A loan agreement is an agreement between two parties whereby one party (usually referred to as the lender) agrees to provide a loan to the other party (usually referred to as the borrower).

Purpose of the Loan

The National Credit Code (which is included as Schedule 1 in the National Consumer Credit Protection Act 2009 (Cth)) (the NCC) provides certain protections for the provision of credit by a financial institution to an individual where the credit is provided or intended to be provided wholly or predominantly:

  • for personal, domestic or household purposes;
  • to purchase, renovate or improve residential property for investment purposes; or
  • to refinance credit that has been provided wholly or predominantly to purchase, renovate or improve residential property for investment purposes.

The NCC does not apply if the credit is provided wholly or predominantly for business purposes, or for investment other than residential property investment.  So, if more than half of the credit is intended to be used for business purposes, the NCC does not apply.

Furthermore, the NCC does not apply to certain loans, including low cost short term credit (less than 62 days), credit without prior arrangement, insurance premiums paid by instalments, bill facilities and staff loans.

Business Purpose Declaration

There is a presumption that the NCC applies to any loan to an individual.  The onus is on the lender to rebut the presumption, which may be difficult if there is no evidence of the loan purpose.

The onus is reversed if the lender obtains a “business purpose declaration” from the borrower (i.e. a declaration from the borrower to the effect that the purpose of the loan is not for the above purposes).  Such a declaration is ineffective if the lender knew that is was not true.

Unscrupulous lenders may coax vulnerable consumers to sign a business purpose declaration when applying for credit, even though the borrower is borrowing purely for personal, domestic or household purposes. This is so that the lender can avoid having to comply with the NCC, which could have devastating effects on a borrower. If a borrower signs a business purpose declaration, and it is later proved that they were persuaded to sign it to get the loan, the lender may have committed an offence.

The declaration must be substantially in the form prescribed by regulation 68 of the National Consumer Credit Protection Regulations 2010 (“NCCP Regulations”), otherwise it will be ineffective, and it must contain a warning that the protection of the NCC may be lost as a result of signing the declaration.

The borrower

For the NCC to apply, the borrower must be a natural person (not a corporation or trust), or alternatively it may be a strata corporation.

The lender

The NCC will only apply if the lender provides credit in the course of a business of providing credit or as part of, or incidental to, any other business. However, where credit is provided incidentally to another business, such as where a retailer allows a customer to pay by instalments, there would appear to be no requirement that the retailer need be in the business of providing that type of credit. If the credit is provided incidentally to the retail business, that will be sufficient.

If a shopkeeper provides credit on only one occasion, then that transaction will probably fall within the NCC, provided the other factors are met. However, a one-off loan by a person to a friend would not be covered by the NCC, whether or not interest was charged on that loan.

Charge for providing credit

The NCC only applies if a charge is or may be made for providing the credit. The charge is not limited to interest; any charge will be sufficient.

Conclusion

The NCC applies to all credit contracts (including loan agreements) entered into on or after 1 July 2010, where each of the following elements are met:

  • the borrower is an individual or a strata corporation; and
  • the credit is, or is intended to be, provided wholly or predominantly:
      • for personal, domestic or household purposes (including buying residential property); or
      • to purchase, renovate or improve residential property for investment purposes; or
      • to refinance credit that has been provided for such purposes;
  • a charge is or may be made for providing the credit; AND
  • the lender provides the credit in the course of a business of providing credit or as part of, or incidental to, any other business of the lender.

For more information on whether the National Credit Code applies to your loan agreement, or for any other finance law related matters, please contact us on 1300 544 755.  One of our finance law specialists would be delighted to assist!

Jill McKnight

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