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December 24, 2012

Credit reform phase 2 draft bill released

Treasury has released a draft National Consumer Credit Protection Amendment (Credit Reform Phase 2) Bill 2012 for consultation.

UPDATE 18 February 2013: The Commonwealth Government has decided that any reforms to small business finance will be deferred. This decision is limited to the small business reforms in Phase 2 of the consumer credit reforms.

The exposure draft Bill introduces reforms in relation to:

  • credit provided to small business, including the introduction of a ‘Credit Permit’ regime;
  • credit provided for investment purposes (the introduction of limited responsible lending obligations);
  • private lenders who provide credit contracts or consumer leases through an intermediary;
  • short-term and indefinite term consumer leases, where there is an expectation the consumer will want the use of the leased goods for a period which means they will pay more than the cash value of the goods;
  • anti-avoidance practices.

A 6 month transition period is proposed from the time the Bill is passed.

Lending to small business
The Act will apply to lending to a small business.

A person will be prohibited from engaging in small business credit activities unless they hold a credit permit.

In order to obtain a credit permit from ASIC a lender must be a member of an ASIC-approved external dispute resolution scheme.

Small business means a business that:
(a) has less than the following number of employees:
(i) if the business is or includes the manufacture of goods—100 people;
(ii) otherwise—20 people; or
(b) has no employees.

It is also proposed that contracts where the maximum amount of credit exceeds the sum of $5 million will be excluded.

The bill introduces a definition of a "protected small business credit contract". It is proposed to introduce specific responsible lending obligations in relation to this class of contracts to address equity stripping practices through the provision of credit to small businesses in financial distress.

A protected small business credit contract is defined as a credit contract that meets each of the following three criteria:
• the predominant use of the credit is to refinance the liability under an existing small business credit contract;
• the borrower has defaulted in respect of the repayments due under that contract; and
• the contract is secured by a mortgage over residential property.

As the borrower is in default of an existing credit contract, the provider of credit assistance is to be under an onus, in respect of a proposed refinance, to make inquiries to ensure the credit contract is suitable. These inquiries are intended to ensure the borrower has an exit strategy in respect to discharging their liability under the protected small business credit contract.

Investment lending
These reforms are designed to impose limited responsible lending rules to two particular classes of transactions that have particular risks for consumers:
• Loans secured over the family home where the borrower does not appreciate that if the investment does not generate the expected returns, they will need to meet the repayments from other resources and may be at risk of losing their home, depending on their overall financial position.
• Loans to finance investments in products being offered illegally, by a person who does not hold an Australian Financial Services Licence (where there is a consequent risk the entire investment proceeds will be lost by the consumer).

Private lending
The bill will regulate a "credit activity investor" who is an individual (or other small entity) who only engages in credit activities as a credit provider or lessor in accordance with a servicing agreement with an intermediary.

Under this model a credit activity investor would be exempt from the need to hold an Australian credit licence provided:
• They are a member of an ASIC-approved External Dispute Resolution scheme (so that they will be contractually obliged to comply with decisions of the scheme).
• The intermediary is the holder of an Australian credit licence.
• There is an agreement between the intermediary and the private credit providers and private lessors.

A credit contract will still be unregulated when a private individual who is not in the business of providing credit arranges a credit contract directly with the borrower.

Langes is available to advise clients on these proposals.

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Posted 24th December 2012 by David Jacobson in legislation, Phase 2

April 24, 2012

Draft Credit Enhancement Bill amendments

Treasury has released for public consultation draft legislation to amend the Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 (the Enhancements Bill).

The Enhancements Bill was introduced into Parliament on 21 September 2010.

These amendments to the Enhancements Bill respond to recommendations contained in committee reports, and to other issues raised in consultations with stakeholders. (Background)

The amendments propose changes to:

  • the regulation of reverse mortgages;
  • hardship applications under the National Credit Code;
  • arrangements regarding the caps on the maximum cost payable in respect of both small amount credit contracts and all other credit contracts;
  • the prohibition on licensees using terms such as ‘pre-approved’; and
  • changes to allow for the introduction of disclosure requirements in relation to the use of employer payment authorisations.

The Bill is scheduled to be debated in Parliament in the Winter 2012 sittings.

Separately, Treasury has released a Discussion Paper setting out a range of possible measures aimed at reducing the dependency of consumers on high-cost short-term small amount loans ("payday loans"), including by:

  • minimising the use of these loans where other solutions to a consumer’s financial needs are available (for example, by negotiating directly with their utility provider, where the credit would otherwise be used to pay an electricity bill);
  • encouraging the use of existing alternative forms of credit (such as no interest or low interest loan schemes); and
  • promoting the availability of financial counselling services that can provide constructive and long-term solutions.

