Consumer credit contracts

Disclosure requirements

Sections 16 and 17 of the Code and section 126 of the National Credit Act

The disclosure requirements in relation to credit contracts are intended to encourage truth in lending.  These requirements are listed in the table in Going to Court – Making and Defending Claims under Inadequate Disclosure.  If the client is not provided with this information, they may be able to negotiate waiver of interest and fees (with the potential for compensation for loss).

Unjust transactions

Under section 76 of the Code, the court can reopen unjust consumer credit transactions.

“Unjust” is defined to include unconscionable, harsh or oppressive.  You should consider any unjustness in the form or terms of the contract and in the conduct of the creditor prior to the transaction being entered into.

You should obtain instructions from your client about the circumstances in which they entered into the contract or accepted a change to the contract.  In particular, consider (these are the considerations the Court must consider under section 76(2) of the Code):

• the relative bargaining power of the parties;
• whether or not, at the time the contract was entered into or changed, its provisions were the subject of negotiation and whether the debtor had a chance to alter or reject any of the provisions;
• whether the contract imposes conditions that are unreasonably difficult to comply with, or not reasonably necessary for the protection of the legitimate interests of the creditor;
• the age, physical and mental condition of the debtor when entering into the contract;
• the form of the contract and the intelligibility of the language it’s expressed in;
• whether or not, and if so when, independent legal or other expert advice was obtained by the debtor;
• the extent to which the provisions of the contract and their legal and practical effect were accurately explained to the debtor and whether or not the debtor understood those provisions and their effect;
• whether the credit provider or any other person exerted or used unfair pressure, undue influence or unfair tactics on the debtor and, if so, the nature and extent of that unfair pressure, undue influence or unfair tactics;
• whether the credit provider took measures to ensure that the debtor understood the nature and implications of the transaction and, if so, the adequacy of those measures; and
• whether at the time the contract, mortgage or guarantee was entered into or changed, the credit provider knew, or could have ascertained by reasonable inquiry at the time, that the debtor could not pay in accordance with its terms or not without substantial hardship.

You may need to counter the creditor’s argument that the terms of the transaction or the conduct of the credit provider was justified in the light of the risks undertaken by the credit provider.

You should also keep in mind that unjust contract provisions only take into account circumstances that are known, or reasonably foreseeable, at the time the contract was entered (i.e. it won’t be relevant that the client subsequently developed a mental or physical illness).

Refer to the table in Going to Court – Making and Defending Claims for the remedies available in the event that an unjust transaction is reopened.

Unsuitable credit contracts

Chapter 3 of the National Credit Act imposes a series of obligations on credit providers, which are designed to reduce the prevalence of inappropriate loans being granted to consumers.

Sections 128 and 129 of the National Credit Act require a creditor to assess whether a credit contract or increased credit limit will be “unsuitable” for a consumer.  This assessment must be done not more than 90 days prior to entering the credit contract or increasing the credit limit under that credit contract.  Section 133 prohibits credit providers from entering into unsuitable credit contacts.

If a credit provider has not met the requirements under the National Credit Act and has entered into an unsuitable contract with your client, your client is entitled to seek compensation under section 178 of the National Credit Act.

In assessing whether the credit contract is suitable or not, section 130 of the National Credit Act requires the creditor to:

• make reasonable inquiries about the consumer’s requirements and objectives in relation to the credit contract;
• make reasonable inquiries about the consumer’s financial situation; and
• take reasonable steps to verify the consumer’s financial situation.

ASIC’s Regulatory Guide 209: Credit Licensing: Responsible Lending Conduct provides guidance to credit providers about how to fulfil these obligations. The Guide advises that the level of inquiries and steps taken to verify information will vary depending upon the circumstances. Relevant factors will 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 section 131 of the National Credit Act, a creditor must assess that a credit contract will be unsuitable for a consumer if it is likely that:

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

Section 132 requires a creditor to provide to a consumer, upon request, a written copy of the assessment within prescribed timeframes (for example, if the credit contract was entered into less than two years ago, the credit provider must provide the assessment within seven days of receiving the request). The creditor cannot charge to provide a copy of this assessment (section 132(4) of the National Credit Act).

Similar obligations apply to finance brokers under sections 116-122 of the National Credit Act, including that a broker must not suggest that a consumer enters into, increases or remains in a contract which is “unsuitable” for the consumer.

The provisions in Chapter 3 relating to disclosure came into effect until 1 April 2011. However, the main Chapter 3 obligations relating to the obligation to assess the appropriateness of the loan for the consumer applies to contracts entered into from 1 July 2010 where the credit provider, broker or assignee for the debt is not an Authorised Deposit Taking Institution or a registrable corporation (contact ASIC if you are unsure whether the creditor falls into one of these categories). From 1 January 2011 all licensed credit providers, brokers and assignees have been subject to the obligations under Chapter 3 (except the disclosure provisions, which came into effect on 1 April 2011).

If your client entered into a credit contract after 1 April 2011 and there is reason to think that the contract is unsuitable and that the creditor did not comply with its obligations under the National Credit Act, you should request a copy of the assessment.

Interest rates

In relation to credit contracts:

• if excessive interest rate charges are alleged to be an unjust term under section 76 of the Code, the court will have regard to the annual percentage rate or rates payable in comparable cases (section 76(2)(o) of the Code);
• under section 78 of the Code, a debtor can apply to the court for an order that an establishment fee or charge, change in interest rates or early termination fee or charge is unconscionable. If the court agrees, it can annul or reduce the change, fee or charge and make ancillary orders; and
• under section 39 of the Victorian Credit Act, a credit contract (and any mortgage given to a credit provider in relation to that contract) is unenforceable if the interest rate exceeds 48 percent.

Refer to the table in Going to Court – Making and Defending Claims for the consequences of excessive interest rates.

Linked credit

If your client has entered into a “linked credit” contract (i.e. a client enters into a contract with a credit provider that is linked to the supplier of the product the client is purchasing, for example, where a car dealer arranged finance for a useless car), the credit provider might be jointly and severally liable for loss or damage to the client as a result of a misrepresentation or breach of contract by the “linked supplier”.

Refer to sections 129 to 139 of the Code in relation to credit contracts that are “linked” to the supply of goods.

The ACL also provides for protections for a consumer who is a party to a “linked credit contract”.  Where there is a breach of any of the guarantees in the ACL relating to the quality of the goods or services (and in a range of other circumstances), the supplier and the linked credit provider are each liable for the whole amount of the loss and damage the consumer suffers (section 278 of the ACL).