Varying, re-opening and terminating credit contracts
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A debtor may, by written notice to the credit provider, terminate a credit contract at any time up until credit has been obtained under the contract (NCC s 21).
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The credit contract may allow the credit provider to vary essential terms of the credit contract, such as the interest rate and level of repayments. Under division 1 of Part 4 of the NCC, the credit provider must notify the debtor of these changes so that the debtor can decide whether or not to terminate the facility and obtain credit elsewhere.
However, there is no such requirement to give notice regarding:
a change to a new annual percentage rate payable under the contract if both the new rate and when it will take effect are ascertainable from the contract (NCC s 63(2)(a));
an increase in the amount of repayments, if the increase occurs automatically, as specified by the contract, and both the amount of the increase and when it takes effect are ascertainable from the contract (NCC s 63(2)(b));
an increase in the term of the credit contract, if the increase occurs only because of an increase in the annual percentage rate or rates payable under the contract (NCC s 63(2)(c)); and
changes made to the contract under division 3 or Part 4 of the NCC (i.e. changes on grounds of hardship and unjust transactions) (NCC s 63(2)(d)) (see ‘Unjust contracts’, below).
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Sections 76 and 77 contain the NCC’s version of statutory unconscionable conduct. These sections allow a court to grant relief to debtors from the consequences of entering into ‘unjust transactions’. The NCC provides similar relief to lessees in relation to unjust consumer leases (entered into from 1 March 2013) (see ‘Consumer leases’, below).
The provisions set out a two-step test:
Step 1: Was the contract, mortgage or guarantee unjust at the time it was entered into or changed?
Step 2: If the transaction is reopened as unjust, what remedy should a court grant the debtor?
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A definition of the term ‘unjust’ is provided in section 204(1) of the NCC, which states that ‘unjust includes unconscionable, harsh or oppressive’.
The definition of unjust is wider than that of unconscionable conduct at common law (see Maisano v Car & Home Finance Pty Ltd (Credit) [2005] VCAT 1755). The concept includes both:
substantive unjustness (i.e. the idea that the terms of the document itself are unconscionable); and
procedural unjustness (i.e. the idea that the conduct of the parties at or prior to the time the transaction was entered into was unconscionable. Further, the fact that a contract favours one party’s rights over another will not, on their own, amount to unjust conduct.
When deciding whether a transaction is unjust, a court must consider:
the public interest; and
all the circumstances of the case.
Note the presence of two competing public interests of consumer protection and upholding bargains. In Giannopoulos v Rapid Funds Pty Ltd [2013] SADC 9 (per Cole J at 130), it was held that unfairness and poor decision making do not necessarily amount to injustice and that it is generally desirable for contracts to be honoured.
In addition, a court may consider a lengthy list of factors contained in section 76 of the NCC. These considerations include:
whether the credit provider or any other person exerted or used unfair pressure, undue influence or unfair tactics on the debtor, mortgagor or guarantor and, if so, the nature and extent of that unfair pressure, undue influence or unfair tactics;
whether at the time the contract, mortgage or guarantee was entered into or changed, the credit provider knew, or could have ascertained by reasonable inquiry of the debtor at the time, that the debtor could not pay in accordance with its terms or not without substantial hardship;
the terms of other comparable transactions involving other credit providers and, if the injustice is alleged to result from excessive interest charges, the annual percentage rate or rates payable in comparable cases.
Just because a transaction exhibits one of the above factors does not make that transaction unjust.
A contract may be found to be unjust even though none of the section 76(2) criteria are present. If the court is satisfied that in the circumstances, at the time the relevant credit contract, mortgage or guarantee was entered into or changed, the credit contract, mortgage or guarantee was unjust, the court may ‘reopen’ the relevant transaction (NCC s 76(1)).
To decide if a contract term is unjust, consideration must be given to the circumstances in which the term or arrangement was made.
However, the court cannot take into consideration any circumstances that were not reasonably foreseeable when the credit contract, mortgage or guarantee was entered into or changed (NCC s 76(4)).