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Posted 24th April 2012 by David Jacobson in legislation, Phase 2

April 20, 2012

Application of new credit card rules

The credit card provisions of the National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Act 2011 commence on 1 July 2012.

Do they apply to debit cards with attached overdrafts or lines of credit?

Whilst the debit card functions are not affected, when the card is used to obtain credit under a continuing credit contract the new rules may apply.

Section 133BA(1) defines "credit card contract":
"(1) A credit card contract is a continuing credit contract under which credit is ordinarily obtained only by the use of a credit card."

Section 133BA(2) defines "credit card":
"(2) A credit card is:
(a) a card of a kind commonly known as a credit card; or
(b) a card of a kind that persons carrying on business commonly issue to their customers, or prospective customers, for use in obtaining goods or services from those persons on credit; or
(c) anything else that may be used as a card referred to in paragraph (a) or (b). "

Section 133BA(5) says:
(5) If a credit card can also be used in other ways (for example, as a debit card, or to access other accounts):
(a) the article is a credit card (despite the fact that it can also be used in those other ways); but
(b) the provisions of this Act that are expressed to apply in relation to credit cards do not apply to the article in so far as it can be used in those other ways.”

In other words it is a credit card if it can be used to obtain credit (and that is ordinarily the only way the overdraft or line of credit is accessed) but if it can be used for other things (such as to debit a savings account) those other uses are not affected.

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Posted 20th April 2012 by David Jacobson in legislation, Phase 2

December 5, 2011

Committee report on Consumer Credit Enhancement Bill

The Parliamentary Joint Committee on Corporations and Financial Services has delivered its report on its Inquiry into Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011.

The Committee has made 14 recommendations including:

  • extending the commencement date for the miscellaneous consumer credit enhancements (hardship variations, unfair or dishonest conduct, representations) from 1 July 2012 to 1 January 2013
  • requiring hardship applications to be made in writing
  • to not prescribe the method by which a credit provider must provide projections for reverse mortgages to potential borrowers
  • to amend the definition of reverse mortgages to clearly exclude other forms of credit arrangements that provide the option of interest only repayments.
  • that the Government revisit the measures proposed relating to small amount credit contracts and caps on costs :"Further consultation with stakeholders should be undertaken to address the concerns identified throughout the inquiry and to develop measures that will ensure cohesive and consistent national consumer credit legislation and an appropriate balance between consumer protection
    and industry viability."

The Bill is awaiting resumption of Parliament on 7 February 2012.

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Posted 5th December 2011 by David Jacobson in legislation, Phase 2

November 4, 2011

Consumer credit enhancements: consumer leases

Schedule 3 of the Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 contains amendments to the NCCP Act (including the National Credit Code) which relate specifically to contracts for consumer leases, commencing on 1 July 2012.

Currently leases that contain a right or option to purchase are functionally the same as a credit contract and are therefore deemed to be credit contracts by the Code in section 9. Part 11 regulates consumer leases where there is no right or obligation to purchase the leased goods.

The Bill contains changes designed to achieve regulatory consistency between leases and credit contracts.

Some of the main regulatory differences between the two include:
• the form of consumer leases;
• the obligation to provide an information statement or statement of account;
• the content of the disclosure requirements;
• liability for conduct such as false and misleading representations; and
• the rights of lessees and lessors in respect of enforcement proceedings.

Lessees may mistakenly believe that they have an ability to buy the goods at the end of the lease when they do not.

What do you need to do?

If you provide consumer leases (as defined) then your procedures and systems will change.

If the Bill is passed, changes include:

  • Lessors are required to provide an ongoing statement of account if requested by the lessee and an end of lease statement.
  • Consumer leases can be changed on the grounds of hardship or on the basis the transaction is unjust.
  • The lessor will be obliged to provide a statement of the amount payable on termination.
  • The lessor will be obliged to inform the lessee when a direct debit default occurs.
  • The lessee will have a right to terminate a lease in two different circumstances:
    • before the goods have been provided; and
    • after the goods have been provided.
  • The Code provisions relating to enforcement matters will be extended to consumer leases
  • Lessors will be liable for a supplier's misrepresentation.
  • A criminal penalty may be imposed on a lessor or supplier for harassment.

