Uniform Consumer Credit Code Developments

Although most lenders are focused on the major problems presented by the liquidity crisis, there are many continuing developments in the realm of consumer protection.

1. Mandatory comparison rate (MCR)

Currently the Uniform Consumer Credit Code (UCCC) requires a comparison rate to be stated if an advertisement specifies an interest rate or repayment amount. In addition, a comparison rate schedule must be displayed at lenders' offices and be given to each prospective customer together with an application for credit. The MCR only applies to UCCC regulated loans and does not apply to continuing credit contracts.

The legislation started on 1 July 2003 and has a sunset date of 1 July 2009. The government also commissioned a report into whether the regime should be extended.

The mortgage industry has been lobbying for the MCR to be abandoned. New Zealand previously adopted a similar regime, which was subsequently abandoned.

On 27 May 2008 a final impact statement prepared by Hawkless Consulting Pty Limited was released. That report concludes that the MCR regime fails to achieve the objectives expected of it and accordingly, the MCR should sunset on 1 July 2009.

The UCCC Ministers (or the Commonwealth if it takes over the regulation of credit) are not bound to accept this recommendation. The report suggests amendments to the MCR regime, if it is decided to retain the regime.

The report can be accessed by clicking here.

2. Default notices

The UCCC Management Committee is considering amending the UCCC's requirements for default notices. Currently, section 80 of the UCCC requires a lender to give a notice to all borrowers allowing at least 30 days to rectify a default before enforcement proceedings are commenced and before the debt is accelerated.

The amendment is intended to make the effect of the notice clearer to borrowers. This will be achieved by requiring the notice to:

• contain a prominent heading stating that it is a default notice;

• clearly specify the period for remedying the default;

• specify that repossession of the mortgaged property may be required if the default is not remedied; and

• specify that repossession of the mortgaged property may not extinguish the debtor's liability to repay the loan.

Gadens lawyers and the Mortgage and Finance Association of Australia (MFAA) made a joint submission supporting the thrust of the amendments, but suggested that the requirement to specify a date on which the notice expires is impractical because that date might not be known when the notice is prepared and signed. Gadens lawyers and the MFAA submitted that consumers should be able to calculate 30 days from when they receive a notice.

3. Commonwealth takeover of credit and finance broker regulation

The Commonwealth has announced that it proposes to take over the regulation of mortgage brokers and mortgage credit. A green paper was released on 3 June 2008 calling for submissions on the proposals. The green paper can be accessed by clicking here. Gadens lawyers will issue a separate report on these proposals.

An initial concern is that the Commonwealth regulation will extend only to mortgages but not other form of consumer credit. This proposal would obviously be a retrograde step.

How these proposals impact on the other initiatives discussed in this short report is unknown.

Although the industry has been keen for national uniformity (which of course is much easier with Commonwealth legislation), there are significant risks associated with this takeover. Industry's association with the states has been very good and there has been significant consultation before laws have been implemented. We hope this will be the same with the Commonwealth.

4. Fees

There has been much written in the press recently regarding fees, in particular exit fees (including deferred establishment fees and early repayment fees).

The Commonwealth government asked ASIC to undertake a review of mortgage entry and exit fees and ASIC published a report. Fees are also being considered by the Australian states and territories through the UCCC Management Committee and, in particular, in relation to the Consumer Credit Code Amendment Bill 2007, which proposes to tie all fees to costs. I attended both the UCCC round table discussion and the ASIC round table discussions dealing with these issues, and forcefully submitted that tying fees to cost is both impractical (how is cost measured?), and uncompetitive. I also emphasised that the proposal is unfair for consumers and will increase the real cost of credit. It is essential that lenders have an appropriate hedge against churn.

Given the uncertain nature of the transfer of responsibility of credit law to the Commonwealth, the progress of this examination of fees is uncertain. What can be said with certainty is that ASIC and the state representatives clearly understand that any new restriction on fees needs to be considered carefully because it could have a major adverse impact on both consumers and lenders.

5. Personal Property Securities Reform

An exposure draft has been released of Commonwealth legislation to reform how security is taken over all property except real estate. This new law will revolutionise how security is taken over non real estate assets, and will, for example, replace in full that old favourite, the fixed and floating charge (aka equitable mortgage).

There is much work to be done, but the regulators are keen to progress to achieve a proposed start by May 2010. Gadens lawyers will be monitoring developments, conducting education courses, and drafting new documents and procedures to help lenders change easily to the new system.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.