National Consumer Credit Protection Amendment Regulations 2011 (No. 2)

Administered by Department of the Treasury

Legislation au F2011L00465 Regulations Not in force Legislative Instrument

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EXPLANATORY STATEMENT

Select Legislative Instrument 2011 No. 40

Issued by authority of the Treasurer

 National Consumer Credit Protection Act 2009

National Consumer Credit Protection Amendment Regulations 2011 (No. 2)

The National Consumer Credit Protection Act 2009 (the Act) applies to the provision of credit for personal use.  Schedule 1 to the Act contains the National Credit Code (the Code).  The Code provides a consumer protection framework for consumer credit and related transactions.

Section 329 of the Act provides that the Governor-General may make regulations prescribing matters required or permitted by the Act to be prescribed, or necessary or convenient to be prescribed for carrying out or giving effect to the Act. 

Section 31 of the Code provides that the regulations may specify credit fees or charges or classes of credit fees or charges that are prohibited for the purposes of the Code.

On 12 December 2010, the Government announced that it would ban exit fees for new home loans from 1 July 2011.

The Regulations amend the National Consumer Credit Protection Regulations 2010 to prohibit these exit fees.

The prohibition does not apply, however, if the fee or charge is a discharge fee, a break fee for a fixed rate loan, or if it is incurred before the termination of a credit contract that is terminated before any credit has been provided under the contract.

Discharge fees cover administrative costs that are incurred as a result of terminating a loan.  Break fees on fixed rate loans are not banned by the Regulations as this would risk eliminating these products, which provide flexibility to consumers.  Fees for terminating a loan before it is drawn are also not be banned by the Regulations as they allow lenders to recover legitimate costs.

Details of the Regulations are set out in the Attachment.

A draft of the Regulations and explanatory statement was released for public consultation between 15 February 2011 and 1 March 2011.

The Regulations are a legislative instrument for the purposes of the Legislative Instruments Act 2003.

The Regulations commence on 1 July 2011.


ATTACHMENT

 

Details of the National Consumer Credit Protection Amendment Regulations 2011 (No. 2)

Regulation 1 – Name of the Regulations

This regulation provides that the title of the Regulations is the National Consumer Credit Protection Amendment Regulations 2011 (No. 2).

Regulation 2 – Commencement

This regulation provides that the Regulations commence on 1 July 2011.

Regulation 3 – Amendment of the National Consumer Credit Protection Regulations 2010

This regulation provides that the National Consumer Credit Protection Regulations 2010 (the Principal Regulations) are amended as set out in Schedule 1.

Schedule 1 – Amendment

Item [1] – After Part 7-2

Item [1] inserts a new Part 7-2A (Prohibited credit fees and charges), including a new regulation 79A (Termination fees for certain credit contracts), into the Principal Regulations. 

Regulation 79A provides for a prohibition on termination fees for certain credit contracts entered into on or after 1 July 2011.

Subregulation 79A(1) prohibits a credit fee or charge if:

•                 it is provided for in a credit contract entered into on or after 1 July 2011;

•                 it is to be paid on or in relation to the termination of the credit contact, whether the liability to make the payment is incurred at that time or at an earlier time; and

•                 any of the amount of credit provided under the credit contract is secured over residential property.

The prohibition applies to any such credit contract to which the Code applies.  This includes credit contracts under which credit is provided for investment in residential property.  However, regulation 65C of the Principal Regulations currently provides that the Code does not apply to the provision of credit if:  the credit is provided for the purpose of investment in residential property; the credit is not provided for purpose of investment in a single residence; and, the total amount of credit provided, or to be provided, is more than $5 million.

The meaning of credit fees and charges and termination is defined in section 204 (Principal definitions) of the Code.  That section provides that:

•                 credit fees and charges means fees and charges payable in connection with a credit contract or mortgage with certain exceptions.  These exceptions include: interest charges; government charges, or duties, on receipts or withdraws; and enforcement expenses.

•                 termination of a credit contract includes the discharge or rescission of the contract.

Subregulation 79A(2) provides that the prohibition in subregulation 79A(1) does not apply to certain credit fees and charges to which the prohibition would otherwise apply.  These credit fees or charges are break fees, discharge fees, and credit fees or charges incurred before the termination of a credit contract that is terminated before any credit has been provided under the contract.

Subregulation 79A(3) defines the meaning of break fee, discharge fee, and fixed rate loan for the purposes of regulation 79A.  The terms are defined as:

•                 break fee means a credit fee or charge that: relates only to the early repayment of an amount provided under a credit contract for a fixed rate loan; relates only to the portion of the loan that is fixed; and relates to the difference between the fixed interest rate and the prevailing rate at which credit is provided by the credit provider under that class of credit contract.

