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52/1996 Uniform Consumer Credit Code - 011196
National Office Instruction
amending General Orders (1993 edition)
Instruction No. 52
Date of Effect: 1 November 1996
UNIFORM CONSUMER CREDIT CODE - 1 NOVEMBER 1996
AMENDMENTS TO THE DEFENCE SERVICE HOMES ACT 1918 BY THE VETERANS' AFFAIRS LEGISLATION AMENDMENT ACT (NO 1) 1996
The purpose of this instruction is to explain the effects of the Uniform Consumer Credit Code and of the complementary amendments to the Defence Service Homes Act 1918 on the Defence Service Homes Scheme.
In July 1993, national agreement was reached to introduce uniform legislation to regulate the provision of consumer credit. The resultant Uniform Consumer Credit Code (the Code) applies to all credit provided in the course of business of a credit provider to a borrower who is an individual, or strata corporation, and if the credit is provided wholly or predominantly for personal, domestic or household purposes.
The Code provides greater protection for borrowers and makes lending institutions more accountable in their dealings with their customers. It came into effect in all States and Territories on 1 November 1996. However, Tasmania has a two staged implementation - 1 November 1996 for national lending institutions which have obtained the necessary Ministerial approval and 1 March 1997 for the remaining lending institutions.
This instruction is intended to explain the impact of the Code on our dealings with members of the veteran community on DSH matters. It also explains the changes to the Defence Service Homes Act 1918 which are directly related to the commencement of the Code.
The Code appears as an Appendix to the Consumer Credit Act of each State and Territory. However, as the Code is State and Territory legislation, it was recognised that there could be a conflict in legal rights for DSH borrowers under some provisions, because DSH loans are provided under Commonwealth legislation. This potential conflict would not necessarily have been resolved by relying on Section 109 of the Constitution which provides that Commonwealth law shall prevail over State law where they cover the same subject and are in conflict.
To ensure that DSH borrowers have consumer rights similar to those that other borrowers have under the Code, complementary amendments to the Defence Service Homes Act 1918 were introduced into Parliament on 22 May 1996 to remove any potential conflict. Those amendments were contained in the Veterans' Affairs Legislation Amendment Act (No 1) 1996 which received Royal Assent on 8 November 1996. The DSH Act amendments provide for concurrent operation of the Code apart from matters contained in the amending Act.
Amendments to the Agreement between the Commonwealth and the Westpac Banking Corporation are also necessary and are presently in draft. These changes will adopt certain elements of the Code which provide more favourable conditions for clients than are currently provided, and protect the Bank from losses incurred as a result of actions of Commonwealth officers. Details of the amendments to the Agreement will be explained once that document has been signed by the respective parties.
Staff Awareness Sessions
Staff awareness sessions on the Uniform Consumer Credit Code have been conducted in each State Office over the past few weeks in order to ensure that staff are across the issues and that the risk of our breaching the Code are minimised. This instruction therefore will not repeat the detail of the extensive training notes provided to staff as part of the staff awareness exercise. Rather it is meant to highlight the Code's impact and explain the changes to the Defence Service Homes Act 1918 which complement the introduction of the Code.
The Code's Impact
Generally we need to be aware of the Code's provisions as contained in the training notes referred to above. Specifically, we need to be aware of those provisions which directly impact on the administration of the DSH Scheme. In summary they are:
- A requirement for the credit provider to disclose any commission payable for the introduction of credit business financed by a loan contract. We may receive enquiries from members of the veteran community about this aspect, as certain business referred to Westpac attracts commission under the Agreement between the Commonwealth and the Bank.
- A number of provisions imposing Penalty units for non compliance.
- A provision that interest charges on new loans are not to exceed the daily balance method of calculation.
- A provision prohibiting third party mortgages.
