare contract void (s179(2)(a)) • Vary contract (s179(2)(b)) • Refuse to enforce terms of the contract (s179(2)(c)) • Direct licensee to refund any amounts (s179(2)(d))
Alternatives to Court Our approach: • Internal dispute resolution department (IDR) • Customer Advocate • Australian Financial Complaints Authority (AFCA)
‘Benefit’ What happens if client obtains a benefit under an unsuitable contract? Benefit may include: – lower fees or interest rates on the new debt. – a credit contract that better suits the consumer’s requirements and objectives. – a period of lower or no interest. An issue for clients with credit card balance transfers – any loss?
Sally’s story A separated mum with an adult son & dependent grand-daughter, Sally came to us with large debts with various lenders and was about to declare bankruptcy. Sally’s hardship stemmed from her unsuitable home loan, forcing her into a spiral of debt. We assisted her to establish breaches of responsible lending. She received a refund of all interest, fees, and charges, worth over $90,000. This left her debt free and with $50,000 cash in hand!
Small amount credit contracts (SACCs) Payday loans
What is a SACC? Section 5 NCCPA: A credit contract is a small amount credit contract if: a) The contract is not a continuing contract b) The credit provider is not an ADI c) The credit limit is less than $2000 d) The term is at least 16 days but not longer than 1 year e) The debtors obligations are not secured
Problems with payday lending • High establishment and monthly fees • High default fees • Smaller loans can increase quickly • Cycle of repetitive borrowing • Multiple debts with multiple lenders • Debt spiral • Target the vulnerable
Responsible lending (recap) Responsible lending means that all consumer credit brokers and lenders must: • Make reasonable inquiries about the borrower’s financial situation and objectives and requirements • Verify the financial information the borrower provided to them • Assess whether the loan would be not unsuitable for the borrower Chapter 3 of the National Consumer Credit P rotection Act 2009 (Cth) (NCCPA) ; in particular ss 115 – 117 and 128 – 130 .
Enhanced responsible lending for payday loans Additional obligations for payday lenders: • Obtain bank records for past 90 days ( s.117 (1A) s.130(1A) NCCPA ) • A payday loan will be presumed unsuitable where: The borrower is in default on another payday loan The borrower has had 2 or more payday loans in the 3 month period before the assessment as to suitability (s.118(3A), s131 (3A) NCCPA) The borrower receives at least half their income from Centrelink and the repayments of all the payday loans they have including this loan would exceed 20% of their income (NCCP Regulations 28S)
SACCs: caps on charges • 20% establishment fee (s.31A (2) NCCPA) • 4% monthly fee on the original value of the loan (s. 31A (3) NCCPA) • If there is a default, the maximum amount recoverable is 200% of the amount borrowed (s.39B NCCPA) (adjusted credit amount: amount of credit they receive in their hand)
SACCs Warning Must display warning on premises and website, read over the phone 24
Case Study: Ryan • Remember presumptions: A SACC will be unsuitable for the applicant if they have received 2 other SACCs in the 90 days preceding an application or in default under another SACC. • CCLSWA obtained documents and did our own assessments: Lenders had failed to conduct assessments of suitability or to take reasonable steps to verify Ryan’s financial situation
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Consumer leases Consumer leases are agreements for access to domestic goods, such as a fridge or washing machine, where consumers are locked into an agreement to pay off the good over several years, often with an offer to buy the good at the end of this term 29
Consumer leases: The current law • S.169 National Credit Code a consumer lease is a contract for the hire of goods by a natural person or corporation under which that person or corporation does not have a right or obligation to purchase the goods . • Regulated under part 11 of the National Credit Code - presumptions relation to consumer leases (s.172) - form it must take (s.173) - disclosures it must contain (s. 174) - copy of lease (s.175) - statements of account (s175C) - Division 7, Subdivision B – Changes on the grounds of hardship and unjust contracts.
Sale by instalments • s.9 of NCC (1) a contract for the hire of goods under which the hirer has a right or obligation to purchase the goods , is to be regarded as a sale of the goods by instalment if the charge that is or may be made for hiring the goods together with any other amount payable under the contract (including an amount to purchase the goods or exercise an option to do so) exceeds the cash price of the goods. (2) A debt is regarded as having been incurred, and credit provided in such circumstances
• Option/right to purchase the goods may = ‘sale by instalments agreement’ • NCC s 9: ‘sale by instalments agreement’ = may be regulated credit contract (subject to s.5 (1))
What does this mean for consumers? • Lessors are required to comply with provisions that are largely equivalent to the “responsible lending” provisions that apply to lenders
Responsible Lending 1. Make reasonable enquiries about borrowers financial situation. 2. Make reasonable enquires about borrowers objectives and requirements. 3. Verify the consumer’s situation 4. Obligation to assess unsuitability.
Problems with consumer leases No cap on fees • • Poor disclosure of cost • Irresponsible lending • Exploitation of Centrepay • Consumers who access basic household goods through consumer leases are paying on average three times the retail value of those goods
Alternatives to consumer leases • Save up • Lay-by • Personal loan • No interest loan • Centrelink advance
Current redress available • IDR • EDR 37
Changes to the law • An independent review of the laws regulating payday loans and consumer leases was undertaken in 2015-2016. • This resulted in 24 recommendations being made in a final report provided to the Government on 3 March 2016 (10 re: SACC’s , 8 re: Consumer Leases, 6 Combined) 38
Recommendations (Consumer Leases) • Cap on payments • Base Price • Add-on features/services included • 10% of income • DHS- centrepay • Maximum termination • Prohibit unsolicited selling
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