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Submission of the Consumer Action Law Centre

By Henry Brooks,2014-05-18 12:07
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Submission of the Consumer Action Law Centre

    Response to the

    Consultation Paper “Application of unfair

    contract terms legislation to consumer

    credit contracts”

    July 2007

The Consumer Action Law Centre (Consumer Action) is an independent, not-for-

    profit, campaign focused, casework and policy organisation. It is formed by the

    merger of the Consumer Law Centre Victoria and the Consumer Credit Legal Service

    and builds on the significant strengths of these two centres.

Consumer Action provides free legal advice and representation to thousands of

    vulnerable and disadvantaged consumers across Victoria and is the largest specialist

    consumer legal practice in Australia. Consumer Action is also a nationally-recognised

    and influential policy and research body, pursuing a law-reform agenda across a

    range of important consumer issues at a government level, in the media, and directly

    with industry and in the community.

Unfair Contract Terms and Credit Contracts

Consumer Action strongly supports the inclusion of consumer credit contracts

    in Part 2B of the Fair Trading Act 1999 (Vic). It is our view that Part 2B should

    not have excluded credit contracts, and that the key question should be “Why

    not apply unfair contract terms to credit contracts?” Significant problems arise

    for consumers in relation to credit contracts often having a greater impact

    than unfair contract terms in some other consumer contracts, and yet the

    current credit regulation is unable to prevent, or address, them in the way that

    unfair contract terms regulations could.

Consumer Action, and one of its predecessors, Consumer Credit Legal

    Service, have used Section 70 of the Uniform Consumer Credit Code (UCCC)

    in legal proceedings for many consumers. We agree with the consultation

    paper that it is unlikely that relief under Section 70 would be given on the

    grounds of substantive unfairness alone. However, we also note that Section

    70 provides a mechanism for an individual consumer. Credit providers often

    ensure that matters settle prior to hearing, particularly when there is any

    suggestion that an argument will be made that could bring about any finding

    that reflected on their standard form agreements. This outcome is often of

    benefit to the individual, but ensures that systemic problems, such as unfair

    contract terms, are never legally tested.

We agree with the proposed approach to prioritise certain types of contracts

    for review, and we generally agree with the priority areas proposed in the

    Consultation Paper. While we don‟t have any examples of reverse mortgage

    agreements, we believe that the work done by CHOICE highlights problems

    with these agreements that should be investigated. Non-bank housing

    finance causes significant problems, particularly loans targeted at consumers

    who are already in financial difficulty. While we don‟t present any examples of

    these agreements in this submission, we believe this should be a high priority.

     We provide some discussion, and examples, of the following areas that we

    believe should be prioritised:

    ? “Credit” contracts that, due to the structure of the agreements are not

    (or may not be) regulated by the UCCC. These contracts could be

    reviewed immediately under current legislation;

    ? Vendor terms (in relation to houses);

    ? Small, high cost loans;

    ? Rent-to-buy contracts (for cars and other goods);

    ? Consumer leases (particularly those that use lease arrangements to

    avoid the UCCC requirements that apply to loans);

    ? Non-bank housing finance;

    ? Penalty fees relating to credit cards;

    ? Unilateral variation clauses, particularly those that are very broad or

    that have already been applied by the lender in an unfair way;

    ? Default clauses (definition of default)

Why include consumer credit contracts?

As pointed out on page 5 of the consultation paper many of the factors that

    lead to unfairness in consumer contracts generally apply to consumer credit

    contracts.

The arguments for including consumer credit contracts in Part 2B can be

    expanded as follows:

    (i) the Uniform Consumer Credit Code (UCCC) does not allow

    Consumer Affairs to have an unfair term prescribed or to apply to

    VCAT for a declaration that a term is a prescribed unfair term the

    absence of the power to prescribe terms is economically inefficient,

    and largely undermines the objective of protecting vulnerable

    consumers from unfair terms. While the UCCC allows a consumer

    to apply to a Tribunal or Court to have a credit contract reopened on

    the basis that it is unjust, such an action can only be taken by an

    individual, and cannot be used in a way that can prevent, or 1address, systemic unfair conduct or contract terms.