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Posted 4th November 2011 by David Jacobson in legislation, Phase 2

October 21, 2011

Consumer Credit Enhancements: Reverse Mortgages

Schedule 2 of the Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 contains amendments to the NCCP Act (including the National Credit Code) which relate specifically to contracts for reverse mortgages, commencing on 1 July 2012.

What do you need to do?

If you provide reverse mortgages (as defined) then your procedures and systems will change.

A reverse mortgage is defined for the purposes of the Code as an arrangement which involves a credit contract and a mortgage over a dwelling or land securing a debtor’s obligations under the contract and either:
• the arrangement is an arrangement of a type which ASIC has declared to be a reverse mortgage ; or
• the arrangement meets the following two conditions:
– the total amount the borrower owes under the contract or mortgage may exceed the maximum amount of credit they may be provided under the contract without them being required to reduce their liability to a figure less than that maximum amount; and
– the arrangement meets any prerequisites prescribed by the regulations (with it anticipated that this regulation-making power may be needed to exclude other classes of credit contracts where the protections applicable to reverse mortgages are not appropriate).

Bridging finance contracts are excluded from the definition of reverse mortgages as these are also credit contracts where the outstanding balance of the contract can increase until the final repayment, but where the protections applicable to reverse mortgages are not necessary.

The provisions in the Bill include new obligations for persons who engage in credit activities in relation to reverse mortgage contracts. The key elements of these requirements are:
• introducing a ‘no negative equity guarantee’ protection through a prohibition against credit providers requiring or accepting repayment of the loan for an amount which exceeds the market value of the mortgaged property (subject to certain exceptions);
• mandating that holders of an Australian credit licence must undertake the following conduct before they make an assessment or a preliminary assessment under
sections 123, 124 or 128 of the NCCP Act:
– using a website approved by the Australia Securities and Investments Commission (ASIC), show a consumer projections of the potential effect a reverse mortgage may have on the equity they have in their home;
– provide the consumer with a print out of these projections;
– notify the consumer of additional information that will assist them to decide whether to enter into a reverse mortgage, and, if so, on what terms; and
– give the consumer a reverse mortgage information statement;
• prohibiting credit providers from specifying that certain types of conduct can constitute a default under a reverse mortgage contract;
• disclosure of the way in which non-title holding residents will be treated under a reverse mortgage contract;
• prohibiting credit providers from entering into a reverse mortgage contract unless the consumer has received legal advice regarding the contract (with commencement of this obligation deferred to a date to be prescribed by regulation); and
• new requirements on credit providers where they have given a default notice to the debtor, including an obligation to take reasonable steps to contact the debtor in person, to make sure they understand they are in default and therefore provide them with an opportunity to rectify the default.

ASIC's moneysmart website provides a visual demonstration of possible outcomes.

The draft Regulations provide that it will be presumed that a credit contract will be unsuitable for a borrower under the following circumstances:
• that the credit contract is not a reverse mortgage;
• the borrower is at least 55 year of age and is not in full-time employment when the credit contract will be entered into ;
• the amount owing under the contract can only be repaid by selling the borrower’s principal place of residence; and
• if reasonable inquiries about the consumer’s requirements and objectives establish that the consumer would use the credit provided under the contract predominantly to pay for regular or recurring household expenses, or to pay for expenses relating to the health of the consumer, or another resident of the property aged over 55 years old. This would not include the consumer’s use of the credit provided under the credit limit in the contract as part of discharging the consumer’s obligations under another credit contract that is secured by a mortgage over the consumer’s principal place of residence.

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Posted 21st October 2011 by David Jacobson in legislation, Phase 2, responsible lending

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.
(more...)

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

August 29, 2011

A national consumer credit interest rate cap

The draft National Consumer Credit Protection Amendment (Enhancements) Bill 2011 proposes that from 1 July 2012 a credit provider must not enter into a credit contract, including continuing credit contracts but excluding small amount credit contracts, if the annual cost rate of the contract exceeds 48%.

Currently, New South Wales, Victoria, Queensland and the ACT impose an interest rate cap on regulated consumer credit but Victoria calculates its cap differently. There are no caps in Western Australia, Tamania and South Australia.

The prohibition on exceeding the annual cost rate is proposed to apply throughout the life of the contract and the rate of a contract will therefore change as, for example, fees are levied or payments are made.

The formula for calculating whether or not the 48% annual cost rate has been exceeded is based on the model currently in force in NSW.

The formula allows for amounts to be prescribed by regulation that would be taken into account in calculating the annual cost rate .

