Important upcoming changes to the Consumer Credit Code
Introduction
In late 2003, the Ministerial Council on Consumer Affairs (“MCCA”) took submissions on its Discussion Paper, “Fringe Credit Providers”. After consideration of the submissions received, amended proposals were published in a Decision-Making Regulatory Impact Statement and Final Public Benefit Test (“RIS”).
The RIS made a number of recommendations including that the provision of consumer credit by way of bill facilities no longer be exempt from the Consumer Credit Code (“Code”). That proposal, seen to be as urgent, has been fast-tracked in advance of the broader fringe lending recommendations set out in the RIS.
The MCCA has now published a Consultation Package, setting out a number of further recommendations to amend the Code stemming from the RIS. In addition to their relevance to so called “fringe credit providers”, a number of the recommendations also affect mainstream lenders.
The Proposed Changes
In short, the proposed amendments to the Code are as follows:
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Require an annual percentage rate to be provided for all loans where there is a charge for credit and that charge is in the nature of interest.
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Clarify that the pawnbroker exemption only applies where money is lent on the security of goods and where the realisation of those goods is the lender’s only recourse upon non-payment.
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To prevent short-term loans evading coverage by the Code, for the purposes of determining the amount of fees and charges imposed, a fee or charge is to include any fee paid to another party for referral to the credit provider.
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Removal of the presumption that applies to a business purpose declaration under s11 of the Code to encourage credit providers to ascertain the true purpose of a loan.
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A court to be able to review all unconscionable/unreasonable fees and charges.
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Lenders to provide information to customers about direct debit authorities.
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Credit providers prohibited from taking security over essential household goods.
Business Purpose Declarations
One of the most significant changes is the proposed amendment of s11 of the Code to remove the special evidentiary status of a business purpose declaration.
In its current form, s11 provides that:
“Credit is presumed conclusively for the purposes of this Code not to be provided wholly or predominantly for personal, domestic or household purposes if the debtor declares, before entering into the credit contract, that the credit is to be applied predominantly for business or investment purposes (or for both purposes).”
Ergo, a credit provider who has obtained such a declaration from a borrower is currently under no obligation to take any further steps whatsoever to ascertain whether the proposed lending is, in fact, wholly or predominantly for business or investment purposes.
It is proposed that the Code be amended so as to remove the presumption relating to business purpose declarations and associated provisions. The MCCA states that it is not intended to prohibit credit providers from requiring a statement about purpose, rather to remove any special evidentiary status.
It is intended that credit providers who claim credit was not provided wholly or predominantly for personal, domestic or household purposes, will be required to show that they took active steps to ascertain the consumer’s particular purpose for seeking the credit.
Should this amendment come into effect, lenders seeking to exclude a loan from the terms of the Code will need to ensure that they have evidence supporting the position, which might include such things as:
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Signed statements from borrowers;
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Evidence of the destination of funds upon drawdown;
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Copies of relevant documentation such as agreements for sale of land, agreements for the sale of business, lease agreements for investment properties, etc.
Incoming mortgagees beware
The High Court has recently handed down a decision with significant ramifications for incoming mortgagees. In Black v Garnock [2007] HCA 31, the Court held that the prior unregistered equitable interest of a purchaser in land was defeated by a writ for the levy of property registered on title just hours prior to settlement of the sale.
The Facts
In June 2005, the Garnocks (the purchasers) entered into a contract to purchase a property from the vendor. On 23 August 2005, the Blacks (creditors) obtained a writ for the levy of property from the District Court of NSW.
On 24 August 2005, the following events occurred:
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At 8.53am, the solicitor acting for the Garnocks searched the register and determined that the property was clear and free of any unexpected encumbrances.
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At 11.50am, the Blacks’ writ was registered.
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At around 2.00pm, settlement of the sale proceeded and the Garnocks paid for the property with a bank cheque from their incoming mortgagee.
Subsequently, in light of the prior registration of the writ, the Registrar General refused to register the transfer.
Decision
By a 3 to 2 majority, the High Court held that the Garnocks’ interest was postponed to the interest of the Blacks. The Court held that, pursuant to section 105B(2) of the Real Property Act 1900 (NSW) (“RPA”) the Sheriff of NSW was empowered to take possession of the property and to sell it to satisfy the judgment debt and that other registrable interests were postponed to that statutory right. This notwithstanding the fact that a writ is not an “interest in land”.
In brief, the Torrens Title system of registration provides the following regime of priorities:
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A legal interest in land generally has priority over a subsequent legal interest.
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An equitable interest in land generally has priority over a subsequent equitable interest.
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In the absence of notice of a prior equitable interest, a legal interest will generally have priority over an equitable interest, even if that equitable interest existed prior to registration of the legal interest.
It is with regard to the final point above, that the holder of an equitable interest will often lodge a caveat on title so as to ensure that any person who subsequently tries to register a legal interest on title will be on notice of the existing equitable interest (and so that interest cannot be registered until the caveat is removed).
Alongside the Torrens Title regime is a statutory regime governing writs of execution set out in sections 105 to 105D of the RPA. Most notably:
- The registration of a writ does not create an interest in land (s105(1));
- The Registrar General may record a writ in the register (s105(2));
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The Registrar General shall not, while a writ remains registered, register another dealing unless the dealing acknowledges the writ as a prior encumbrance (105A(2)); and
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The Registrar General may register a transfer to a purchaser from the Sheriff and, upon that transfer, the purchaser takes the land free from all estates and interests except those recorded in the register (s105B).
The fact that the writ does not create an interest in land would, ordinarily, make the interest uncaveatable. However, the statutory regime provides the writ with a special form of registrable interest.
Interestingly, however, as the writ is not an interest in land, it has no priority over other prior registered interests of either a legal or equitable nature. Accordingly, a caveat lodged to protect the equitable interest of an incoming mortgagee or purchaser will have priority to the interest recorded in the writ because the writ registration system refers only to the time of entry of the interest and has no regard to the nature of other interests.
Ramifications
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A purchaser should seriously consider whether a caveat should be lodged upon exchange of contracts to protect its equitable interest in the land.
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An incoming mortgagee should also consider requiring their mortgagor, as purchaser, to lodge a caveat to protect their interests as mortgagee
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Conversely, parties seeking to recover a debt who know that there is real property registered in the name of the debtor, should now, more than ever, consider issuing a writ for levy of property with a view to having that writ registered on title to the land.
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If an incoming mortgagee or purchaser has not lodged a caveat on title prior to settlement, they would be well served to ensure that:
