Private Lending and the National Credit Code 2009 – How are they related?

Private lending and the National Credit Code are an important relationship to understand in Australia. Australia’s consumer credit legislation is encompassed in the National Consumer Credit Protection Act 2009 (“the Act”). Schedule 1 of this Act includes the National Credit Code (“the Code”) which regulates Australian credit licence holders and debtors.

Section 5 of the Code outlines how it applies to cases when credit is provided. These requirements are cumulative (Lauvan Pty Limited & Anor v Bega & Ors [2018] NSWSC 154). It applies to:

1. A debtor who is a natural person or a strata corporation; and
2. Credit being provided or intended to be provided wholly or predominantly:
   • For personal, domestic, or household purposes; orTo purchase, renovate or improve residential property for investment purposes; or
   • To refinance credit that has been provided wholly or predominately to purchase, renovate, or improve residential property for investment purposes; and
3. A charge is made for providing the credit; and
4. Credit being provided in the course of business of providing credit.

If the person to whom the credit is provided is not either a “natural person” or a “strata corporation”, the Code will not apply. This means that the Code will not apply where the borrower is a company.

Therefore, if private lenders involved in private lending to a natural person or a strata corporation and it is for one of the three purposes listed in point 2 above, then the Code will apply.

Implications

If the Code is to apply to a provision of credit, there are requirements imposed on lenders to provide greater protection for consumers. Some of these requirements include:

• that the Lender needs to be licensed in accordance with the Code;

• the need to provide precontractual disclosure of matters prescribed by the Code;

• The need to provide an information statement in the form required by the regulations of the debtor’s statutory rights and obligations; and

• The requirement to provide Code compliant loan documents to debtors.

Failure to comply with the Code as a lender can have serious consequences. If a lender, the maximum penalty for individuals is the greater of:

• 5,000 penalty units (currently $1,565,000);

• Three times the benefit obtained and detriment avoided.

The maximum penalty for a company is the greater of:

• 50,000 penalty units (currently $15,650,000);

• Three times the benefit obtained and detriment avoided;

• 10% of the annual turnover for the 12-month period ending at the end of the month that the body corporate contravened (no more than 2,500,000 penalty units).

If convicted of an offence, the maximum term of imprisonment is two years.

The courts regularly consider the application of the Code and examples include:

1. The Code was found not to apply when a partnership borrowed money to operate a farming business on two properties (Gooley v NSW Rural Assistance Authority [2020] NSWCA 156);
2. The Code also did not apply in Integrated Securities No 3 Pty Ltd v Creatrix Web Development & Online Marketing Solutions Pty Ltd [2021] NSWSC 596 as while the homeowners needed a loan to complete renovations, the Lender had lent to a company associated with the owners.
3. In King v Nguyen [2021] NSWDC 495 it was found that the Code did not apply as the plaintiff (i.e., the Lender) was not in the business of providing loans and the defendant had clearly signed a business purpose declaration that the loan was to be used for his business.

It is important for private lenders to consider the Code in their lending practice.  The consequences of failing to comply with the code for transactions that are covered by the code are serious.

If you are a private lender and need some advice, please contact pdclaw.au today.

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