- Special provisions for hardship relief provide that: 'A debtor who is unable reasonably, because of illness, unemployment or other reasonable cause, to meet the debtor's obligations under a credit contract and who reasonably expects to be able to discharge the debtor's obligations if the terms of the contract were changed in a manner set out in subsection (2) may apply to the credit provider for such a change.' DSH borrowers will be able to apply for hardship relief under both the Code and the DSH Act. We have verbally agreed with Westpac that initially, hardship applications will be treated under the DSH Act. We could have a case where we refuse relief, yet the Bank might be inclined to approve it under the Code. In such cases we are to review the earlier decision. If we still refuse relief, we are to indemnify the Bank for any losses, costs, expenses etc incurred as a result of a hardship application under the Code. Bearing in mind that the cost of indemnifying the Bank could outweigh the cost of providing the relief sought, delegates are to exercise extreme care in reaching decisions in hardship cases. Advice should be sought from the National Office in any case which might cause the indemnity clause to be invoked.
- A provision for the court to re-open and consider changing a credit contract including unconscionable interest and other charges. The amendments to the DSH Act incorporate mirror clauses of sections 70, 71 and 72 of the Code but modified so as not to disadvantage DSH borrowers. The changes are explained in more detail later in this instruction.
- A number of provisions regarding 'Related Sale Contracts'. Under section 115, the Agreement between the Commonwealth and the Westpac Banking Corporation would be classed as a sale contract. Under the definition in section 117, DSH and Westpac would be classed as 'linked credit providers'. DSH would be classed as a 'supplier' in that we regularly refer persons for the purpose of obtaining credit. (ss117(1)(b) refers). Under s118 of the Code, the credit provider is liable with respect to suppliers' misrepresentations. However, there will be a clause inserted into the Agreement indemnifying the Bank from any liability under the Code. DSH staff therefore must be particularly careful in their dealings with applicants and borrowers. This extends to what we say, what we write and what we advertise. Accordingly, we have subjected our standard letters to UCCC scrutiny. Any which affect the Bank are also to be cleared by the Bank and this is in hand.
- A number of provisions regarding 'Related Insurance Contracts'. There is no doubt that our insurance activities are covered by section 132 of the Code in that the scheme provides insurance over mortgaged property in connection with a credit contract. However, borrowers are free to insure with whom they wish, and so it is most unlikely that any of the Code's other provisions will have an impact.
- A number of provisions regarding advertising. Section 140 provides that a person must not publish an advertisement that states or implies that credit is available unless the advertisement complies with the section. Cost of credit must contain the annual percentage rate or rates. We must be in the habit of quoting pa in every reference to rates. All DSH advertisements are to be cleared through the National Office and Westpac. There are penalties for false or misleading representations.
There is one further change to the DSH Scheme which does not arise directly from the introduction of the Code. Under current arrangements, the monthly repayments on old DSH loans funded before the sale to Westpac are due on the first day of each month. Repayments on new loans funded by Westpac since the sale are due on the fifth day of each month. These repayment days are defined in the Agreement between the Commonwealth and Westpac as 'rest days'. Having two rest days when one would suffice is administratively cumbersome. Amendments to the Act to coincide with the introduction of the Code provide a timely opportunity to remove one of the rest days. No client would be disadvantaged by moving the rest days which currently fall on the 1st of the month to the 5th of the month.
It has therefore been decided to abolish the rest days which occur on the 1st day of the month on Defence Service Homes (DSH) mortgages where applicable and replace them with rest days which occur on the 5th day of the month for administrative simplicity.
Changes to the DSH Act
Details of the changes to the DSH Act are as follows:
(i) Amendment to Section 4
As another Supplementary Agreement is to be implemented, it is necessary to change the current definition of the term 'agreement' in section 4. It is also necessary to introduce a number of new definitions in section 4 clarifying the interpretations to be applied and the meanings of terms used in the amendment.
In order to clarify any doubt about the status of the UCCC in relation to the DSH Act, a new Section 4D provides for the concurrent operation of the Codes of the States and Territories apart from matters covered in the Amending Act itself.
(ii) New Provisions to Give Courts Re-opening Powers Similar to those Contained in Sections 70, 71 & 72 of the Uniform Credit Code, Modified so as not to Disadvantage DSH Clients
The DSH Act is amended to incorporate most of the provisions in Sections 70, 71 and 72 of the Consumer Credit (Queensland) Act 1994 which form the basis of all States' and Territories' Consumer Credit Acts.