•                 discharge fee means a credit fee or charge that only reimburses a credit provider for the reasonable administrative cost of terminating the credit contract.  Administrative costs of terminating a credit contract may include, for example, the cost of calculating the payout figure on termination, the cost of processing the termination, the cost of discharging a related mortgage, and third party costs that arise because of the termination.

•                 Fixed rate loan means a credit contract under which the annual percentage rate is fixed for an agreed term, for the whole or part of the amount due under the credit contract.

Subregulation 79A(4) provides that for the definition of discharge fee, a cost is a reasonable administrative cost only if it does not exceed a reasonable estimate of the average reasonable administrate cost to the credit provider of terminating that class of credit contract.

The prohibition contained in regulation 79A assists consumers to switch home loan credit providers by banning certain termination fees.  These fees include those fees commonly referred to as deferred establishment fees.  It also includes other fees that do not reflect costs borne by a credit provider as a result of terminating a loan or that seek to penalise a debtor for terminating a loan early.

Overview

The National Consumer Credit Protection Act 2009 was enacted to provide a consumer protection framework for consumer credit and related transactions, as outlined in the National Credit Code. This Act, administered by the Parliament of Australia, aims to protect consumers by regulating the credit industry, ensuring that credit providers operate fairly and transparently. The Act empowers the Governor-General to create regulations necessary for its implementation. One such regulation, the National Consumer Credit Protection Amendment Regulations 2011 (No. 2), addresses the issue of exit fees for new home loans, aiming to prohibit these fees to protect consumers from unfair charges associated with terminating credit contracts. This regulation specifically bans termination fees for certain credit contracts entered into after 1 July 2011, except in cases involving discharge fees, break fees for fixed rate loans, or fees incurred before the provision of credit under the contract. This legislative measure was introduced in response to concerns about excessive fees that do not reflect the actual costs incurred by credit providers upon contract termination or those intended to penalise consumers for early termination. The policy objective behind these amendments is to enhance consumer protection by ensuring that credit providers do not impose excessive or unfair fees on consumers, particularly in the context of home loans. By banning certain termination fees, the Regulations aim to facilitate easier switching of credit providers for consumers, thereby promoting competition and fair practices within the credit industry. The Regulations underwent public consultation before their implementation on 1 July 2011, ensuring that they reflect stakeholder concerns and maintain a balanced approach to consumer protection and industry regulation.

Scope and Application

The National Consumer Credit Protection Act 2009 applies to the provision of credit for personal use and includes a comprehensive consumer protection framework in the National Credit Code. This legislation aims to protect consumers by regulating credit fees and charges, ensuring fair practices in the credit industry. The Act applies to various entities involved in credit transactions, including credit providers, credit representatives, and others, across all states and territories in Australia. The Act's scope includes prohibiting certain credit fees and charges, particularly those that may unfairly penalise consumers for terminating their credit contracts early, unless specific conditions are met. The National Consumer Credit Protection Amendment Regulations 2011 (No. 2) further refine these protections by specifically banning exit fees for new home loans, effective from 1 July 2011. However, exceptions are made for discharge fees, break fees for fixed rate loans, and fees incurred before the provision of credit under terminated contracts. These exclusions are intended to maintain flexibility for lenders while protecting consumers from unfair practices. The Regulations provide detailed definitions and criteria for these exclusions, ensuring clarity and consistency in their application.

Key Provisions

The National Consumer Credit Protection Amendment Regulations 2011 (No. 2) make significant changes to the regulatory framework governing consumer credit in Australia by introducing a prohibition on certain termination fees for home loans. Regulation 79A, inserted into the National Consumer Credit Protection Regulations 2010, specifically targets fees associated with the termination of credit contracts that are entered into on or after 1 July 2011 and involve residential property as security. This prohibition applies broadly to any credit contract that the National Credit Code governs, including those involving investment in residential property, with the exception of certain high-value investments (Regulation 65C). Entities governed by the Act and the Code must ensure that they do not charge any fees or charges that are considered termination fees under the new regulation. These fees must not be imposed on consumers for the termination of credit contracts that are secured over residential property, unless they fall under specific exemptions such as discharge fees, break fees for fixed-rate loans, or fees incurred before any credit is provided under the contract. Credit providers must be diligent in ensuring that their practices and contractual terms comply with these new requirements, especially given the detailed definitions provided for terms such as 'break fee', 'discharge fee', and 'fixed rate loan' in subregulation 79A(3). Failure to comply with the new regulations can result in significant legal and financial consequences. Under the National Consumer Credit Protection Act 2009, breaches of the Code can lead to civil penalties for credit providers. The specific penalties are not detailed in the explanatory statement but are typically substantial, reflecting the seriousness of contravening consumer protection laws. Additionally, in cases of wilful or negligent breaches, credit providers may face criminal penalties, which can include fines and, in severe cases, imprisonment. These consequences underscore the importance of adherence to the new regulatory requirements to avoid severe repercussions.

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