Understanding credit and finance

Section 17 of the National Credit Code (NCC) sets out the information a credit provider must disclose in a credit contract, as follows:

• the credit provider’s name;
• the amount of credit;
• the annual percentage rate or rates;
• a calculation of interest charges;
• a total amount of interest charges payable; 
• repayments;
• credit fees and charges;
• changes affecting interest and credit fees and charges; 
• statements of account;
• the default rate; 
• enforcement expenses; 
• mortgages or guarantees; 
• commission;
• insurance financed by contract; and 
• an information schedule to be included above the signature clause of the contract in form 6 or 7 of the NCCP Regulations, (together, ‘the disclosure requirements’).

Of the disclosure requirements, those in italic text are deemed ‘key requirements’ (s 111 NCC).

The key requirements are slightly different for continuing credit contracts (s 111(2) NCC). These requirements are the same as those under the Old Code, the main source of consumer credit law before 1 July 2010.

Under Part 6 of the NCC, credit providers are liable to pay a civil penalty to debtors, or to a government fund, if they fail to disclose a key requirement in a credit contract document.

The payments are ‘penalties’ because they are pun­itive, not compensatory, in nature. Accordingly, Part 6 does not require that any loss be suffered by a debtor before a penalty is applied.

However, unlike most penalties, they may be paid to an individual (that is, the debtor under the credit contract), rather than the state.

A party to a credit contract, a guarantor and the Australian Securities and Investments Commission (ASIC) have standing to apply to a court for an order under Part 6. Before granting such an order, a court must determine:

• whether a contravention of a key requirement has been established (s 113(1) NCC); and
• whether the contravention ought to give rise to a penalty (s 113(2) NCC).

A credit provider cannot be ordered to pay a penalty to a debtor or guarantor that is more than the total amount of interest charges payable under the credit contract unless the debtor or guarantor has suffered a loss (s 114(1)–(2) NCC).

If the debtor or guarantor has suffered a loss, the court may impose a greater penalty that must not be less than the amount of the loss suffered (s 114(2) NCC).

Specific provisions in the National Consumer Credit Protection Act 2009 (Cth) (‘NCCP Act’) commenced on 1 July 2013 that limit the amount of interest, fees and charges that a lender can charge under small amount credit contracts and medium amount credit contracts (see ‘Payday loans’ in Chapter 5.8: Mortgages, consumer leases and other finance products).

For other loans, the total amount of fees and charges on a loan must not be greater than 48 per cent per annum. This limit does not apply to authorised deposit-taking institutions (e.g. banks, credit unions and building societies).

The NCC does allow ‘unconscionable’ interest or charges (such as an establishment fee or early termination fee) to be reviewed and reduced or annulled (s 78 NCC).

For information about the restrictions on interest and fees under small amount credit contracts and medium amount credit contracts see ‘Payday loans’ in Chapter 5.8: Mortgages, consumer leases and other finance products.

Credit providers cannot charge consumers early termination fees (also known as ‘exit fees’) in relation to secured home loans entered into after 1 July 2011 (reg 79A National Consumer Credit Protection Regulations 2010 (Cth) (‘NCCP Regulations’)).

Not all ‘exit’ fees are prohibited. Regulation 79A(2) makes it clear that credit providers can charge:

• a break fee in relation to a fixed rate loan; and
• a discharge fee that reimburses the credit provider for the reasonable administrative cost of terminating the credit contract.

A ‘break fee’ is a fee or charge that relates:

• only to the early repayment of an amount provided under a credit contract for a fixed rate loan; and
• only to the portion of the loan that is fixed; and
• to the part of the credit provider’s loss, arising from the early repayment, that is a result of differences in interest rates.

Although the ban on early termination fees applies only to home loans taken out after 1 July 2011, relief may be available to consumers with older loans where the fee is, for example, not a reasonable estimate of the lenders loss (s 78 NCC; ASIC RG220 Early termination fees for residential loans: Unconscionable fees and unfair contract terms).