Section 70 of the Code provides for a Court to re-open unjust credit transactions. In deciding whether a term of a contract was unjust, the court may have regard to a number of factors. One such factor is the age of the mortgagor.
Under the agreement between the Commonwealth and the Bank, the Bank is not obliged to make an advance unless the lending criteria in Schedule 'C' to the Agreement are satisfied. Schedule 'C' contains the criteria which are to be applied. These criteria differ from the Bank's normal lending criteria. As the age of the borrower is excluded from Schedule C, the Bank is specifically prohibited from taking age into account. The effect of this is that the Bank may be obliged to make a loan under a Commonwealth Scheme but in doing so, may put itself at jeopardy under a State law.
To avoid this, the Bank is exempted from Section 70 of the Code by the amendment to the DSH Act mirroring Section 70 but for changes necessary to reflect the special provisions of the DSH Act and Agreement. The changes are detailed as follows.
Section 70(2) of the Code lists matters (a) to (o) which may be considered by the Court in determining whether a particular credit contract, mortgage or guarantee is unjust. Sub paragraph (f) provides:
'(f) whether or not the debtor, mortgagor or guarantor, or a person who represented the debtor, mortgagor or guarantor, was reasonably able to protect the interests of the debtor, mortgagor or guarantor because of his or her age or physical or mental condition;'
The DSH Act equivalent of Sub-section 2(f) of the Code will apply:
(a) in full only to third party mortgagors or guarantors; and
(b) in part to borrowers - that is, only in respect of physical or mental condition, not in respect of age.
Without this limited application, the policy of excluding the applicant's age as a factor in granting a loan would be undermined. Further, if the Code provision were inserted as is, the Court may give the clause a wider meaning than is intended.
For the same reasons, Sub-section 70(2)(l) of the Code is not mirrored in the proposed amendments. That sub-section allows the Court to consider whether at the time the contract was entered into, the borrower would not have been able to repay the loan in accordance with its terms at all, or not without 'substantial hardship'. The inclusion of a similar provision would conflict with the policy of not considering the applicant's age when granting loans.
A list of further matters to be considered by the Court under this section has been added. These are that:
(a) the Bank and the Commonwealth have entered into an agreement for the provision by the Bank of Subsidised Advances;
(b) the Bank is required to provide a Subsidised Advance if the requirements of the Act and the Agreement are satisfied;
(c) the interest rate applicable to a Subsidised Advance is determined by the Act; and
(d) in some circumstances, the Bank would not provide advances to an Eligible Person if the advance was assessed on ordinary commercial lending criteria rather than the criteria set out in the Act or the Agreement.
A provision has also been included that the Court is not to have regard to:
(a) any inequality in bargaining power between the Bank and the borrower which arises because an Eligible Person who wishes to obtain a Subsidised Advance may only apply to the Bank and not another financial institution for that Subsidised Advance; and
(b) the age of the borrower.
Sub-section 70(6) of the Code describes the circumstances in which s70 does not apply. The DSH amendment provides that the section does not apply to:
(a) a change to a contract brought about by a change to the DSH Act, any other Act or the Agreement;
(b) a contract where the borrower is not an individual or where the purpose of a loan is not predominantly for personal, domestic or household purposes; and
(c) a contract, mortgage or guarantee entered into before the commencement date.
The DSH amendment also provides that it is not possible for a borrower to seek review of interest charges payable in accordance with the Act on the grounds they are unjust or unconscionable. This is necessary because:
(a) the interest calculation method set out in Clause 8.1 of the Agreement may produce an amount of interest which exceeds that permitted by Section 26(1) of the Code; and
(b) in any event, it is possible that interest rates prescribed by the Act may exceed market rates.
Section 71 of the Code which deals with the powers of the Court if it does re-open a transaction is reflected in the DSH Act.
Likewise, Section 72 of the Code in so far as it relates to fees and charges (but not interest rates) is reflected in the DSH Act.
These matters are dealt with by inserting new provisions into the DSH Act under the following headings:-
Sub-sections 23A Power to reopen unjust transactions
23B Matters to be considered by court
23C Unforeseen circumstances
23E Orders on reopening transactions
23F A court may review unconscionable fees and charges
23G Time limit
(iii) New Provision to Provide Access to Legal Aid
An amendment to the Defence Service Homes Act 1918 (new Subsection 23J) provides for access to Legal Aid to clients wishing to re-open transactions under the new provision.
