NCCP Regulations amended and exit fees

Amendments were gazetted on 24 November to the National Consumer Credit Regulations, including a major change to the scope of regulated residential investment loans.

The amendments comprised in the National Consumer Credit Protection Legislation Amendment Regulations 2010 (No 3) contain many minor 'tidying up' provisions. 

From a commercial perspective, the key amendments are as follows.

• Regulation 24A provides an exemption for ADIs and RFCs from the requirement to provide credit guides and make an unsuitability assessment in respect of loan and lease applications received during the period 1 October 2010 and ending on 31 December 2010, so long as the credit contract or consumer lease is entered on or before 1 April 2011. 
• Regulation 28A(3) which exempts ADIs who arrange loans through other ADIs is amended to provide that the credit assistance provider is jointly liable with the lender of record to pay any compensation for a breach of the prohibition on entry into unsuitable loans.  The credit assistance provider can be indemnified by the lender of record.  ADIs acting as credit assistants in these transactions had lobbied for an exemption from the prohibition on providing unsuitable loans altogether, but that request has not been accepted. 
• Regulation 65C provides that the National Credit Code does not apply to a loan if:
• 1. the loan is provided for the purpose of investment in residential property; and
  2. the credit is not provided for the purpose of investment in a single residence; and
  3. the total amount of the credit is more than $5 million. 

Disclosure regime

Another regulation will be made hopefully by mid December dealing with the disclosure regime.

In summary:

• lenders and lessors give credit guides
• brokers give credit guides, quotes, and credit proposal documents
• lenders and brokers must give a copy of the credit assessment on request.

It's hoped that the commencement date for the credit guide, quote, and credit proposal will be postponed until 1 April 2011 to allow industry time to draft, train, and crank up IT systems.

Exit fees

Exit fees (remember, they used to be called DEFs?) have received much publicity since the release of RG220.  Although RG220 said that reasonable exit fees should be enforceable, some lenders responded by abolishing exit fees altogether. 

It is important to remember that exit fees in this context relate to early repayment fees or DEFS, and don't affect fees that are ordinarily payable whenever a loan is discharged.  Accordingly, lenders who have abolished exit fees may have retained discharge administration fees or other costs associated with repayment and discharge of any security.

It's worth reflecting that RG220 principles will generally only apply to NCC regulated loans.  There are a significant number of loans which aren't NCC regulated, including in particular residential investment loans made by contracts dated before 1 July 2010. 

However, natural person and small business borrowers will still have access to EDR schemes (COSL and FOS) in relation to exit fees for unregulated loans. 

Rules provide that it can't deal with a complaint if it relates to a fee, charge, commission or interest rate, unless (and irrespective of whether the loan is regulated):

• the complaint concerns the non-disclosure, misrepresentation, miscalculation or incorrect application of the fee, charge, commission or interest rate; or
• the charging of the fee, charge, commission or interest rate is in breach of the law or is unconscionable.

COSL asks lender members to provide a breakdown of the costs they say make up the exit fee, and so it likely COSL and FOS will take costs into account when assessing whether exit fees for unregulated loans are unconcionable. 

Generally the only legal obligation on lenders in relation to unregulated loans is not to act unconscionably or in a misleading or deceptive fashion. 

So long as the exit fee is not so large as to be unconscionable, and the contract was entered into in circumstances which did not amount to unconscionability or misleading or deceptive conduct or undue influence, an exit fee for an unregulated loan should be enforceable even if it exceeds the guidelines in RG220 (which basically relate to costs).

Although RG220's comments regarding unfair contract terms only apply to regulated loans made on or after 1 July 2010, the comments relating to the NCC will extend to all loans which were regulated by the UCCC prior to 1 July 2010.  Accordingly, lenders need to have in hand information to justify their costs when challenged in respect of these 'old' loans. 

Unilateral right to vary interest rates

The mainstream press can't write enough about the credit industry at the moment!!  Some reports are accurate, but many proceed on completely wrong assumptions.

The latest claim is that bank's unilateral right to vary interest rates is possibly invalid.  Too late, the courts have considered these clauses many times, and it is clear that a clause in a loan contract which provides that a lender may vary interest rates will be subject to an implied duty to act reasonably.

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