Credit Law and Casework basics 20th July 2016 Lachlan Edwards Solicitor Consumer Action Law Centre Worker advice line: 9602 3326 Rural access: 1300 881 020 advice@consumeraction.org.au www.consumeraction.org.au

Learning Outcomes Key aspects of the National Consumer Credit Protection Act (NCCPA)- when and how to use these aspects in client advocacy Key aspects of the National Credit Code (NCC); when to use the Code and whether to use it concurrently with the NCCPA and other tools through case study examples Ways of using both the law and code in the context of advocacy to get the best outcomes for the client Why/ when to apply use of External Dispute Resolution (EDR) in the context of the client situation

How does that help me? You’ll learn: Why credit law is key in FC work When credit law applies to your client’s cases How credit law can help you get good outcomes for your client’s case Where to go next if the creditor disagrees

How do these laws help my clients? The NCCPA and NCC provide important rights and protections that you need to know in order to help your clients. They are: assistance if they are sick or lose a job restrictions on providing them contracts they can’t afford information about contracts they enter rights when they are taken advantage of Distinguish between Code and Act – explain difference between the two

When do the credit laws apply?

Types of contracts Credit contracts e.g. Credit card, car/home loan, pay day loans Lease contracts: rental items such as cars, white goods eg. Radio Rentals & Motor Finance Wizard Mortgages Guarantees Plus Vendor terms contracts: contracts made for purchase of land BUT ownership doesn’t pass to purchaser until all repayments are made Mortgage / Finance Broker contracts: where someone helps your client to get one of the above

What is ‘credit’? Question for the audience?

What is ‘credit’? Definitions Payment of a debt owed by one person to another is deferred One person incurs a deferred debt to another Question for the audience? Get something, pay later Agree to pay money back later Definition 1: Payment of a debt owed by one person to another is deferred Eg. A bank lends money to a consumer to be paid back later Eg. A person hires goods and pays the amount back in instalments Definition 2: One person incurs a deferred debt to another Eg. A future debt Eg. Purchase of land with payments made by instalments at specified dates

When do credit laws apply? Borrower must be a person Lender must be a business A “charge” for providing credit Purpose must be a personal, domestic or household purpose or to purchase, renovate or improve a residential investment property Charges Examples of a charge: Interest % Application and establishment fees Amounts above the “cash price” of the goods being rented/leased Some complicated exceptions to this e.g. fee or charge does not include a government fee, charge or duty of any kind. If for business purposes, the Act won’t apply Credit alone will not be covered. Example – power bills. You pay at the end of the month, but the money you owe accrues during the month and payment is deferred. However, there is no “fee” for proving credit. Purpose If for business or investment purposes wont get the protection of the Credit Act Where it is a mix of business and personal, then you look at the predominant purpose – was more than 50 % of the loan used for personal purposes. legislation changed to cover residential investment property on 1 July 2010

The Act doesn’t apply to... Residential tenancies Pawnbrokers (note exception) Loans from an employer to an employee (dependant on the terms of the loan) All other contracts eg: contracts of sale for goods or services Exception re pawn broking is challenging the contract as unjust and the fees/interest/charges as unconscionable

Does the credit law apply to… Electricity or gas contracts? Credit cards? Insurance premiums paid by instalments? Rent to buy contracts? Loans to buy shares? Lines of credit for a small business?

How does the credit law help my client’s case?

So you can avoid this happening. https://www.youtube.com/watch?v=F6-KTXl7LsY

Key Protections in Credit Law Example Hardship assistance If your client cannot pay a loan due to change of circumstances they can request a hardship change such as to change repayments Disclosure Information required to be detailed in the credit contract e.g. interest rates, total amount borrowed, total fees Unjust transactions Harsh, oppressive or unconscionable contracts, mortgages or guarantees Hardship -can be anything and is not limited by the law -there seems to be a standard industry response to offer three months of no payments, reduce payment etc -our view is that hardship can be longer than that, or can ultimately change the entirety of the contract as long as the consumer can demonstrate some ability to repay the contract. If the lender doesn’t oblige, one could complain further to FOS. Disclosure - Applies to loans, not leases -credit laws say contracts must explain certain things such as an interest rate - Different rules for different products e.g. reverse mortgages, credit cards, leases Unjust contracts Contracts including those that are harsh, oppressive or unconscionable Example include: asset based lending, contracts consumers do not understand etc Not just getting the raw end of the stick, requires something more than just a bad deal

Key Protections in Credit Law Example Responsible Lending Lenders must assess whether a credit contract is “suitable” to the client’s situation. Credit will be unsuitable if a consumer: could not afford to repay the credit the credit did not meet their purpose in wanting the credit Small amount credit contracts Otherwise known as pay day loans. Specific rules apply. Default and repossession Ending contracts and where a client defaults on payment Responsible lending Making sure consumers can repay contracts they enter and that they meet the consumers purpose Importance is ability to afford it, or it meeting their purpose Outcomes could include reduction in debt by reducing interest/fees etc Small amount credit contracts Will go thorugh this shortly Default A notice must be given where payment is made that gives 30 days to bring the account/loan up to date Repossession Rules around when a car can and cant be repossessed If less than 25% or 10k left on loan cant repossess unless specific circs e.g. reasonable grounds to believe disposed of at risk etc