A contravention of the annual cost rate requirement will be a breach of the current prohibition in section 23 of the National Credit Code on charging amounts in excess of those allowed under the Code, and will also be a breach of a key requirement under section 111 of the Code, enabling a consumer to seek a penalty up to a maximum of all credit charges, and enabling ASIC, in respect of systemic non-compliance, to seek a penalty of up to $500,000.

Stakeholders have raised concerns about the risk of some bridging finance contracts being inadvertently caught by the 48% cap.

The current cap on costs in the Credit (Commonwealth Powers) Act (NSW) 2010 includes an exemption for temporary credit facilities provided by Authorised Deposit-taking Institutions and the continuation of this exemption will be considered in consultations.

Stakeholders have been asked to consider whether there should be a similar exemption for temporary credit facilities, and, if so, the circumstances in which it should apply.

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Posted 29th August 2011 by admin in legislation, Phase 2

August 8, 2011

Phase 2 draft Credit Bill parts released

The Assistant Treasurer has released for public consultation the Exposure Draft of three parts of the National Consumer Credit Protection Amendment (Enhancements) Bill 2011 and draft regulations.

The drafts contain refinements to existing provisions of the National Credit Code as well as two elements of Phase Two of the National Credit Reforms: loans to persons over 55 (whether by reverse mortgage or otherwise) and consumer leases.

Enhancements
The draft includes:

  • broadening of the grounds of variations that can be requested by consumers on the basis of financial hardship and changes to procedures in respect of borrowers applying for hardship variations;
  • introducing a remedy for unfair or dishonest conduct by providers of credit services;
  • restricting the use of specified terms and regulating representations;
  • extending the prohibition on unsolicited canvassing (door-to-door selling);
  • 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).

Reverse mortgages and Seniors protection
The draft Bill defines a reverse mortgage as one only entered into with persons aged at least 55 years old where full repayment of the debt is not required until:
• each borrower dies;
• the dwelling or land is sold;
• each borrower permanently vacates the home;
• the credit provider (or associated person) exercises their legal rights under the contract to take possession of the home;
• a term in the contract ends (such as a fixed term loan); or
• the borrower reaches a certain age (such as 85 years old).

The provisions in the draft bill include:

  • Reverse mortgage specific responsible lending conduct obligations
  • Non-title holding resident arrangements (to be a key requirement)
  • providing an Information Statement
  • Excluded default clauses
  • Requirement for independent legal advice
  • Mandatory default procedure
  • Statutory negative equity protection (both before and after sale)

The draft Regulations provide that it will be presumed that a credit contract will be unsuitable for a borrower under the following circumstances:
• that the credit contract is not a reverse mortgage;
• the borrower is at least 55 year of age and is not in full-time employment when the credit contract will be entered into ;
• the amount owing under the contract can only be repaid by selling the borrower’s principal place of residence; and
• if reasonable inquiries about the consumer’s requirements and objectives establish that the consumer would use the credit provided under the contract predominantly to pay for regular or recurring household expenses, or to pay for expenses relating to the health of the consumer, or another resident of the property aged over 55 years old. This would not include the consumer’s use of the credit provided under the credit limit in the contract as part of discharging the consumer’s obligations under another credit contract that is secured by a mortgage over the consumer’s principal place of residence.

Consumer leases
The draft Bill contains changes designed to achieve regulatory consistency between leases and credit contracts in respect of the form of leases, alterations, fees and charges, statements of account, variations, reopening and enforcement procedures.

A new section will impose an obligation on the lessor to provide a statement to the lessee at the end of a lease. The end of lease statement would notify the lessee that their lease was coming to an end. Further details about the sort of information that must be disclosed in the statement will be prescribed in subsequent regulations.

Timetable
Submissions close on 17 August 2011. Legislation is expected to be introduced in to Parliament later this year with commencement scheduled for 1 July 2012.

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Posted 8th August 2011 by David Jacobson in legislation, Phase 2, responsible lending

March 24, 2011

Home Loans and Credit Cards Bill introduced

The National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Bill 2011 has been introduced into Parliament (see background here).

It is intended that the provisions will come into effect as follows:

1 September 2011: the home loan provisions (Schedule 1, part 1) .
1 July 2012: the credit card provisions (Schedule 1, part 2).

The Bill confirms that the prohibition on offering to increase the credit limit of a credit card contract will apply to credit card contracts whether entered into before, on or after 1 July 2012 and the provisions relating to use of a credit card in excess of credit limit and the order of application of payments made under credit card contracts will apply to credit card contracts entered into after 1 July 2012.

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Posted 24th March 2011 by admin in legislation, Phase 2
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