Natural person or strata corporation

The debtor must be a natural person i.e. a flesh and blood human, and not a corporation or trust, or alternatively it may be a strata corporation.

The purpose of the loan

The NCC applies to loans given for predominantly personal, domestic or household purposes, including residential property investment.

However, the NCC does not apply if the credit is provided wholly or predominantly for business purposes, or for investment other than residential property investment. That is, if more than half of the credit is intended to be used for business purposes, the NCC does not apply [s 5 (4)]. A common example to illustrate the difficulties of dividing up the purpose of the credit to determine its predominant purpose is the purchase of a motor vehicle which is intended to be used partly by a business and partly for private purposes. In those circumstances, a business purpose declaration under section 13(2) of the NCC will often assist a credit provider.

If in legal proceedings (whether brought under the NCC or not), a party (usually the borrower) claims that the NCC applies to a credit contract. Section 13 of the NCC creates that presumption, unless the contrary is established by the other party, usually the credit provider.

Business purpose declarations

A "business purpose declaration" may be signed by a borrower before entering into the credit contract, if the purpose of the credit (including a re-finance) is not for personal, domestic or household purposes or for a residential investment property [NCC s 13(2)]). Such a declaration is ineffective if a credit provider knew that it was not true - that is if a borrower's purpose was in fact personal, domestic or household.

Unscrupulous lenders may coax vulnerable consumers to sign a business purpose declaration when applying for credit, even though the borrower is borrowing purely for personal, domestic or household purposes. This is so that the credit provider can avoid having to comply with the NCC, which may have devastating effects on a borrower. If a person signs a business purpose declaration, and it is later proved that the credit was not for business purposes (that is the borrower was persuaded to sign it to get the loan), the credit provider may have committed an offence.

The declaration must be substantially in the form prescribed by regulation 68 of the National Consumer Credit Protection Regulations 2010 ("NCCP Regulations") (otherwise it will be ineffective). It must also contain a warning that the protection of the NCC may be lost as a result of signing the declaration.

Charge for providing credit

The NCC applies only if a charge is or may be made for providing the credit. The charge is not limited to interest, and any charge will be sufficient [NCC s 5(1)(c)]. If a consumer buys goods or services on an instalment basis, with a discount offered for up-front payment, there may be an argument that a charge has been made for providing "credit".

If title and possession of the goods passes to the purchaser (compared to a lay-buy, where the goods are held by the supplier until payment is made in full, even though there might be a nominal charge) or if the services are provided, there is likely to be a conclusion that credit has been provided and the contract is regulated by the NCC.

The credit provider must provide credit in the course of a business

The NCC will only apply if the credit provider provides credit in the course of a business of providing credit or as part of, or incidental to, any other business. However, where credit is provided incidentally to another business, such as where a retailer allows a customer to pay by instalments, there would appear to be no requirement that the retailer need be in the business of providing that type of credit. If the credit is provided incidentally to the retail business, that will be sufficient.

If a shopkeeper provides credit on only one occasion, then that transaction will probably fall within the NCC, provided the other jurisdictional factors are met. However, 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.

Book-up, which is commonly used by store owners and traders in regional and remote communities is a form of credit which is regulated by the NCC. Store owners must be licensed to provide book-up if the term exceeds 62 days and there is a charge to the customer, or if for less than 62 days, the charge for the book-up is 5% or more of the amount, or more than 24% per annum.

For more information about book-up see Book-up on www.moneysmart.gov.au

Sale by instalments

The laws unambiguously apply to:

These types of contracts have commonly been used to provide high-cost credit to low-income and disadvantaged consumers on onerous terms and had previously avoided regulation under consumer credit protection laws. The important characteristic is whether the charge for providing the credit is an amount that exceeds the cash price for the goods. For more information refer to Consumer Leases.

In South Australia, there are laws to protect purchasers of land by instalments. Section 6 of the Land and Business (Sale and Conveyancing) Act 1994 (SA) abolishes instalment purchase or rental purchases of land and entitles a purchaser to recover monies paid under such a contract from any court of competent jurisdiction.

Section 6 of the NCC exempts from regulation certain categories of contracts that would otherwise be covered under section 5.

Short-term credit

Generally, the NCC will not apply to a credit contract that limits the period for which credit will be provided to 62 days or less.

However, the NCC does apply to a loan of less than 62 days if fees and charges exceed 5% of the amount of the loan or if the interest rate exceeds 24% p.a. Additional anti-avoidance provisions have been included in the NCC that ensure the definition of fees and charges for the purposes of this exemption will cover:

a. a fee or charge payable by the debtor to any person for an introduction to the credit provider;

b. a fee or charge payable by the debtor to any person for any service if the person has been introduced to the debtor by the credit provider; and

c. a fee or charge payable by the debtor to the credit provider for any service related to the provision of credit, other than a service mentioned in paragraph (b).

These provisions are designed to ensure that short-term high-cost lenders such as pay-day lenders are unable to avail themselves of the exemption. Because the interest rate is low, very few payday lenders are likely to fall into the category set out in the section 6(1) exception.

For more information about consumer protection in relation to pay-day lending, please refer to Short Term and Small Amount Credit Contracts, below.

Credit without prior arrangement

The NCC will not apply to credit that is provided without prior agreement between the credit provider and the debtor [s 6(4)]. An example is where a cheque account becomes overdrawn but there is no agreed overdraft facility, or when a savings account falls into debit.