    (ii) consumer credit contracts are one of the main areas where

    consumers enter into unfair contracts. In some cases this is due

    primarily to unfair advertising or selling practices, or exploitation of

    the consumer‟s vulnerable status. However, other cases unfair

    contract terms contribute to the general unfairness of the

    transaction. In fact, along with telecommunications and car hire,

    we believe that the consumer credit industry is one of the key

    industries in which unfair consumer contract terms are a serious

    problem.

    (iii) extending Part 2B to consumer credit contracts would supplement

    rather than displace the UCCC, and would therefore not undermine

    the national consistency of the UCCC. Unfair contract terms, unlike

    some other State-based regulation, would not require businesses to

    adopt different practices in other states, but to simply ensure that

    their contracts do not contain unfair contract terms.

     1 See Director of Consumer Affairs Victoria v JLL Pty Ltd (t/as City Finance Loans and Cash

    solutions (Moreland))

The remainder of our response provides discussion, and examples, relating to

    the areas we believe should be given priority.

    Contracts that Avoid the UCCC

Some of the most unfair terms we see, are contained in contracts that in effect

    are credit contracts, but are worded so as to avoid (or attempt to avoid)

    regulation by the UCCC. However, we don‟t believe that this is an argument

    not to extend coverage of unfair contract terms regulation to credit. The legal

    status of such contracts is often unclear, and legal proceedings rarely lead to

    a Court or Tribunal decision. It is a problem that in these cases it is often not

    possible to clearly establish whether the UCCC applies or whether unfair

    contract terms legislation applies. It is unfortunate that in relation to these,

    often exploitative contracts, consumers currently can‟t have the benefits of

    both the UCCC and unfair contract terms legislation.

We believe that Consumer Affairs should immediately prioritise the application

    of the current unfair terms regulation to these contracts.

    Motor Finance Wizard / Kwik Finance

This agreement claims that it is not covered by the UCCC due to their being

    no interest charged, despite the fact that the price paid for the vehicle is

    thousands of dollars more than market price.

    “It should be noted and understood that there are no credit charges

    under this contract and that this contract is an “INTEREST FREE”

    transaction not covered by the provisions of the uniform Consumer

    Credit Code (enacted by Queensland legislation) (herein after called

    the “UCCC”) and as a borrower you are upon signing the contract

    outside the consumer protection provisions of the UCCC.”

    “4. ATTORNEY

    WE APPOINT THE LENDER AS OUR ATTORNEY

    We irrevocably appoint the Lender as our attorney (with power to

    appoint substitutes) to do all things, which the Lender considers

    necessary to protect its interest in the Goods or to enforce the

    mortgage or any insurance policy over the Goods.”

    “IT IS AGREED as follows: -

    1. In consideration of:

    1.1 The loan specified in Schedule 6 (called “the Loan”)

    1.2 Any further loans which the Lender may make to for on

    account of the Grantor and of any liability which the

    Lender may during the currency of this security incur on

    behalf of the Grantor.”

    “PROVIDE ALWAYS THAT:

    1.3.5 The Grantor shall have the right to pay off the loan and fee at

    any time before the due date without any rebate or abatement of

    monies payable hereunder.”

    “5. AND the Grantor shall be in default

    5.1 In the event of default it shall be lawful for the Lender to

    exercise the powers conferred on the Lender by Law AND in

    addition the Lender shall with the consent of the Grantor (which

    consent is hereby expressly given) have and may exercise all

    the following further powers and authorities.

    5.1.1 To retain or remove and carry away the Security by lawful

    force (if necessary) including from the place where the

    security is situated and/or the premises occupied by the

    Grantor or otherwise deal with the security as the Lender

    may deem fit and to take on lease otherwise any land or

    premises which the Lender may think necessary for the

    storage or otherwise in connection the Security.