In Shannon v Permanent Custodians Limited [2020] WASCA 198, the Court of Appeal of the Supreme Court of Western Australia declared that a mortgage granted by the respondents to the appellants to secure the purchase of their first home was an unjust transaction under section 76.
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Under section 77 of the NCC, a court has a discretionary power to make any one or more of the following orders upon reopening a transaction under section 76:
a. reopen an account already taken between the parties;
b. relieve the debtor and any guarantor from payment of any amount that the court considers to be excessive;
c. set aside either wholly or in part or revise or alter an agreement made or mortgage given in connection with the transaction;
d. order that the mortgagee takes such steps as are necessary to discharge the mortgage;
e. give judgment for or make an order in favour of a party of such amount as, having regard to the relief (if any) which the court thinks fit to grant, is justly due to that party under the contract, mortgage or guarantee;
f. give judgment or make an order against a person for delivery of goods to which the contract, mortgage or guarantee relates and which are in the possession of that person; or
g. make ancillary or consequential orders.
An application under section 76 must be made within two years of the relevant credit contract being rescinded, discharged or otherwise brought to an end (NCC s 80).
The courts have found the following to be unjust:
a bank manager asking a guarantor to sign a guarantee without ensuring he knew what he was signing (Violi v Commonwealth Bank of Australia [2015] NSWCA 152); and
unaffordable loans entered into by disability support pensioners who may not have appreciated the nature and consequence of the loans (Perpetual Trustees Victoria Ltd v Burns [2015] WASC 234).
In Australian Securities & Investments Commission (ASIC) v Channic Pty Ltd (No 4) [2016] FCA 1174, the Federal Court found that a Cairns-based lender entered into unjust transactions when it provided loans to vulnerable Indigenous consumers so they could purchase second-hand cars from a related car yard. Ultimately, the court ordered (in ASIC v Channic Pty Ltd [2017] FCA 363) that the relevant credit contracts be treated as invalid from the outset.
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A court can also annul or reduce any change in the annual percentage rate, any establishment fee or charge or fee payable on early termination of a credit contract if the change or charge is unconscionable (NCC s 78(1)). A change to an annual percentage rate is unconscionable if:
the change occurs in an unreasonable manner, having regard to the advertised rate before or at the time the contract was entered into and the period of time since the contract was entered into; or
the change discriminates against the debtor compared to other similar debtors (NCC s 78(2)).
A court or dispute resolution scheme has to decide if an establishment fee or charge is unconscionable taking into account the credit provider’s reasonable costs (NCC s 78(3)). A termination fee or charge is unconscionable if it exceeds a reasonable estimate of the credit provider’s loss arising from the early termination or prepayment of a contract (NCC s 78(4)).
Financial hardship
It is not uncommon for things like job loss or ill health to prevent a person from making payments on their loan.
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It is prudent for a borrower experiencing financial difficulty to see a free financial counsellor to discuss all options available as soon as possible (for contact details, see Chapter 5.4: Financial counselling services).
Application for a variation on grounds of hardship
Sections 72 to 74 of the NCC allow a debtor who is experiencing financial hardship to ask a credit provider to vary the terms of their credit contract. If the debtor is dissatisfied with the credit provider’s response, they can apply to a court or dispute resolution scheme to vary the contract. The NCC also contains similar provisions that regulate hardship applications in relation to consumer leases (see ‘Consumer leases’, below).
Whether these provisions apply depends on:
the date of entry into the contract;
the reason for the hardship application; and
the amount of credit provided under the contract.
Successful hardship applications show that the debtor will be able to meet their obligations under the contract if it is varied in the way they propose.