Credit contracts where only an account charge is payable

Continuing credit contracts are excluded from the NCC if the only charge that is made with respect to the provision of credit under that contract is a periodic or other fixed charge that does not vary according to the amount of credit provided and the charge is $200 or less for the first 12 months and $125 or less for each 12-month period after that [NCCP Regulations reg 51].

Joint credit and debit facilities

A number of products offered by banks and other financial institutions now allow a consumer to use the account as both a savings and a credit facility. Under such a facility, a consumer who has funds to his or her credit in the account will receive interest on that amount, while the facility also allows the consumer to run the balance below zero to an agreed credit limit, upon which the consumer will pay interest. Section 6(6) of the NCC provides that these products will be regulated, but only in respect of the aspect of the arrangement that represents the credit facility.

Therefore, a consumer could not use the NCC to challenge the validity of a new fee which was imposed only when the consumer had funds in the account. On the other hand, a consumer could challenge a fee, such as a monthly account charge, which applied to the account irrespective of whether the account was in credit or debit.

Bills of exchange and promissory notes

Section 6(7) ensures that bills of exchange and promissory notes are regulated under the NCC, except for where such bill facilities are provided by an authorised deposit-taking institution, or where otherwise exempted under the NCCP Regulations.

Insurance premiums payable by instalments

Many insurers now allow annual insurance premiums to be paid by monthly instalments. Often the combined amount of the monthly premiums exceeds the annual premium by an amount equivalent to a finance company interest rate, e.g. 20%. However, these agreements are not regulated by the NCC.

Pawnbrokers

The NCC does not apply to credit provided by a pawnbroker in the ordinary course of a pawnbroker's business as long as:

However, pawnbroking transactions may be re-opened as unjust under sections 76 to 81 of the NCC. For more information, refer to Second-hand dealers and pawnbrokers.

Trustees of estates

The NCC will not apply where credit is provided by a trustee of the estate of a deceased person to a beneficiary or prospective beneficiary of the deceased's estate. However, such arrangements are subject to the unjust transactions provisions of clauses 76 to 81 of the NCC.

Employee loans

A partial exemption from the NCC applies where credit is provided by an employer, or a related corporation of an employer, to an employee or former employee if:

Nevertheless, Part 1, Part 4, Division 3 of Part 5, Division 4 and 5 of Part 7 and Parts 12, 13 and 14 of the NCC do apply to employee loans.

Margin loans

The NCC does not apply to margin loans within the meaning of section 761EA(1) of the Corporations Act 2001 (Cth). Margin loans are regulated as a financial product under Chapter 7 of that Act.

Exclusions in the Regulations

The NCCP Regulations provide for a number of further exemptions relating to various government schemes, the provision of credit by particular credit providers and other limited circumstances [regs 51-63]. Most notable of these provisions is the exclusion from regulation in certain circumstances of credit under $50 [reg 52].

A mortgage is void to the extent that it secures an amount exceeding the sum of the debtor's liabilities under the credit contract and any reasonable enforcement expenses associated with the mortgage [NCC s 49]. Similarly, a mortgage is void to the extent that it seeks to secure an amount in excess of the guarantor's liability under the guarantee and any reasonable enforcement expenses of the mortgage.

All-property mortgages

The NCC provides that a mortgage that does not describe or identify the property which is subject to the mortgage is void [s 44(1)]. A provision in the mortgage that charges all the property of the mortgagor (an all-property mortgage) is also void [cl 44(2)].

Section 45 of the NCC places a restriction on the ability of a credit provider to take a mortgage over future properties. This section provides that a provision in a mortgage that has the effect of creating a mortgage over property that is to be or may be acquired by the mortgagor after the mortgage is entered into, is void. There are three exceptions to the restriction of taking a mortgage over future property. They are:

The final restriction on property is that a mortgage cannot have the effect of securing goods supplied from time to time under a continuing credit contract, unless those goods are specifically identified [s 46].

All-accounts mortgages

All-accounts mortgage, that is, mortgages which cover all debt owed by a debtor to the credit provider, are allowed under the NCC, provided certain requirements are met [s 47]. Borrowers must agree in writing in advance to a mortgage covering all accounts (for example a separate future credit contract or related guarantee), otherwise the mortgage will be unenforceable. This is to prevent credit providers from retrospectively adding an unsecured loan to a mortgage without the borrower's prior agreement.

Third-party mortgages

The NCC prohibits a credit provider from entering into a mortgage to secure obligations under a credit contract unless the mortgagor is a debtor under the contract or a guarantor under a related guarantee [s 48(1) & (2)].

A third-party mortgage is unenforceable [cl 48(3)]. A party to the mortgage may apply to a court for an order that the credit provider take such steps as are necessary to discharge the mortgage [s 48(4)].

Blackmail securities

The NCC aims to stamp out the practice of taking security over low-value chattels that do not genuinely secure the obligations of the lender. Such securities are used only to enable the lender to threaten deprivation of those goods in the event of non-payment under the secured loan, even though seizure of sale of such goods would not significantly reduce the balance of the loan.

Section 50 of the NCC prohibits the creation of mortgage over essential household property, as defined in section 116(2)(b)(i) of the Bankruptcy Act 1966 (Cth). The prohibition does not apply, however, where the mortgagee supplied the goods to the mortgagor as part of a business carried on by the mortgagee of supplying goods and the mortgagor has not, as a previous owner of the goods, sold them to the mortgagee for the purposes of the supply, or where the mortgagee is a linked credit provider of the person who supplied the goods to the mortgagor.

Section 50 also prohibits mortgages over goods that are used in earning income by personal exertion if the goods do not have a total value greater than the relevant limit set by the Bankruptcy Regulations 1966 (Cth).