The maximum that lenders may charge under a UCCC credit contract for interest, fees and charges will be 48% per annum, following an amendment to the Consumer Credit Act in NSW and ACT.
The NSW amendment is contained in the Consumer Credit (New South Wales) Amendment (Maximum Annual Percentage Rate) Act 2005 (the Amendment Act) which was assented to on 17 November 2005 and commences on a date to be advised.
The Consumer Credit Act in the ACT has been similarly amended. The ACT amendment is contained in the Justice and Community Safety Legislation Amendment Act 2005 and commenced on 22 December 2005.
The law in NSW and the ACT prior to the amendment
Under the previous law in NSW, the interest rate under UCCC regulated contracts could not exceed 48% per annum. In respect of short-term credit contracts (ie, credit contracts with a term that does not exceed 62 days), the aggregate of interest and credit fees and charges could not exceed 48% per annum. Credit fees and charges did not include enforcement expenses, but included default fees.
Under the previous law in the ACT, 48% per annum was the maximum interest rate for short-term credit contracts only. Fees and charges were not included in the calculation of the rate.
The new law
The new law requires the aggregate of interest and fees and charges to be included in the calculation of the maximum annual percentage rate for allcredit contracts for UCCC regulated credit in NSW and ACT (ie, not just short-term credit contracts). There is an exemption for fees and charges relating to temporary credit facilities established by an authorised deposit-taking institution (ADI) provided in relation to an existing credit or debit account (eg, overdrafts and short-term excesses).
Possible application to a wide range of credit contracts
Many lenders may derive a yield in excess of 48% per annum if the borrower repays early. This is because the imposition of lenders mortgage insurance (LMI), establishment fees, early repayment fees, mortgage duty, and deferred establishment fees (DEFs) may result in the 48% per annum limit being breached.
Example: Assume a loan with a base interest rate of 7%per annum, an establishment fee of 1%, LMI of 1%, and a DEF of 2%. These fees total 4% of the principal sum. If the loan is repaid after one month, the fees are equal to 48%, to which the base rate of 7% pa is added, resulting in a rate of 55% pa which exceeds the prescribed maximum.
However, in these circumstances we consider the credit contract will not breach the new legislation because there is no obligation on the borrower to repay early.
What is the consequence of breach?
A credit contract is void to the extent it imposes a monetary obligation in excess of the maximum, and any amount paid in excess of the maximum may be recovered by the borrower. In addition, the credit provider is guilty of an offence for entering into such a contract.
National uniformity was a key objective of the UCCC. It is unfortunate that there are now special provisions in ACT and NSW regarding interest rates. By Jon Denovan, Sydney.
t (02) 9931 4927
t (02) 9931 4810
t (03) 9617 8596
t (03) 9617 8538
This publication is provided to clients and correspondents for their information on a complimentary basis. It represents a brief summary of the law applicable as at the date of publication and should not be relied on as a definitive or complete statement of the relevant laws.
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On 12th November 2016, new laws will commence to protect small businesses from unfair terms in standard form contracts.
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