With interest rates going up along with the costs of living, more and more people are starting to experience trouble meeting their loan obligations, and it is predicted that this financial strain is unlikely to subside anytime soon.
Accordingly, we thought it would be a good time to review a consumer’s rights and options when it comes to your loan obligations.
Consumer credit loans are governed by the National Consumer Credit Protection Act 2009 (“Act”). Broadly speaking, the Act regulates loans that are provided for personal, domestic, or household purposes. This includes loans to purchase, renovate or improve a residential property for investment purposes.
Was the loan suitable
The first step should be to consider whether you should have been given the loan in the first place. The Act has strict proscriptions against lenders giving out loans that are unsuitable.
Under the Act, before a finance broker or credit provider offers a loan to a consumer, they must first assess the suitability of that loan for the particular consumer. This requires the broker / lender to consider the consumer’s:
- requirements and objectives in relation to the loan (for example, the requirements for a car loan are likely to be different to a loan to purchase an investment property);
- financial circumstances – this includes consideration of the customer’s income, the stability of that income, their average living expenses, and any other liabilities;
- the Act also requires the broker and lender to take reasonable steps to verify the customer’s financial circumstances. For example, obtaining tax returns or payslips to demonstrate income.
The assessment should also “stress test” the loan by seeing whether the loan’s affordability will withstand interest rate increases. For example, the Australian Prudential Regulation Authority (APRA) currently expects lenders will assess a consumer’s ability to meet loan repayments against an interest rate that is 3% higher than the rate on offer at the time the loan is later out.
Once the assessment is complete, the broker or credit provider must assess the loan as unsuitable if:
- the customer would be unable to comply with the obligations under the loan without substantial hardship; or
- the loan does not meet the customer’s requirements and objectives for the loan.
A broker or credit provider must not offer a loan which is unsuitable to a consumer.
A person who receives a loan which is unsuitable to them can apply for to the court for a range of orders, including orders to compensate for loss or damage, or to declare the loan void. However, while it has not been tested in court, it seems unlikely that a court would declare a loan void and allow a consumer to keep an asset purchased with the loaned funds.
If a debtor is, or will be, unable to meet their obligations under the terms of a loan agreement, they may seek to vary the loan agreement by giving a hardship notice to the credit provider. Within 21 days of receiving the notice, the credit provider can request further information from the debtor to assist the credit provider in deciding:
- whether the debtor is able to meet their obligations under the loan agreement; or
- how to change the loan agreement to assist the debtor to meet their obligations.
However, the credit provider does not have to agree to change the contract, and usually will not agree if, for example, they believe the debtor would still not be able to meet their obligations even if the agreement was changed.
Within 21 days of receiving the information, the credit provider must give the debtor notice that they have either:
- agreed to vary the loan agreement; or
- explains why they have not agreed to vary the loan agreement.
A credit provider cannot begin enforcement proceedings against the debtor until 21 days after they have provided a notice that they have not agreed to vary the loan agreement.
The Act does not apply to business loans or loans given to corporations. Accordingly, businesses tend to have a harder time resisting or disputing loan agreements with their creditors.
However, for small businesses there may be some recourse under the Banking Code of Practice. This is a code of conduct that banks can voluntarily enter into which governs and guides how banks interact with their customers.
If your credit provider has signed the code, the terms of the code may be incorporated into your agreement, giving them contractual affect. A list of signatories to the code can be found here: https://www.ausbanking.org.au/banking-code/code-signatories/
The extent to which a consumer can rely on the code, will depend on which version of the code was in force when they entered into the loan agreement. For example, the current version of the code was released on 5 October 2021 and provides that:
- the bank will exercise the care and skill of a diligent and prudent banker when considering a new loan or a credit increase; and
- in assessing whether a small business can repay the loan the bank will consider the business’s financial position and the business’s part performance / conduct with the bank (eg overdrawn balance, amid payments etc) account conduct.
However, courts have interpreted previous iterations of such terms narrowly, holding that they do not prohibit a bank from granting an unsuitable loan, so loan as they exercise the requisite amount of care and consider the businesses financial position, etc.
Another potential avenue for small business’s is to complain to the Australian Financial Complaints Authority (AFCA). AFCA is a independent tribunal which considers consumer complaints against credit providers, including complaints regarding the suitability of the loan, or refusal to vary the loan agreement on the grounds of hardship. Its rules allow it to consider complaints relating to small business loan facilities of up to $5,425,000. AFCA has a wide range of powers, including requiring the credit provider to forgive a debt, pay damages to the small business’s, or vary the terms of a loan agreement.
If you think your loan was not suitable to your circumstances, you should seek legal advice about your rights and possible avenues. Consumer credit is a highly regulated industry. The requirements for consumer loans can be confusing and differ depending on the type, amount, and duration of the loan.
If you are experiencing financial difficulty as a result of your loans, the best thing you can do is get on the front foot. By and large, creditors much prefer debtors pay their loans than having to resort to court enforcement procedures. As such, most of the time they will work with you. There are a number of potential options available to people who are unable to meet their loan obligations due to financial hardship.
The team at Rose regularly advises clients in respect of these types of matters. If you have any questions in relation to this topic and would like to discuss how this may impact you or your business, please give us a call or complete our enquiry form and we would be happy to assist.