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Credit Repayment (Protecting Vulnerable Borrowers) Bill 2015

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2013 - 2014 - 2015

 

 

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

 

 

Credit Repayment (Protecting Vulnerable Borrowers) Bill 2015

 

 

 

 

EXPLANATORY MEMORANDUM

and

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

 

 

 

 

 

Circulated by the authority of

Bob Katter MP



Credit Repayment (Protecting Vulnerable Borrowers) Bill 2015

 

OUTLINE

Financial institutions have historically exercised untrammelled and unrestrained powers via their superior bargaining power when dealing with borrowers in default of their credit agreements. 

 

When exercising powers of sale, significant or substantial assets cannot be sold overnight, yet commonly financial institutions will require quick sales of properties in order to recoup their losses.  This often leads to a situation where maximum value for the secured property is not realised and the borrower is left significantly disadvantaged once the financial institution’s security is discharged.  This situation is exacerbated in the case of agricultural and rural properties, where the size, complexity and high value of the property often means that longer periods are required to find a suitable buyer and maximise sale price. 

 

The object of this Bill is therefore to protect vulnerable borrowers from unfair arrangements commonly imposed by financial institutions when a borrower is in default of credit agreements to which a security over Australian land applies.

 

The bill seeks to provide protection by:

 

1.        Preventing what are commonly referred to as “fire sales” of Australian land provided as security under the credit agreement; and

2.        Preventing confidentiality clauses in settlement agreements for the repayment of credit.

The bill is to apply to vulnerable borrowers where an imbalance in the bargaining position vis a vis the financial institution providing credit is commonly recognised to exist.  To this end the bill is to apply to all credit agreements where security is provided over:

 

1.        A property used for carrying on a business of primary production;

2.        A residential premises;

3.        Premises from which an owner/operator business is based are located on the property.

This bill requires the financial institutions to provide the borrower who is in default of their credit agreement with a notification setting out their claim of default.  The borrower then has a two year period in which the financial institution cannot exercise its power of sale, providing the borrower with time to market their property for sale in order to achieve maximum sale price.

 

The bill provides adequate protection for the financial institution within this time period by requiring the borrower to continue to make interest payments on the credit amount, so long as those interest payments do not amount to default or penalty rates of interest.

 

The bill also prevents financial institutions from imposing on the borrower any default or penalty rate of interest, additional charges, penalties or impositions however they may be described, that were not in place before the default arose.

 

Finally, the bill prevents confidentiality clauses in settlement agreements.  This intrusion into the doctrine of privity of contract is necessary to address the substantial imbalance of power often prevalent between financial institutions and the borrowers protected under this legislation.

 

 



 

FINANCIAL IMPACT

The Bill will have no financial impact. 

 

STATEMENT ON COMPATIBILITY WITH HUMAN RIGHTS

 

The Statement of Compatibility with Human Rights appears at the end of this Explanatory Memorandum.

 

NOTES ON CLAUSES

Part 1 - Preliminary

Clause 1 - Short title

This clause provides for the Act, when enacted, to be cited as the Credit Repayment (Protecting Vulnerable Borrowers) Act 2015.

 

Clause 2 - Commencement

This clause provides for the Act to commence on the day after it receives Royal Assent.

 

Clause 3 - Definitions

This clause sets out definitions.

 

Clause 4 - Protecting Vulnerable Borrowers

 

Subsection (1) of this clause sets out the contractual situation to which the section will apply, namely where credit is provided by a financial institution to a borrower, where the borrower defaults in the repayment of credit, and where security has been given over Australian land for the repayment of the credit, whether by the borrower or another person.

 

Financial institution is defined within the Bill as a financial corporation within the meaning of section 51(xx) of the Constitution or a body corporate that carries on its sole or principal business the business of banking, lending or insurance. 

 

Australian land is defined within the Bill as any legal or equitable estate or interest in real property that is located in Australia and is:

 

(a)     Used for caring on a business of primary production within the meaning of the Income Tax Assessment Act 1936;

(b)    Used for residential purposes; or

(c)     A premises from which an owner/operator business is based.

The section is to apply to any contracts for provision of credit entered into before or after the commencement of the section.

 

Subsection (2) requires the financial institution to give the borrower notification of their claim of default as soon as practicable after the financial institution becomes aware of the default and must register the notification of their claim of default with an authorised Government instrumentality.

 

Subsection (3) prohibits a financial institution from enforcing a right to re-possess or sell the land for a period of two (2) years after the default, if the value of the land exceeds $150,000. 

 

Subsection (4) provides that a borrower will be unable to rely on subsection (3) if:

 

(a)     an amount of interest in relation to the credit becomes due and payable after the default; and

(b)    the amount is not paid to the financial institution within one month after it became due and payable; and

(c)     the rate of the interest is not a default or penalty rate of interest arising from the default; and

(d)    the financial institution gave the borrower notification of their claim of default and there was in fact a default in existence at that time.

This sub-clause is aimed at ensuring a reasonable level of protection for the financial institution in the two year period that they are unable to re-possess Australian land in the event of default, on condition that the borrower continues to make interest payments on the credit amount within that period.

 

Subsection (5) This section prevents a financial institution from imposing on the borrower any default or penalty rate of interest, additional charges, penalties or impositions however they may be described, that were not in place before the default arose.

 

Subsection (6) This clause provides that a term of a settlement agreement is void if the agreement provides for how default in the repayment of credit is to be remedied and the term prevents the borrower or another party to the agreement from disclosing the contents of the agreement to another person.

 

This perceived intrusion into the doctrine of privity of contract is necessary to address the substantial imbalance of power which often exists between financial institutions and borrowers.

 

Clause 5 - act not to apply to State banking, or State insurance, within that State

This clause is included to prevent the Bill from infringing constitutional prohibitions about State banking.

 

 

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

 

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

 

Credit Repayment (Protecting Vulnerable Borrowers) Bill 2015

 

This Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

 

Overview of the Bill

 

The object of this Bill is to protect vulnerable borrowers from unfair arrangements commonly imposed by financial institutions when a borrower is in default of a credit agreements to which a security over Australian land applies.

 

Human rights implications

 

This Bill does not unacceptably limit any of the applicable rights or freedoms.

 

Conclusion

 

This Bill is compatible with human rights as it does not raise any human rights issues.

 

 

Hon Bob Katter MP