    5.1.2 To make any sale or disposition authorized hereby of by

    law of the Security or any part or parts there of at such

    place or places in or out of the Commonwealth at such

    time or times by public auction or private contract or

    partly by one mode and partly by the other and either

    altogether or in lots and either for cash or at this risk of

    the Grantor upon credit or partly for cash and partly for

    credit and if upon credit upon such security or otherwise

    or without security and with or without interest and upon

    such terms in all respects as the Lender shall think fit.”

Vendor Terms Contracts

We agree that vendor terms contracts are one type of contracts that need

    particular attention.

    2In Lewis v Ormes, the Consumer, Trader and Tenancy Tribunal of NSW (the Tribunal) determined, in relation to a vendor terms (consumer credit)

    transaction that the transaction be reopened, the contract set aside and that

    compensation was payable to the Applicants.

    One of the factors leading to the determination was a particular clause in the

    vendor terms agreement that allowed the vendor to retain all payments made

    as liquidated damages for non-performance by the purchaser. The clause

    was as follows:

    9.5 The following shall apply upon the termination:

    (i) the Purchaser shall forfeit to the Vendor and the Vendor shall keep

    the deposit and all Instalments paid under this Contract, as liquidated

     2 (Commercial) [2005] NSWCTTT 481 (18 July 2005)

    damages for non-performance of the Contract without necessity for the

    Vendor to give notice or to do any other thing; and

    (ii) the Purchaser shall have no claim against the Vendor for the cost or

    value of any improvements made by the Purchaser to the property; and

    (iii) the termination shall not extinguish or affect the Vendor’s

    entitlement to recover all moneys done up to the termination or the

    reasonable enforcement charges.

We believe it is likely that if unfair contract terms legislation was available, and

    applied to consumer credit contracts; a regulator would find this clause to be

    an unfair contract term. However, while the individual consumer was

    successful in relation to this case, neither the Tribunal nor the regulator, has

    the power to declare the term unfair, or to prohibit its use by the vendor (credit

    provider) or by other credit providers.

    Small, High Cost Loans

Terms that are commonly unfair in these agreements relate to the high fees

    and charges. For example, one Amazing Loans agreement included a „Loan Advance and Administration Fee‟ of $2269.70 in relation to a $1500 loan.

The use of fees, rather than interest, to cover the majority of the cost of the

    loan also means that the consumer is severely penalised if the loan is paid out

    early.

In some cases terms relating to the type of security taken are unfair, for

    example where low-value, necessary household items are subject to a

    mortgage.

Amazing Loans

While the interest rate was 45.5%, fees of $750 were also charged. The

    amount of credit advanced was $750. Despite the fact that early payout

    would not entitle the borrower to any rebate of this fee, the contract terms

    include an Early Termination Fee.

    Early Termination Fee…..the fee is equal to 10% of the Amount of

    Credit…..

    11.4 Any part of any legislation having the effect of limiting our rights

    or powers, or requiring it to give notices or to take away any other

    action does not apply, unless we are prevented by law from excluding

    its application. Any part of any legislation that gives rights or protection

    to us, or imposes obligations on you, will apply except to the extent that

    it is inconsistent with any part of this contract.

    Cash Loan Money Centre

    “The debtor shall cause and permit each person who has an interest in

    any land upon which the mortgaged goods are situated or to

    which they are affixed or over which access is necessary to

    exercise any right of the mortgagee in relation to the mortgaged

    goods, to grant to the mortgagee in form and substance

    satisfactory to the mortgagee a right of entry to the relevant

    property and a right to exercise any other mortgagee‟s rights in

    relation to the mortgaged goods upon that property.”

    I authorise Cash Loan Money Centres or its agents to enter the

    premises where the mortgaged goods are stored so that an

    inspection, inventory or removal of goods may be carried out”.

Rent-to-Buy Contracts (eg for motor vehicles).