Responsible lending When applying for a loan, creditors* must: make reasonable inquiries about the consumer’s financial situation and requirements or objectives take reasonable steps to verify the consumer’s financial situation and requirements and objectives make an assessment of unsuitability Creditors = lenders, lessors, brokers This involves getting documents Asking questions to verify

Responsible lending An example of how simple responsible lending can be. This is taken from … Basically find out your clients income at the time of the loan (fortnightly, monthly, whatever) Subtract their expenses Then from that figure, subtract the repayment on the loan If the amount is less than the HPI or even in deficit, you have a responsible lending case to make

Responsible lending Creditors are prohibited from entering into (or increasing limits of) unsuitable contracts with consumers. A contract is unsuitable if, at the time it’s entered into: It’s likely the consumer can’t afford to repay it (or not without major hardship) OR it doesn’t meet the consumer’s requirements or objectives Presumption of unsuitability where only ability to comply is by selling their home – asset based lending

How does this help my client? Damages = $ your client paid minus $ client borrowed/cost of goods Example Paul took out 62 payday loans over 3 years Damages = $18,303.23 (amount paid) minus $13,028.00 (total cash he actually received) TOTAL REFUND: $5,275.00 JM: damages is about putting your client in the position that your client would have been, had the wrong-doing not occurred. If they receive a benefit, that’s fine, but they don’t have to pay any more.

Pay day lending (SACCs) What’s a Small Amount Credit Contract (SACC)? $2,000 or less 16 days to 12 months Max costs: 20% establishment plus 4% monthly Unsecured, not a credit card Unsecured, not a credit card

Pay day lending (SACCs) Small amount credit contract provisions: Lender must see 90 days bank statements Repayments can’t be more than 20% of income if Centrelink over 50% of income Presumed unsuitable if: Two + SACCs in 90 days before the loan Existing pay day loan already in default

Responsible lending – possible client outcomes Successful outcome based on putting client back in position had breaches not occurred. Examples: Client pays principle but interest, fees, charges are not repaid Client is refunded money paid above what they could afford. Secured loans – keeping or giving back the car is a complicated issue. FOS takes the view that the car often needs to be given back (bulletin 60 states It is our view that, if there has been maladministration in lending, the customer should be returned to the position they were in, had the loan not been approved. A customer cannot retain the asset purchased with a loan and, at the same time, claim that they should not be liable to repay the loan)

Hardship Consumers can request change to their loan agreement (repayments, interest etc) A change can be requested where the consumer has reasonable cause The creditor can request information to help offer appropriate assistance The credit provider can refuse the change where they don’t believe: there is reasonable cause for the change, or even with the change, the consumer wouldn’t be able to repay the contract Changes are often temporary e,g, wont necessarily reduce the overall amount owing – indeed, often increases it. During a loan, things can change.

Code of Banking Practice Not law but contains protections against: Maladministration Direct debits Guarantees Hardship Chargebacks The Code binds subscribers which not all creditors are but is considered good industry practice by FOS and there is some authority that if forms part of the banker/customer contract. Banks obliged to • act fairly and reasonably towards its customers in a consistent and ethical manner (cl 3.2); • supply the terms and conditions of any banking services it offers to any person on request (cl 12); • promptly process instructions to cancel a direct debit authority and complaints about an unauthorised direct debit (without directing or suggesting that the matter should be raised first with the debit user) (cl 21); • where a customer disputes a credit card transaction, claim a chargeback right and not accept a refusal from the relevant merchant’s bank except in certain circumstances (cl 22.1); • before offering, giving or increasing an existing credit facility, exercise the care and skill of a diligent and prudent banker in selecting and applying its credit assessment methods and in forming its opinion about the customer’s ability to repay (cl 27); • try to help a customer overcome their financial difficulties with any credit facility held with the bank, including by developing a repayment plan, communicating with the customer’s financial counsellor, informing the customer about the hardship variation provisions in the NCC (if applicable) and confirming the main details of any hardship assistance it provides in writing (cl 28); • not accept a person as a co-debtor under a credit facility where it is clear, on the facts known to the bank, that the person will not receive a benefit under the facility (cl 29.2); • before signing a person up as a co-debtor, take all reasonable steps to ensure that they understand they may be liable for the full amount of the debt and their rights to terminate their liability in respect of future advances or accommodation (cl 29.2–29.3); • give certain information to a prospective guarantor about the financial situation of the debtor whose loan is being guaranteed (cl 31.4); • not ask a prospective guarantor to sign a guarantee unless it has allowed them until the next day to consider the information referred to above (unless the prospective debtor has received independent legal advice after receiving the information) (cl 31.5); • not give the guarantee instrument to the debtor or their representative (unless the representative is a lawyer or financial advisor) to arrange the signing (cl 31.6(a)); • ensure the guarantee is signed in the absence of the debtor and in the presence of the bank (cl 31.6(b)); • comply, and take all reasonable steps to ensure their collection agents also comply, with the Australian Competition and Consumer Commission and the Australian Securities and Investments Commission’s Debt Collection Guideline for Collectors and Creditors (cl 32.1(a)); • not assign a debt while considering a customer’s hardship request or while a customer is complying with an agreed hardship arrangement (cl 32.1(b)).