Hardship applications are available where:
a. Contracts entered in before 1 July 2010
Varying, re-opening and terminating credit contracts the debtor borrowed an amount less than or equal to the floating threshold used under the Uniform Credit Code (‘Old Code’) (National Consumer Credit Protection (Transitional and Consequential Provisions) Act 2009 (Cth) (‘Transitional Act’) sch 1 item 3(5)). A historical list of threshold amounts can be found at www.moneysmart.gov.au; and
the debtor is unable reasonably, because of illness, unemployment or other reasonable cause, to meet their obligations under a credit contract.
b. Contracts entered into from 1 July 2010 to 28 February 2013
The maximum amount of credit provided under the contract is no more than $500 000 (NCC s 72(5) (as it then was)); and
the debtor is unable reasonably, because of illness, unemployment or other reasonable cause, to meet their obligations under a credit contract.
The courts have held that the time to apply the threshold test is the date on which the relevant contract was entered into, not the date when the debtor applied to the credit provider for a change to the contract under section 72 (see Perpetual Trustees Victoria Ltd v Monas [2010] NSWSC 1156).
Where a loan exceeds the relevant threshold or the debtor applied for hardship for a reason other than illness, unemployment or other reasonable cause, the credit provider may still be required to provide assistance under applicable industry codes. For example, under Part 9, chapters 39–41 of the Banking Code, a credit provider must try to help a consumer (with their cooperation) to find a sustainable solution to their financial difficulties. Under paragraphs 171–172 of the Banking Code, a credit provider may, at its discretion, reduce or waive an individual’s debt on an unsecured personal loan or credit card on a case-by-case basis and on compassionate grounds.
c. Contracts entered into from 1 March 2013: The Consumer Credit Legislation Amendment (Enhancements) Act 2012 (Cth) commenced on 1 March 2013 and simplified the hardship arrangements for credit contracts entered into on or after 1 March 2013. It also provides for similar hardship provisions in relation to consumer leases entered into from 1 March 2013 (see ‘Consumer leases’, below). Some of the provisions are:
a hardship application may be made if the debtor considers that they are or will be unable to meet their obligations under a credit contract (for whatever reason) (NCC s 72(1));
a debtor has a statutory right to request (in writing or verbally) a hardship variation regardless of the amount of credit that is provided under their contract (NCC s 72(1));
a credit provider does not have to agree to change the contract if they reasonably believe that the debtor would not be able to meet their obligations under the contract even if it was changed or that there is no reasonable cause (such as family violence, illness or unemployment) for the debtor’s inability to meet their obligations under the contract (NCC s 72(3)); and
there are no limits to the form of hardship variation (the way in which the contract can be varied).
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A debtor’s hardship application for a contract entered into before 1 March 2013 is a two-step process:
Step 1: Write to the credit provider.
Step 2: If the application is rejected by the credit provider, apply to a dispute resolution scheme.
Step 1: Write to the credit provider
A debtor must submit a written application seeking the credit provider’s consent to change the contract terms in one of the ways set out in the NCC (s 72(2)):
a. extending the contract period and reducing the amount of each payment. This is useful where the debtor’s financial situation has changed (e.g. where the debtor’s income is less than at the time the loan was entered into);
b. postponing payments for a specified period. This is useful where the hardship is temporary, for example the debtor has a temporary illness or short-term loss of employment; or
c. a combination of options (a) and (b) above.
The letter should set out the cause (such as illness, unemployment or other reasonable cause) of the financial hardship and the grounds on which the debtor believes they will be able to comply with the terms of the contract if it is changed. A credit provider must within 21 days of receiving the application provide a written response stating whether or not it agrees to the change.
Credit providers are exempted from sending a notice to a debtor confirming the agreement to change a credit contract for less than 90 days on grounds of hardship (NCC s 72(4A)).
If the credit provider does not agree to a hardship variation, it must provide a written response that includes:
the name of the dispute resolution scheme of which the credit provider is a member;
the debtor’s rights under that scheme; and
the reasons for not agreeing to the change (NCC s 72(4)) (as it then was).
It is advisable to lodge a complaint with the relevant dispute resolution scheme (AFCA) at the same time as applying to the credit provider for hardship if the matter is urgent because legal action has been threatened or a default notice has been served.