(iv) New Provision to Specify Appropriate Court for Hearing Disputes
An amendment to the Defence Service Homes Act 1918 (new Subsection 23K) provides for an appropriate court to hear cases brought under the new re-opening provision, bearing in mind that some clients will have DSH loans and 'top-up' finance secured under the one mortgage.
(v) Change in Interest Charges from Monthly to Daily Balances
Clause 8.1 of the Agreement between the Commonwealth of Australia and the Westpac Banking Corporation provides for interest on subsidised advances to be calculated on the outstanding principal at the end of the preceding month.
Section 26 of the Code provides that the maximum interest charge that may be imposed is the amount determined by applying the daily percentage rate on unpaid daily balances.
The daily balance interest charge method is regarded as more favourable for clients than is the monthly balance charge method.
Accordingly, the DSH Act amendment (new Subsection 35A) will allow the Agreement to impose interest on unpaid daily loan balances rather than on unpaid monthly balances for all existing and future DSH loans. Section 45 of the Act which currently nullifies any attempted change of Clause 8.1 of the Agreement is specifically addressed by new Subsection 45(2). The restriction on changing Clause 8.1 will be re-imposed after the change is made. As the method and timing of subsidy verification and payment will also be changing from monthly in advance to monthly in arrears, several of the sub-clauses of Clause 11 of the Agreement will also require amendment. As they too are restricted by the provisions of Section 45 of the Act, the legislative amendment addresses this restriction and re-imposes it three months after Royal Assent to the Bill.
These changes, together with the commencement clauses in Item 7 of the amending Act, provide that the Bank will charge interest on new DSH loans based on the daily balance method from 1 November 1996. They also provide for the conversion of the existing loan portfolio to the daily balance method of interest calculation from 1 June 1997. Each contract between the Bank and a borrower affected by the change will be amended by force of law. A joint Westpac/DSH letter explaining the change will be sent via a mail-out to all existing borrowers a month or so prior to the change.
(vi) Change in Rest Days
The amending legislation (Subsection 35A para (2)) makes special provision for the change in 'Rest Days' for Specified Portfolio Assets from the 1st to the 5th of the month, to align them with the 'Rest Days' for Subsidised Advances. The legislation will override the terms of all existing mortgage documentation. This change will occur on 1 June 1997 moving that rest day to the 5th of June. This will mean that after 5 June 1997, the monthly repayments on all DSH loans will be due on the 5th of the month.
Summary of Impact
The Code commenced on 1 November 1996. Associated amendments to the Defence Service Homes Act 1918 also commenced with effect from that date.
This means that we will need to be mindful of the implications of the Code in our dealings with members of the veteran community on any financial credit issue, including maintaining an awareness of their consumer rights under the law.
The impact for the DSH Scheme is that from 1 November 1996, new DSH loans will have loan interest calculated on the daily balance method rather than the current monthly balance method. The existing 100,000 loans will remain under the monthly balance method until 1 June 1997, at which time they will be converted to the daily balance method.
At the time of the conversion, the timing of verification and payment of the monthly subsidy claim will change from being in advance to being in arrears. The usual monthly payment for June 1997 therefore will not occur. The July 1997 subsidy payment will represent payment in arrears from the end of the period covered by the May 1997 payment.
The change in the 'Rest Days' for specified portfolio assets from the 1st to the 5th of the month will also occur on 1 June 1997. This will mean that after that date, the monthly repayments on all DSH loans will be due on the 5th of the month.
DSH staff will need to exercise due caution in any of their dealings which implicate or affect the Bank and be mindful of the Indemnity clauses in the Agreement.
Local forms used and all advertising material must be cleared through the National Office in the first instance. If necessary, they will be cleared through Westpac as well.
Amendments to the General Orders
Amendments to the General Orders will be promulgated once the proposed changes to the Agreement are finalised.
Effect on Previously Issued NOI's
This instruction has no effect on previously issued NOIs.
Housing & Community Support
13 November 1996