Consumer Credit Contracts 07 Dec 2011
The Credit Contracts and Consumer Finance Act 2003 (“Act”) was enacted to simplify and update the law relating to the provision of credit. The previous Credit Contracts Act 1981 ("CCA") was complicated and not well understood. Parry Field Lawyers provide legal advice on a range of commercial matters including entering credit contracts.
Which Contracts Does The Act Apply To?
The Act is mainly concerned with “consumer credit contracts”. The key requirements for a consumer credit contract are:
- The debtor must be a natural person and must enter into the contract primarily for “personal, domestic household purposes”; and
- Interest and/or credit fees are payable, and/or a security interest is being taken by the creditor; and
- The creditor must be in the business of providing credit or makes a practice of doing so in the course of another business.
The Act does not apply to companies, incorporated societies or family trusts.
The requirement for a loan to be primarily for personal, domestic or household purposes should make it relatively easy to determine whether or not the Act applies. A good example is a loan for the purchase of a home. Clearly that would be for personal, domestic or household purposes in which case the loan is a consumer credit contract. However, if the loan is for the purchase of a rental property, it is not a consumer credit contract, as the debtors are not intending to occupy the house themselves.
In cases of doubt, the Act does provide that a declaration by the debtor that the credit is for use primarily for business or investment purposes (or both) rather than personal use, will generally be sufficient to ensure the contract falls outside the Act.
What Does the Act Require?
The Act aims to ensure that the interests of debtors who enter into credit contracts are protected by ensuring that proper information is given to them as to the calculation of costs, fees, charges and interest charges in relation to the credit contract. It is also designed to prevent oppressive terms or conduct by creditors.
- The creditor must disclose the financial terms of the transaction in a format that can be easily understood (including the method of calculating interest, any penalty charges for early repayment of a loan and default interest charges).
- The debtor has the right to cancel the credit contract at any time before initial disclosure has been made and within three working days after that has occurred. In order to cancel a consumer credit contract, the debtor must give written notice and refund any money or return any property they have received under the contract.
- Creditors are required to charge reasonable fees for credit (but this does not apply to the interest rates).
- The Court has the right to “reopen” a credit contract if it considers the contract is oppressive or that a power contained in the contract has been or will be exercised in an oppressive manner or if a person has been induced to enter into a contract by oppressive means. The Court’s powers to reopen a consumer credit contract include situations where the debtor suffers unforeseen hardship and it was not foreseeable at the time the debtor entered into the contract that they would not be able to meet their obligations (for example illness, injury or loss of employment).
- Failure by a creditor to comply with the Act’s disclosure requirements prevents them enforcing the contract.