In brief
The National Credit Code (Code) imposes a number of onerous obligations on lenders and serious penalties for non-compliance. As a result, lenders need to ensure that they undertake necessary due diligence in order satisfy themselves as to the application and use of credit being advanced to borrowers, particularly in the case of natural persons.
What you need to know
The National Credit Code (Code) is contained in Schedule 1 of the National Consumer Credit Protection Act 2009 (Cth) and regulates the provision of credit to consumers. The Code came into operation on 1 July 2010 as part of a broad range of reforms to consumer credit laws. Lenders need to be aware of the potential application of the Code and ensure they comply with their obligations.
Broadly speaking, the Code imposes a number of obligations and requirements on lenders in relation to credit contracts, related mortgages and guarantees which are intended to increase the protections afforded to consumers.
Failure to comply with the credit obligations can result in significant civil and criminal penalties.
Application of the Code
Subject to certain exceptions[1], the Code applies to the provision of credit if[2]:
- the borrower is a natural person or strata corporation; and
- the credit is provided or intended to be provided wholly or predominantly:
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- for personal, domestic or household purposes; or
- to purchase, renovate or improve residential property for investment purposes or to refinance credit that has been provided for this purpose; and
- a charge is or may be made for providing the credit; and
- the lender is in the business of providing credit or the credit is provided as part of, or incidentally to, any other business of the lender.
1. ‘Wholly or Predominately’
Wholly or predominantly means the purpose for which more than half of the credit is intended to be used, for example:
“A person obtains a personal loan of $20,000. They intend to use $15,000 to purchase household goods, and $5,000 to purchase shares as an investment. As more than 50% of the credit is intended to be used for a personal, domestic or household purpose, the Code will apply to the provision of the credit”[3],
or the predominant use of the goods or services purchased with the credit, for example:
“A person who has a small courier business obtains credit for the purpose of purchasing a car that is to be used both in the person’s business and for their own personal use. The person intends to use the car mostly (more than 50% of the time) for the courier business. The Code will not apply to the provision of this credit”[4].
2. Business Purposes Declaration
Where a borrower claims that the Code applies to the provision of credit, there is a presumption in favour of its application and the onus is on the lender to prove otherwise. The presumption is reversed where the borrower, prior to entering into the credit contract, declares that the credit is to be provided wholly or predominantly for business or investment purposes (Business Purposes Declaration). A Business Purposes Declaration may be of use to lenders in circumstances where there is a degree of uncertainty as to a borrower’s intended use or application of credit being advanced. The declaration will however be ineffective if the lender knew or ought to have known that the credit was to be applied for a Code purpose.
Conclusion
As the Code nears a decade of operation, it is important lenders do not become complacent with regards to its application. Serious penalties apply for non-compliance and lenders need to ensure that they undertake necessary due diligence in order satisfy themselves as to the application and use of credit being advanced to borrowers, particularly in the case of natural persons.
[1] Section 6, National Credit Code.
[2] Section 5, National Credit Code.
[3] Regulatory Guide 203, Australian Securities and Investments Commission.
[4] Regulatory Guide 203, Australian Securities and Investments Commission.
