“Consumer credit”, involves the making of personal loans to natural persons (and strata corporations) for non-business and non-investment purposes. This type of lending is heavily regulated in a way that lending to corporations or for business and investment purposes is not.

The National Credit Code regulates consumer credit across Australia. It commenced on 1 July 2010. It was introduced by the National Consumer Credit Protection Act 2009 (Cth), and its text is found in Schedule 1 to that Act. It replaces the former Consumer Credit Code, to which it is similar but not identical.

The National Consumer Credit Protection (Transitional and Consequential Provisions) Act 2009 (Cth) provides a transitional regime whereby the National Credit Code applies to loan agreements entered into on and after 1 July 2010, while most of its provisions will also apply to loan agreements entered into prior to that date.

The National Credit Code (“the Code”) refers to any loan agreement that it regulates by the expression “credit contract”. There is a credit licencing regime contained in the main body of the National Consumer Credit Protection Act 2009 (Cth), but it is confined to lenders who enter into credit contracts.

See Introduction.

Section 5 of the Code contains the principal test of whether a loan is regulated by the National Credit Code. Only loans to natural persons or strata corporations can potentially be regulated by the Code. To be regulated, there must be a credit charge for the loan (eg interest) and the credit provider must engage in a business of providing credit. The loan must also be for personal, domestic or household purposes, in relation to an investment in residential property, or to pay out an existing loan taken out for such purposes.

Credit providers keen to ensure that a proposed loan is for business purposes (and hence excluded from the Code) often require the borrower to execute a business purposes declaration, as s 13 of the Code enables the credit provider to rely on a generally irrebuttable presumption of business purposes given such a declaration provided the terms of that section are met. A credit provider who knows the falsity of such a declaration cannot, however, rely upon it, and the declaration is also rendered ineffective if a “prescribed person” such as a broker or other intermediary knows the declaration is false, even if the broker or intermediary is not the agent of the credit provider. A business purposes declaration entered into after there is a binding agreement to lend is ineffective.

There are a variety of minor exemptions which exclude the Code applying to various types of loans not normally encountered in a commercial lending context, and also to certain instances of short-term credit.

See Loans and mortgages regulated by the Code.

The Code, together with the licencing regime contained in the National Consumer Credit Protection Act 2009 (Cth), contain a wealth of procedures, regulations and prohibitions relating to the conduct of credit providers entering into regulated credit contracts.

Credit providers must:

• be licenced;

• carry out a particular procedure in considering whether to lend;

• make a series of specified written disclosures to the prospective borrower; and

• comply with specifications on:

Debtors have specified statutory remedies.

Failure by a credit provider to abide by the regulatory regime can attract criminal and/or civil penalties, may prevent interest or other credit charges being recovered, and may even void the entire loan.

Lenders regulated by the Code require a thorough understanding of the very detailed provisions of the Code and its associated Act and Regulations.

The Code restricts the ability of a credit provider to charge default interest — a higher default rate is permitted, but it can only be applied to the balance of money in default and not the entirety of the loan.

Mortgages over all property of the mortgagor or mortgages failing to adequately specify the property that is mortgaged are void under the Code, and future property cannot be targeted without specificity.

Credit providers are well-advised to include a clause in their mortgages providing for the deletion of any provisions that are prohibited by the Code to reduce the risk of the entire mortgage being invalidated by such provisions.

See Effects of regulation by the Code.

Prior to commencing proceedings to enforce a mortgage regulated by the Code, a mortgagee must (with limited exceptions) send a notice under s 88 of the Code and wait for one month for it to expire unfulfilled. A s 88 notice is a default notice similar to a notice under s 57(2)(b) of the Real Property Act 1900 (NSW), s 84 of the Property Law Act 1974 (Qld) and equivalent provisions in other jurisdictions, but its informational content is far more extensive, and the notice must include lengthy prescribed notifications as to the debtor’s rights.

Under s 93 of the Code, the s 88 notice regime is also a precondition for a mortgagee taking advantage of an acceleration clause in either the credit contract or the mortgage.

Under s 90 of the Code, a credit provider normally cannot proceed to enforce a guarantee until there has been judgment against the debtor, unless the debtor is insolvent or the credit provider obtains leave from the court after showing the debtor cannot repay the debt.

A debtor, mortgagor or guarantor can apply under s 94 of the Code to the credit provider for a postponement of enforcement proceedings, but the credit provider is not obliged to grant a postponement. The debtor, mortgagor or guarantor can, however, apply to the court for a postponement if one cannot be agreed with the credit provider.

A failure to serve s 88 notices before commencing mortgage enforcement proceedings will not necessarily cause those proceedings to fail, and if the mortgagee acted innocently and the mortgagor has suffered no actual detriment, the failure will likely be overlooked.

See Enforcement of Code-regulated mortgages.