Rent & Buy Pty Ltd

While the agreement appears to give the consumer the right to purchase the

    vehicle at the end of the term, the agreement does not appear to comply with

    the UCCC either as a loan or a consumer lease. Terms used include

    “renter”, “hire agreement” as well as “mortgaged property” and “credit

    contract”. It is unclear whether or not the credit provider intends the UCCC to

    apply or not.

     “I understand that Management of Rent & Buy P/L will process the

    Direct Debit according to my due date. If payment is not received, I

    authorize Rent & Buy P/L to continue to Direct Debit my account daily

    until Rent & Buy P/L is in receipt of the outstanding payment. All fees

    and charges incurred will be paid by the Renter.”

    We note that agreement to debt the account daily could incur daily bank fees

    of around $30 if the funds are not available.

    “5. The Renter warrants and covenants to The Hirer as follows:

    5.1 The Renter has no real or equitable interest in The Vehicle until

    the payment of all of The Rental to The Hirer and payment of the

    costs and charges referred to in Clause 4 hereof.

    5.3 This agreement shall terminate 2 days after the due date of

    each payment if any payment of Rental is not made by The

    Renter. Upon termination The Renter shall immediately deliver

    up possession to The Hirer without charge or encumbrance.

    5.5 The Renter hereby grants to The Hirer the right to enter property

    and to use such reasonable force as is necessary to recover

    possession of The Vehicle and The Renter hereby releases and

    indemnifies The Hirer is respect to any loss claim or damage in

    respect thereto including the costs of and associated with the

    recovery of The Vehicle including the payment to any third party

    collection or repossession agent.

    5.12 The Renter shall comply with all road rules and statutory

    directions or requirements during the currency of this agreement

    and releases and forever discharges the Hirer in respect to any

    and all obligations or responsibilities in respect therto.”

Consumer Leases

Consumer leases commonly contain unfair contract terms particularly those

    that use lease arrangements to avoid the UCCC requirements that apply to

    loans. In some cases very complex terms are used to, in effect, set up a

    credit purchase agreement, while not legally giving the consumer the right to

    purchase. For example, terms that agree to sell the consumer “similar” goods

    at the end of the lease period. One Flexirent lease gives the consumer the

    option, at the end of the lease, to sell the equipment to another person as

    “agent” for Flexirent, to keep all the proceeds (apart from $1) as commission,

    on the basis that Flexirent will waive its rights to future lease payments. This

    clause is unfair because it is structured to avoid the full provisions of the

    UCCC, and is confusing for the consumer. The problems caused by such

    clauses in these leases are exacerbated, because representations made to

    the consumer often indicate that the consumer is entering into a loan (ie with

    a right to purchase) rather than a lease.

Flexirent

Other terms from a Flexirent agreement include:

    “recover liquidated damages on the overdue amount which you agree

    is a genuine pre-estimate of the actual loss that we will suffer….”

    “No warranties are given in relation to the Equipment or any services

    other than those implied by law”

    “This obligation (to pay) continues no matter what happens, even if the

    Equipment is lost, stolen, damaged or destroyed, if it is defective…”

    “You must rely on your own judgment as to the quality and condition of

    the Equipment and its fitness and suitability for any particular purpose”

    “To the extent permitted by law, damages for breach of warranties

    implied by law are limited to repair or replacement of the Equipment or

    the re-supply of the services”

    Technology Leasing (consumer lease)

    ACQUISITION AND DELIVERY OF THE EQUIPMENT

    1.3 The owner is not responsible for any delay in, or any damage or

    any loss arising as a result of, the delivery, installation or set-up

    of the equipment.

2 OWNERSHIP OF THE EQUIPMENT

    2.1 The equipment is, and will remain, the sole property of the

    owner, whether not affixed to realty and shall not become or be

    made to become part of any real property on which it is placed.

    The client has no right to purchase the equipment. 2.2 The owner has not given any rights or expectations, nor made

    any representations, to the client regarding this agreement or

    the acquisition, use, operation, performance, delivery,

    installation, or tax treatment of the equipment (or equipment of a

    similar value and description) by the client at any time.