Step 2: If the application is rejected by the credit provider, apply to a dispute resolution scheme
If the credit provider rejects an application under section 72 of the NCC (as it then was) or does not respond to the application within 21 days, the debtor can apply to the dispute resolution scheme of which the credit provider is a member for assistance in resolving the dispute.
The debtor can also apply to a court for an order under section 74 of the NCC (as it then was) that the credit provider change the contract in one of the ways set out in section 72(2) of the NCC (as it then was). An application under section 74 can only be made if the debtor has already applied to the credit provider for the change under section 72.
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The following steps outline the process for a debtor’s hardship application for contracts entered into on or after 1 March 2013.
Step 1: Apply to the credit provider for hardship
Even though a hardship notice may be given verbally or in writing, it is advisable to give it in writing. The debtor only needs to consider that they would be unable to meet their obligations under the contract and inform the credit provider of their inability to meet the obligations (NCC s 72(1)). The notice does not have to comply with any other form requirements.
Credit providers must respond to an outstanding hardship application before commencing enforcement action (NCC s 89A(2)).
It is advisable to lodge a complaint with the relevant dispute resolution scheme (AFCA) at the same time as applying to the credit provider for hardship if the matter is urgent because legal action has been threatened or a default notice has been served.
Step 2: Supply further information to the credit provider (if requested)
The credit provider may (verbally or in writing), within 21 days after receiving the hardship notice, ask the debtor to provide specified information about:
a. whether the debtor would be unable to meet their obligations under the contract (NCC s 72(2)(a)); and
b. how to change the contract if the debtor is or will be unable to meet those obligations (NCC s 72(2)(b)).
A request for further information must only be made by a credit provider if the information is genuinely needed to allow a final decision to be made and must not unreasonably delay the process.
The debtor must supply the requested information within 21 days of the date of the credit provider’s notice requesting the information (NCC s 72(2), (3)).
Step 3: Wait for the credit provider’s reply
The credit provider must provide a response to the hardship request within 21–28 days (under section 72(5) of the NCC) advising either that:
a. the credit provider and the debtor have agreed to change the credit contract (NCC s 72(4)(a)); or
b. the credit provider and debtor have not agreed to change the contract and if so:
the reasons why they have not agreed;
the name and contact details of the dispute resolution scheme of which the credit provider is a member; and
the debtor’s rights under that scheme (NCC s 72(4)(b)).
If the credit provider and debtor agree to change the contract, the credit provider must give the debtor a notice detailing the changes to the credit contract (NCC s 73(1)). The notice must be provided within 30 days from the date of the agreement to change.
Credit providers are exempted from sending a notice to a debtor confirming the agreement to change a credit contract for less than 90 days on grounds of hardship (NCC s 72(4A)). Credit providers are required by paragraphs 177 and 178 of the Banking Code to provide notice of a decision to provide hardship assistance and confirm the details or the arrangements.
Step 4: If an application is rejected, apply to a dispute resolution scheme
If the credit provider rejects an application under section 72(4) of the NCC or does not respond to the application within the timeframes required under section 72(5) of the NCC, the debtor can apply to the dispute resolution scheme of which the credit provider is a member for assistance in resolving the dispute (see ‘Solving disputes with creditors’ in Chapter 5.10: Unauthorised transactions and ePayments Code).
A credit provider that rejects a hardship application is not allowed to take enforcement action within 14 days from the day the credit provider has given its notice of rejection (NCC s 89A(2)(b)).
The debtor can apply to a court for an order that the credit provider change the contract (NCC s 74). An application under section 74 of the NCC can only be made if the debtor has already applied to the credit provider for the change under section 72 of the NCC.
Varying, re-opening and terminating credit contracts
Chapter: 5.8: Mortgages, consumer leases and other finance products
Contributor: Teresa Gray, Lawyer, Consumer Action Law Centre
Current as of: 1 September 2024
Law Handbook Page: 383
Next Section: Enforcement of credit contracts
