- Developments in Credit Regulation
- Cook and Anor v Permanent Mortgages Pty Ltd  NSWCA 219
Developments in Credit Regulation
The speakers at Thompson Australia's recent credit law conference provided a useful overview of current developments in credit regulation as summarised below.
1. Lenders to join EDR scheme
Victoria proposes to introduce legislation to Parliament by the end of 2007 to require all lenders of UCCC regulated credit to be members of an ASIC approved external dispute resolution scheme. This proposal is supported by industry associations and consumer bodies. Most reputable lenders are already a member of such a scheme. The proposal is designed to give borrowers from fringe lenders access to a free dispute resolution scheme.
2. Reverse mortgage initiative
Victoria is considering requiring a plain English information statement to be provided to all reverse mortgage customers and providing statutory protection against negative equity. In this regard, it is relevant that the proposed national broker legislation will require brokers selling reverse mortgages to undertake special training.
3. Unfair terms in credit contracts
Victoria proposes to amend its Fair Trading Act so that the unfair contract provisions apply to credit contracts. Currently all states and territories have Fair Trading Acts which are substantially the same. The existing Victorian Fair Trading Act goes further than other Fair Trading Acts by providing in Part 2B that unfair contract terms are void. It is proposed to extend to the operation of that part to credit contracts.
4. Responsible lending
Victoria proposes to release a major consultation document on responsible lending. The initial focus will be on credit cards.
5. Mandatory comparison rate
The mandatory comparison rate ('MCR') legislation has currently been extended to 1 July 2009. The objective of the MCR is of course to help consumers identify the true cost of a fixed term loan. Possible options include:
- restrict MCR to credit advertisements and abandon comparison rate schedules
- restrict MCR to selected market segments or product types
- large scale consumer education (but this option takes a long time to take effect and so has little support)
- abandon MCR (there is significant support by regulators and consumer bodies to have some mechanism which assists consumers properly assess the cost of credit).
In this regard, the Commonwealth's component pricing proposals are relevant as they may also provide assistance to consumers to assess the true cost of credit.
6. AML-CTF laws
The Anti-Money Laundering and Counter-Terrorism Financing Act requires all lenders to identify borrowers and maintain an active AML-CTF Compliance Program. Austrac is charged with administering this law.
Austrac is at some pains to point out that although there is a 15 month "shading in" period from the date of commencement, this should not be seen as an amnesty period but rather an "assisted compliance" period. Affected businesses will be required to be taking active steps to comply or risk prosecution.
Although it is up for each business to decide, Austrac expects that most lenders will continue to conduct identification procedures such as 100 points and that any further identification for high risk products or high risk customers would occur as part of the credit approval process, rather than at broker level.
Stage 2 of the second tranche of reforms will cover real estate agents, dealers in precious metals, dealers in precious stones, and a range of non-financial transactions provided by accountants, lawyers, trust, and company service providers. The second tranche requires legislation to be passed and, given the impending federal election, no indication of a commencement date is available.
7. EFT Code of Conduct review
A review is currently being conducted by ASIC of the EFT Code of Conduct. Compliance with the code is voluntary. ASIC is hoping that more non-bank lenders and other providers of electronic payment methods will subscribe.
The key issues to be addressed in the review include:
- dealing with mistaken payments – a growing issue because of 'pay anyone' facilities
- whether the code should be extended to small businesses (currently it only applies to consumers).
Somewhat surprisingly, there is little impetus to change the allocation of liability for loss, possibly because banks continue to want to build confidence in online banking.
8. Personal property securities reform
This reform, promoted by the Commonwealth Attorney General, proposes a single registry for any security over any kind of property other than real estate. For example, the new register would replace ASIC's current register of charges and would replace other registries such as REVs and bills of sale.
New Zealand has already adopted a regime similar to that proposed. Before the adoption of the new regime in in New Zealand, 95% of registered securities were either REVs or company charges. Now REVs and company charges only comprise about 50% of the total security interests registered.
There is much devil in the detail and much work yet to be done but it is hoped that providing certainty in relation to security over non-real estate property will provide cheaper finance while at the same time providing a greater certainty for lenders.
9. Privacy Act review
It is proposed to repeal and replace Part IIIA of the Privacy Act which regulates the use and disclosure of credit and personal information.
The key issue is whether Australia should move to positive credit reporting from the current negative credit reporting regime. The three key options are:
- retain the status quo;
- move to a comprehensive positive credit reporting model like the UK or US; or
- adopt a middle position which might involve recording the maximum limits provided by lenders so that a borrower's maximum exposure can be determined from a search of a credit reporting agency.
Gadens lawyers will continue to monitor developments in all these areas to ensure our advice is timely, commercial, and proactively assists your business.
by Jon Denovan
Cook and Anor v Permanent Mortgages Pty Ltd  NSWCA 219
The NSW Court of Appeal handed down its reasons for judgment on Friday in the much publicised Cooks case.
The upshot of the decision is that even when a loan contract has been found to be unjust, borrowers should not be placed in a better position than they would have been had they not entered into the loan.
You may recall that in 2003 the Cooks had refinanced a loan over their family home. The trial judge found that the incoming lender ought to have been aware, had it "made the most perfunctory of inquires", that the Cooks were not capable of servicing the loan. As a consequence, the trial judge found the loan contract was unjust and proceeded to vary the contract by restricting the interest rate to the rate the Cooks were paying before they refinanced.
The Cooks appealed arguing that the trial judge had erred in not varying the loan contract such that no interest was payable.
A commonsense approach was taken by the appeal judges, who dismissed the appeal, reasoning that if they allowed the appeal, the Cooks would have in fact improved their position because they would have received an interest free loan.
Rather, relief under the Consumer Credit Code for unjust contracts should be directed at returning borrowers to their former position - if that position involved paying interest then it should continue.
The decision may deter borrowers from looking to the Code to provide them with a windfall gain.
By Justin Bates
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