3 PAYMENTS

    3.3 Unless the owner otherwise agrees, payments must be made by

    direct debit from the client‟s bank account or by a credit card

    accepted by the owner. For each payment not made by direct

    debit from the client‟s bank account or credit card and for which

    the owner issues an invoice due to the client, the client must pay

    the owner and invoice fee of $10.

    3.4 The client‟s obligation to pay the rent and other amount due

    under this agreement is unconditional for the whole of the term

    of this agreement, even if the equipment is damaged or

    destroyed, is defective or breaks down or any other thing

    happens in relation to it. All payments are to be made without

    set-off, deductions or withholdings on any account.

4 THINGS THE CLIENT MUST DO

    The client must at its own expense:

    4.1 (a) properly maintain and service the equipment and keep it in

    good order and repair (normal wear and tear excepted);

     (b) have the equipment maintained and repaired only by

    properly trained and competent persons;

     (e) produce the equipment for inspection or testing by the owner

    or its nominee at the request of the owner from time to time and

    (subject to clause 12.3, if applicable) allow the owner or its

    nominee access to any place where the equipment is kept for

    any purpose relating to this agreement;

     (f) if the land or premises on or in which the equipment is to be

    installed is held or occupied by the client as lessee, under lease

    or licensee or is the subject of a mortgage or charge, then the

    client must on or prior to execution of this agreement provide to

    the owner written acknowledgement from the owner of the

    premises and/or security holder that (as applicable):

    (2) the owner may at any time enter on the land or

    premises and detach and remove the equipment.

6 REGISTRATION AND LICENSING OF THE EQUIPMENT

    6.2 If the equipment is registered or licensed in the name of the

    client, when the client is obliged to return the equipment to the

    owner it must at the time of return sign and give to the owner all

    documents , and pay all stamp duty and other fees, necessary

    to transfer the registration or license of the equipment to the

    owner.

    7 INSURANCE

    71. Unless the client has elected to accept the Technorent

    Protection Plan, the client must:

     (a) insure the equipment and keep it insured for its full insurable

    value or the Recoverable Amount (whichever is the greater)

    under an all risks insurance policy which names the owner as

    first loss payee

7.2 The client irrevocably authorizes the owner:

     (a) to receive all money payable in relation to the insurance

    referred to in clause 7.1(a) or payable to any persons in respect

    of damage to, or loss of, the equipment. For this purpose the

    client appoints the owner as its attorney to make, recover and/or

    compromise in the client‟s name any claim under that insurance

    or against any person;

8 RISK AND INDEMNITIES

    8.1 The client assumes all risks and liability in relation to the

    equipment and the use, operation, possession, performance,

    maintenance, repair and storage of it (including liability for injury

    to any person or damage to any property, whether direct or

    consequential) for the period up until the equipment is returned

    to the owner and whether or not it is covered by insurance. 8.2 The client indemnifies the owner against all losses, liabilities and

    expenses incurred by the owner as a result of:

     (a) loss of, or damage to, the equipment by any cause (including

    lawful confiscation);

     (b) anything done by or with the equipment

     (c) any other thing in relation to which the client has assumed

    the risk or liability pursuant to clause 8.1; or

     (d) the occurrence of any event referred to in 13.1

     (e) any infringement of intellectual property rights in relation to

    the equipment. The client must pay to the owner on demand any

    amount payable under this indemnity.

9 DESTRUCTION OF THE EQUIPMENT

    9.2 Within 7 days of receipt of that notice the client must pay to the

    owner the Recoverable Amount as if the client had been

    deemed to have repudiated this agreement and the owner had

    terminated this agreement for that reason. 9.3 The owner will credit to the client any insurance money or

    proceeds of salvage received by the owner if and when received

    (after deducting the net present value of the owner‟s residual

    interest in the equipment) but that credit will not exceed the

    amount payable by the client under clause 9.2

10 OWNER MAY TAKE ACTION

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