The Act sets out the circumstances under which “credit” is said to have been provided and the circumstances under which a “credit contract” is a “consumer credit contract”.

A transaction will usually be a consumer credit contract if:

• credit is provided under a contract (or - if the transaction is a lease and certain criteria are met);
• the debtor is an individual (not a company or organisation) and they are not acting as a trustee of a family trust;
• the debtor has entered into the contract primarily for personal, domestic or household purposes;
• the creditor makes a practice of providing credit, is in the business of providing credit or the debtor and the creditor are introduced by a paid advisor.

The Act presumes that, if the debtor is an individual, they will have entered into the contract for personal, domestic or household purposes.  A creditor can ask the debtor to give a written declaration that the contract is being entered into for business or investment purposes.  If such a declaration is made correctly many of the Act’s provisions will not apply.

Rules affecting Consumer Credit Contracts

Disclosure

Creditors and lessors who enter into consumer credit contracts must give consumers specific information about the terms of the contract in a written disclosure statement.  This is important because it helps consumers understand from the outset what the transaction will cost, and lets them make an informed choice about using credit.

Under the Act creditors are required to provide disclosure for consumer credit contracts.  Important points about the disclosure requirements are:

• generally a written disclosure statement is required:
  - at the start of a contract;
  - at regular intervals during the term of a contract;
  - if the contract is changed, either by agreement or under the terms of the contract; and
  - when a debtor or anyone guaranteeing the contract (the guarantor) asks for it;
• disclosure must be given to a guarantor at the start of a contract and sometimes if the contract is changed;
• disclosure must be clear, concise and not misleading;
• disclosure may sometimes be made electronically; and
• creditors must disclose the annual interest rate separately as well as any credit and default fees.

The Act states what information must be disclosed and how disclosure should be made.

The Act’s regulations include model disclosure statements that a creditor may use to provide disclosure at the outset of a contract.  If the forms are correct, they will meet the Act’s disclosure standards and comply with the law.

Interest

Interest rates (including default interest rates) and the method for calculating the interest charges must be fully and clearly disclosed at the beginning of the contract.

Interest on a consumer credit contract must not be charged in advance.  The maximum interest that can be charged on a consumer credit contract is the amount determined by applying the daily interest rate to the daily unpaid balance.

This means interest cannot be charged on a “flat-rate” basis – it cannot be simply calculated on the original principal then added to the initial loan amount.  This is charging interest in advance.

The Act allows creditors to charge default interest if a debtor defaults in making a payment.  Default interest can only be charged in the contract provides for it and only while the default continues.

There is no longer a 14 day stand-down period on charging penalty interest.

Some common law rules may limit the creditor’s ability to charge default interest.  In addition the Act also prohibits oppressive conduct by the creditor.

Fees

All credit and default fees charged under consumer credit contracts must be disclosed in full at the outset of the contract and must be reasonable.  The Act sets out factors that the courts must take into account when considering whether a fee is unreasonable.  There are special rules for establishment fees (ie, fees creditors charge for setting up consumer credit contracts), third-party fees that creditors pass on to debtors and fees creditors charge on early repayment of a consumer credit contract.

• Establishment fees must be no more than what it cost a creditor to set up the consumer credit contract.
• Creditors cannot “mark up” or charge a premium on any fees charged by a third party.  The creditor can only charge the debtor the actual amount they were charged.
• All other credit fees must reflect:
  - A creditor’s actual costs; and
  - Reasonable standards of commercial practice.
  

Payments

There are rules about the way in which payments are credited.  A creditor must credit a payment as soon as possible unless the contract states that they can credit payments according to a specified schedule of payments contained in their credit contract.

However a creditor must accept any extra or early part prepayment unless the credit contract specifically states that the creditor has the right to decline it, in which case they must refund it to the debtor as soon as practicable.

Full Repayment

Debtors have a right to fully repay a consumer credit contract.  However, creditors may charge a fee if a debtor repays a contract early and the creditor suffers a loss, providing the consumer credit contract expressly allows it.  This would occur, for example, where a creditor lent money at one interest rate and, when the contract was repaid, interest rates had dropped so that the creditor could only re-lend the money at a lower rate.

But this fee must be reasonable.  The regulations include a mathematical formula for calculating any loss.  If a creditor uses the formula correctly, their estimate of loss will be treated as reasonable.  Creditors may estimate their losses in other ways but will have to be able to show that any result is a reasonable estimate.

Credit-related Insurance, Repayment Waivers and Extended Warranties

Creditors must not unreasonably require the debtor to get credit-related insurance, repayment waivers or extended warranties.  For example, a creditor cannot require a debtor to purchase:

• Income-protection insurance, if the debtor is unemployed;
• Insurance for goods sold on credit, if the debtor already has home and contents insurance that would cover the goods;
• A warranty that duplicates the manufacturer’s warranty (eg, a two-month warranty on goods that have a manufacturer’s warranty of 18 months).

Creditors must also disclose to debtors the terms of any credit related insurance.

Cancellation

Debtors have the right to cancel a credit contract up to three days after disclosure has been made.

If the debtor has purchased goods on credit, the debtor may cancel the credit part of the transaction but must pay the cash price of the goods in full.

Enforcement

Oppressive Contracts

The Courts can re-open any credit contract if it is oppressive, or if the creditor has acted or intends to act oppressively, or if the debtor was induced to enter into the contract by oppressive means.

The Act says a contract is oppressive if it is harsh, unjustly burdensome, unconscionable or in breach of reasonable standards of commercial practice.

The powers courts have, if a contract is found to be oppressive, include:

• altering the contract and changing the obligations under it;
• altering the ownership of property; and
• directing the payment of money.

Prohibited Enforcement

If a creditor fails to provide information they are required to disclose under the CCCF Act (particularly at the start of a contract and if the contract is changed), they may not be allowed to enforce the contract until they disclose the information.

Statutory Damages

The CCCF Act sets out new penalties, some of which will apply automatically if a creditor has broken particular rules.  Statutory damages are designed to punish the creditor and deter others from breaching the Act.  Statutory damages are payable regardless of whether the debtor has suffered any loss.

The Act also sets out some circumstances in which a creditor can apply to have any statutory damages reduced.

Other damages and remedial orders

The Court has wide powers to make remedial orders where the creditor has breached the Act.  These orders are designed to compensate the debtor for any loss suffered and can include orders for refunding payments, compensation and exemplary damages.

The Court can make orders not only against the creditor but also against other persons involved in the breach.

Offences

The CCCF Act makes it a criminal offence to breach its provisions.  In most circumstances a convicted creditor will be liable to a fine of up to $30,000.