What is a credit contract?

31 Jan

The NCCP Act and NCC apply to credit contracts defined in the NCC as:

payment of a debt owed by the borrower to the credit provider is deferred; or
the borrower incurs a deferred debt to the credit provider (NCC s 3(1)).

For example, credit includes a person being lent money by a business (a debt) and being required to pay it back at a later date (deferral). The amount of credit is the amount of the debt actually deferred but does not include any interest, fees or charges (NCC s 3(2)).

Aside from the exceptions discussed below, the NCC applies to a credit contract:
- entered into on or after 1 July 2010 and the credit is provided for personal, domestic or household purposes, to invest in residential property, or to refinance credit already obtained for one of these purposes; and
- the person obtaining the credit is a natural person (i.e. not a company or strata corporation); and
- the credit provider charges a fee for providing the credit to the person; and
- the credit provider provided the credit in the course of conducting its business.
For credit contracts entered into before 1 July 2010, the NCC does not apply if the purpose of the credit was to invest in residential property or to refinance credit already obtained.
Credit contracts that meet each of the above tests (NCC s 5, Old Code s 6) will be covered by the NCC (National Consumer Credit Protection (Transitional and Consequential Provisions) Act 2009 (Cth) (‘Transitional Act’) sch 1 item 3). Each of these tests is considered in more detail below.
Importantly, if a party claims in legal proceedings that the NCC applies to a credit contract, a court will presume that the NCC applies unless the contrary is established (NCC s 13(1)). In other words, it is up to the party that says the NCC does not apply to prove that the NCC does not apply.
However, this presumption may be displaced if the borrower has signed a declaration that the loan is for a purpose that is not regulated by the NCC, such as a business purpose (NCC s 13(2)) (see ‘Preliminary requirements for the National Credit Code to apply’, below).
Contracts entered into before 1 July 2010
Generally, the NCC applies to a consumer credit contract entered into and still on foot on 1 July 2010 and the Old Code applied to that contract. However, some provisions of the NCC will not apply to such a contract. Where this is the case, the equivalent provisions of the Old Code apply (Transitional Act sch 1 item 3).
Given that credit contracts may run for years, this chapter endeavours to note where the treatment of contracts entered into before 1 July 2010 is different to those contracts entered into after this date.

Preliminary requirements for the National Credit Code to apply

The NCC does not apply to a credit contract unless the person who obtains the credit is a person or an owners corporation (see Chapter 6.5: Owners corporations). Credit obtained by a corporation or trust is not covered by the NCC.
The NCC does not apply if the credit was not provided wholly or predominantly for a ‘Code purpose’. A Code purpose is credit provided for personal, domestic or household purposes. If the credit contract was entered into on or after 1 July 2010, the Code purpose includes credit obtained to purchase, renovate or improve residential property for investment purposes, or to refinance credit provided for such a purpose. The regulation of credit provided for residential property investment is one of the significant changes between the Old Code and the NCC.
The NCC does not apply if the credit is provided wholly or predominantly for business, or for investments other than residential property investment (NCC s 5(3)). This poses important questions:
1. What percentage of credit must be for a Code purpose to qualify as being wholly or predominantly for a Code purpose?
  Section 5(4) of the NCC states that credit is wholly or predominantly for business, domestic or household purposes if:
  a. more than half of the credit is intended to be used for a Code purpose; or
  b. where the credit is intended to be used to obtain goods and services for more than one purpose, the goods are intended to be mostly used for a Code purpose.
2. Whose purpose?
  The law here is unsettled. Courts have applied at least two different tests for determining the purpose for which credit is provided under a credit contract. One test is concerned with the substance of the transaction; that is, the way the credit provided under the credit contract was ultimately used. The other test looks objectively at the intention of the credit provider, and asks what a reasonable person in the shoes of the credit provider would have understood to be the predominant purpose for which the credit was provided. This test involves taking into account the information communicated by the consumer to the credit provider prior to and at the time the credit contract was entered into.
3. What is the effect of a declaration that the credit is for a non-Code purpose?
  Sometimes a credit provider will ask a consumer to sign a declaration that the credit sought is to be provided for a non-Code purpose, such as a Business Purpose Declaration. Signing a declaration creates a presumption that the credit contract and the credit provided, is not covered by the NCC (s 13(2)). However, unlike under the Old Code, this presumption is not conclusive under the NCC.
  For contracts entered into on or after 1 July 2010, the declaration must be substantially in the form prescribed by regulation 68 of the NCCP Regulations (otherwise it will be ineffective), and must contain a warning that the protection of the NCC may be lost as a result of signing the declaration.
  The declaration will not be effective if, at the time the declaration was made, the credit provider, or a person prescribed by the NCCP Regulations, knew or had reason to believe (or would have done if they had made reasonable enquiries) that the credit would in fact be applied wholly or predominantly for a Code purpose (NCCP Regulations reg 13(3)). Because regulation 67 of the NCCP Regulations defines a prescribed person broadly, the knowledge of most people ordinarily involved in arranging a business purpose declaration will be relevant in deciding whether a business purpose declaration is effective.
  If a declaration is found to be ineffective under the NCC (s 13(3)), the credit will be taken to have been provided for a Code purpose. This exception protects debtors or borrowers, who might otherwise be tricked into signing away their right to protection under the NCC.
  For contracts entered into before 1 July 2010, section 13 of the NCC does not apply. Instead, section 11 of the Old Code applies in effect (Transitional Act sch 1 item 3).
The NCC applies only if there is a charge (e.g. interest or certain fees) for providing the credit. This requirement has been construed broadly by the courts. This means that some contracts used by fringe lenders that hide the credit costs in ‘administrative’ or other fees and charges, to avoid the application of the NCC might still be found to be subject to the consumer credit laws.
The NCC only applies if the credit provider supplies credit in the course of a business of providing credit or as part of, or incidental to, any other business.
The approach taken by the courts has been that whether a loan was made in the course of business is a question of fact in each case. Any system of lending, repetition or continuity of activity would generally indicate the loan was made in the course of business. A one-off loan by a person to a friend would not be covered by the NCC, whether or not interest was charged on that loan.
However, where credit is provided incidentally to the operation of another business, there appears to be no requirement that the business routinely provide credit of that kind. For example, if a retailer allows a customer to pay for goods by instalments, it is only necessary that the credit is provided incidentally to the retail business.
Therefore, even if a retailer provides credit on only one occasion, the transaction will probably be covered by the NCC, provided the other requirements for the NCC to apply are met.
For contracts entered into after 22 May 2009, the Old Code and NCC apply to:
- executory contracts for the sale of land by instalments, known as ‘vendor terms contracts’ or ‘terms contracts’ (NCC s 10); and
- certain contracts for the sale of goods by instalments – often called ‘rent to buy contracts’ (NCC ss 11–12).
These types of contracts have commonly been used to provide high-cost credit to low-income and disadvantaged consumers on onerous terms and have not previously been covered by consumer credit protection laws.