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.

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.

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…)

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.

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.

The Government’s ongoing banking and credit reforms are causing confusion in respect of implementation timing.

The exposure draft National Consumer Credit Protection Amendment (Credit Card and Home Loans) Bill contains 2 specific provisions in relation to transitional application of the new requirements (if passed):

1. Division 4 of Part 3-2A of the amended Act (Credit provider not to offer to increase the credit limit of a credit card contract) will apply to credit card contracts whether entered into before, on or after commencement;
2. Divisions 5 (Division 5—Use of credit card in excess of credit limit) and 6 of Part 3-2A of the amended Act (Order of application of payments made under credit card contracts) will apply to credit card contracts entered into after commencement.

The draft Bill does not specfically require Fact Sheets for credit card contracts and home loans be given to existing borrowers.

The draft National Consumer Credit Protection Amendment Regulations 2011 set out the proposed scope of exit fees to be banned for new home loan contracts from 1 July 2011.

The Regulations will not affect fees in existing home loan contracts but ASIC’s guidelines in RG 220 and the National Credit Code’s unconscionability test will continue to apply to these.

However if existing home loans are refinanced by way of a new contract after 1 July 2011 the new Regulations will apply.

The Government has not yet responded to submissions in respect of these proposals.

The Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen MP, has announced the release of the Consumer Credit Reform Green Paper, National Credit Reform – Enhancing confidence and fairness in Australia’s credit law, for public comment by 6 August 2010.

The Green Paper contains reform proposals that are being considered as part of Phase Two of the Council of Australian Governments’ (COAG) Credit Reform agenda.

Legislation implementing the changes is proposed to be in place for some projects (listed in Part One below) by mid‑2011, and those requiring more consultation (listed in Part Two) to be in place by mid‑2012.

Part One

The Government will consider:

• enhancements to the regulation and tailored disclosure for reverse mortgages;
• extension of the National Credit Code to include disclosure requirements for consumer leases and linked credit providers;
• regulation of credit for personal use and peer to peer lending;
• regulation of various aspects of credit card lending;
• possible extension of unjust conduct provisions to credit service providers; and
• further enhancements to the National Credit Code.

Part Two

The Government will consider projects requiring more in-depth industry consultation, including:

• regulation of the provision of credit to small business;
• regulation of credit for investment loans other than margin loans;
• examination of mechanisms, including state approaches to interest rate caps, to address predatory or fringe lending;
• an examination of the need for any enhancements to responsible lending provisions for post-entry conduct;
• a review of the regulation of credit advertising directed at vulnerable consumers;
• reform of mandatory comparison rates; and
• a possible review of credit licensing requirements for debt collectors.