How can I use the credit law to advance my client’s case?

Often you can use a little bit of law and a bit of fairness (compassionate circumstances) to twist a creditors arm into justice.

Case study # 1 - Sandu Sandu is a single parent who receives parenting payment. Amongst her financial situation she mentions that the company that she rents her fridge off is saying that she is behind on her repayments and is going to take her fridge from her if she doesn’t pay $200 by the end of the month. What questions would you ask her? What are her options? Read this, then as a group around your table tell me what you’d do here, then one person report back to us Part 2 Contract tells us: What she agreed to according to the creditor - Consumer lease / sale of goods by instalments. Code covered – distinguish between lease, rental and hire/purchase What shes paying – do we think she could afford this? What other documents might help? Application forms, assessment of suitability, statement of accounts to see how much she’s paid. Possible legal help: - Hardship Responsible lending, Unjust contract, Unconscionable conduct, misleading and deceptive conduct if didn’t tell her when the contract came to an end

Case study # 1 - Sandu Sandu says: She receives $600 per week. Her rent is $300 After expenses she has no money left at the end of the week Her normal repayment on the fridge contract is $20 per week. The rental company calls and demands answers. What would you do?

Case study # 1 - Sandu The rental company agrees to put things on hold for 3 months by giving Sandu hardship. You investigate Sandu’s finances at the time of entering the contract and she was overcommitted What are her options? Can she raise any legal arguments now that she has hardship?

Case study # 2 – Jane Jane receives DSP because her bad back means she is unlikely to work again. She lives in public housing and has no assets. Since stopping work, Jane has struggled financially. As well as debt on some credit cards, has a loan from Fast financials who are threatening to take her car. What questions would you ask her? What kind of contract? We don’t know until we have the documents. Could be a sale contract, could be a lease contract Contract important because of her misunderstanding about it – she needs to know what she has signed and what the ramifications are for breach Code covered Other laws may be misleading and deceptive conduct, breach of guarantees

Case study # 2 – Jane You request documents and the contracts show that she has had a lot of loans and the payments are significant. What arguments could Jane make? What would be your strategy here? What kind of contract? We don’t know until we have the documents. Could be a sale contract, could be a lease contract Contract important because of her misunderstanding about it – she needs to know what she has signed and what the ramifications are for breach Code covered Other laws may be misleading and deceptive conduct, breach of guarantees

Case study # 3 - Jonny What questions would you ask him? Jonny is referred to you by his social worker. He is 20 and has a drug addiction which has caused him to struggle financially. Jonny tells you that he has been getting regular small loans from Money Makers every month for as long as he can remember. He doesn’t know how many loans he has got from them but it is a lot. What questions would you ask him?

Case study # 3 - Jonny he receives $600 per fortnight. Jonny’s most loan repayments is $50 for 26 weeks and then $12 for 26 weeks. He tells you: he receives $600 per fortnight. his rent is $150 per week. he rents his laptop and stereo paying $150 per month after expenses he has no money left at the end of the week Complete the table on your Case Study worksheet

Case study # 3 - Jonny Jonny is overcommitted based on your calculations. What are Johnny’s options for dealing with the debt? What would your advice to Johnny be?

Where next for my client’s case if the creditor disagrees?

Ombudsman Schemes: FOS & CIO Who are they? Financial Ombudsman Service and the Credit & Investments Ombudsman Service They resolve complaints about lenders, brokers etc They can make binding decisions All licensed lenders, brokers etc must be a member of either service

EDR Schemes – FOS and CIO How can they help? Operate informally - on the papers and the phone, no hearings Free Stops enforcement action while dealt with Decisions binding for creditors Consumer is not bound by their decision No need for a lawyer FOS – fast track process

Regulator - ASIC How can they help? They are the “police” for creditors, brokers, lessors etc They can take action to enforce compliance with the law e.g. The Cash Store case They don’t take action for your client

Session Review Australian credit laws give your clients right and protections The credit laws only apply to certain types of contracts You can use the credit law to get good outcomes for your client If the creditor doesn’t come to an agreement, you can complain to Ombudsman schemes

What are the options? ASIC Credit Act / Code 1. IDR 2. EDR 3. Court Regulators ASIC Law Credit Act / Code Client Complaints Problem 1. IDR 2. EDR 3. Court FC Regulators – systemic change, case studies Forums – ways to get an outcome Advice – come to us if you need Advice CALC

Resources Fact sheets and letters http://consumeraction.org.au/help-for- consumers/support-for-advisers/ http://consumeraction.org.au/help-for- consumers/fact-sheets/ Information about the law www.lawhandbook.org.au

Contact details Consumer Action Law Centre Level 6, 179 Queen Street Melbourne VIC 3000 Worker Advice Line: (03) 9602 3326 Rural access: 1300 881 020 Mon – Fri 10am to 1pm and 2pm to 5pm Email: advice@consumeraction.org.au