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October 12, 2011

Preparing for the National Credit Act enhancements: hardship and restricted terms

As discussed previously the Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 contains provisions for:

  • “Enhancements” (particularly relating to hardship variations), which commence on 1 July 2012;
  • Reverse mortgages, which commence on 1 July 2012
  • Consumer Leases, which commence on 1 July 2012
  • Small amount credit contracts, which commence on 1 July 2012 and
  • Caps on interest rates and costs for all other credit contracts which commence on 1 July 2013

The enhancements contained in the Bill include:

  • broadening of the grounds of variations that can be requested by consumers on the basis of financial hardship (including removing the $500,000 cap and extending the right to regulated residential investment loans) and changes to procedures in respect of borrowers applying for hardship variations;
  • requiring credit providers to finalise an outstanding hardship application before commencing enforcement procedures,subject to limited exceptions;
  • introducing a remedy for unfair or dishonest conduct by providers of credit services;
  • restricting the use of specified terms and regulating representations eg independent ;
  • providing ASIC with power to appear on credit applications in its own right as well as on behalf of consumers;
  • technical drafting corrections (correcting headings and cross-references).

This note discusses what you need to do in response to the enhancements relating to hardship and use of certain words. Future notes will discuss the other amendments.

Changes to hardship provisions
From 1 July 2012, a debtor will have a statutory right to request a hardship variation where the debtor cannot meet their obligations under a credit contract regardless of the amount of credit that is provided under their contract.

Credit providers will need to change their procedures: there will be no limits to the hardship variation change which can be requested. The notice may be given orally or in writing.

Within 21 days after receiving a hardship notice, the credit provider must give the debtor notice of whether or not they agree to negotiate a change to the credit contract.

Where the credit provider agrees to negotiate, the form of the notice will be prescribed in the regulations.

If the credit provider does not agree to negotiate, the credit provider must give a written notice that includes:
• the reasons for not agreeing to negotiate;
• the name of the external dispute resolution scheme which the credit provider is a member of; and
• the debtor’s rights under that scheme.

If a credit provider has given notice that they agree to negotiate, but subsequently decides not to change the contract they would need, within 21 days of the first notice, to give the debtor another notice to this effect.

If, as a result of negotiations, the credit provider agrees to a change to the terms of the credit contract, they must comply with the existing requirements in section 73 of the National Credit Code.

Where a credit provider does not agree to change the terms of the credit contract, a debtor still has the option to apply to a court for a change in the terms pursuant to section 74 of the Code. The court is restricted from making any order that reduces the total amount ultimately payable by the debtor under the credit contract, and is therefore confined to orders affecting the amount and timing of individual payments made under the credit contract.

A new section 89A is introduced to restrict the capacity of credit providers from commencing enforcement action until they have responded to any hardship notice under section 72.

A credit provider will be prohibited from commencing enforcement action where the following conditions apply:
• they are required to serve a default notice under section 88;
• the debtor has given a current hardship notice under section 72; and
• the debtor has not previously given a hardship notice or had given one not materially different from the current hardship notice in the four month period before the current hardship notice was given.

The credit provider cannot begin enforcement proceedings until they have given the debtor notice of their refusal to negotiate and 14 days have passed from the day on which this notice was given.

Under the current section 88, the credit provider must allow the debtor at least 30 days from the date of the default notice to remedy the default. The 14 day period from the day the debtorr gave the hardship notice may therefore occur before, during, or after the 30 day period.

However, the credit provider may take possession of any mortgaged goods if the credit provider believes on reasonable grounds that:

• the debtor has, without the credit provider’s permission, removed or disposed of the mortgaged goods, or intends to do so; or
• urgent action is necessary to protect the goods.

If a debtor gives the postponement request the credit provider must not begin enforcement proceedings unless they have responded to the postponement request and 14 days has elapsed from when they gave that response.

Restricted terms

Section 160B will prohibit a licensee, when providing credit services, from using the following terms (either alone or in combination with other words or letters) in a representation to the consumer about the licensee, the service, or the licensee’s actions in providing the assistance:
• ‘independent’;
• ‘impartial’;
• ‘unbiased’; and
• any other term (in English or any other language) of similar meaning to those words.

However, a licensee may use those terms if they satisfy all of the following requirements:
• the licensee does not receive any commissions (apart from commissions that are rebated in full to the person’s clients) or any other gifts or benefits from a credit provider or lessor that may reasonably be expected to influence the licensee;
• the licensee’s employer (if any) or any other person (or class of person) that may be identified in the regulations does not receive any of the commissions, gifts or benefits described above;
• in providing a credit service, the licensee does not operate under any direct or indirect restrictions, other than restrictions imposed by the NCCP Act or by an Australian credit licence; and
• in providing a credit service, the licensee does not operate under any conflicts of interest that might arise from the person’s associations or relationships with credit providers and lessors, that may reasonably be expected to influence the person in providing the services.

Section 160B will prohibit a licensee, when providing credit services, from using the following terms (either alone or in combination with other words or letters) in a representation to the consumer about the licensee, the service, or the licensee’s actions in providing the assistance:
• ‘financial counsellor’;
• ‘financial counselling’; and
• any other term prescribed by the regulations that is of similar import to these phrases (whether in English or any other language).

However, a licensee may use those terms if :
• they are providing, or offering to provide, the credit service on behalf of another person (the principal);
• they are a representative (as defined in section 5 of the NCCP Act) of the principal;
• regulations exempt the principal from this prohibition in relation to a credit activity because the principal engages in the activity as part of a financial counselling service; and
• the person’s actions in providing or offering to provide the credit service are within the authority of the principal.

The effect of the defence is to allow these terms to only be used by Government funded or not for profit financial counsellors.

A licensee may also use those terms in the negative, for example, to represent that the licensee is not a financial counsellor.

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Posted 12th October 2011 by David Jacobson in legislation, Phase 2