21st February 2008
UCCC Threshold Relief Test
Under the Uniform Consumer Credit Code ("the Code"), a person who is facing financial hardship may be able to renegotiate a credit
contract or negotiate a postponement of enforcement rights.
Section 66 of the Code allows a debtor who is unable reasonably, because of illness, unemployment or other reasonable
cause, to meet the obligations of a credit contract, to apply to the credit provider for certain changes to the terms of
the contract, if the debtor reasonably expects to then be able to meet the revised obligations. Section 86 allows a
debtor, mortgagor or guarantor who has been given a default notice or a demand for payment under section 82 of the Code,
to negotiate a postponement of the enforcement proceedings or the operation of an acceleration clause with the credit
provider. This right to negotiate continues until the end of the period specified in the notice or demand.
If the credit provider refuses to change the terms of the contract, or to negotiate a postponement of enforcement
proceedings or the operation of an acceleration clause, an application can then be made to the Court, which may grant the
change or postponement.
The "old" hardship threshold - pre Nov 2004
Prior to 5 November 2004, the rights in Sections 66 and 86 of the Code and the right to apply to the Court were limited to credit
contracts under which the maximum amount of credit that is, or may be provided, was not more than $125,000.
The "new" hardship threshold - a "floating" threshold - post Nov 2004
Effective from 5 November 2004, as a result of amendments to the Consumer Credit Code Regulation 1995, the threshold was
increased, and, in order to keep pace with inflation, the threshold amount is no longer set out in the Regulation.
Instead, the Regulation now prescribes that the threshold is equal to 110 percent of the average loan size for the
purchase of new dwellings in New South Wales. The average loan size figure is released monthly by the Australian Bureau
of Statistics and is set out in the Table of Housing Finance Commitments in the publication Housing Finance, Australia
Table 10(c) Catalogue 5609.
Because the threshold is linked to an average loan size for the purchase of, and hence to the value of, new dwellings in
New South Wales, the threshold can move up and down from month to month.
The manner in which the hardship threshold is determined has now changed to a "floating threshold" to reflect the current cost of new houses in the Australian property market.
These changes to the Regulations became effective from:
- 5 November 2004 in: Queensland, Victoria, New South Wales, Northern Territory and South Australia;
- 31 December 2004 in: Western Australia; and
- 20 July 2005 in: Tasmania.
Prior to these changes to the Consumer Credit Code Regulations, the threshold for credit relief applications and stay of enforcement proceedings were set at $125,000. This meant that people with mortgages or other consumer loans of more than $125,000 were previously not eligible to apply for hardship relief or postponement of enforcement proceedings. This figure was originally set in 1996 and was generally recognised as not having kept pace with current home mortgages.
At what point is the hardship threshold to be applied?
There are 2 points at which the threshold could be applied:
- At the time the borrower takes out the loan; or
- at the time of the hardship.
For example, now that the threshold floats, a loan may be taken out today for $325,000 and therefore the borrower comes within the threshold protection. However, in 3 months time, when the borrower falls on hard times, the threshold may have fallen to $315,000, at which time the borrower no longer comes within the threshold and loses the protection afforded by the Code.
Also, if enforcement proceedings are on a foot, the borrower may oscillate between coming under, and being over, the threshold.
While the matter is yet to be tested, the better view is that the relevant time is when the loan is taken out. There are 2 persuasive reasons why this should be the case:
- All parties to a transaction need certainty and this can only be achieved by determining the threshold, and therefore the protection, at the time the loan is taken out;
- If the relevant time is when the loan is taken out, a borrower cannot lose the protection provided by the Code. The threshold can move in either direction, but the borrower will still be protected.
But this has yet to be determined by the Courts.
* The current threshold can be found on the "What's New" page of the Consumer Credit Code website
www.creditcode.gov.au which is the source data for parts
of the information contained in this article. Historical data relating to threshold amounts can also be found on this website
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Head of Lending
Iain Pepper is a Vice-President and the Head of Lending for the La Trobe Group.Read full profile here.
La Trobe is one of Australia's leading independent specialist mortgage Financiers. Its business includes residential mortgages, commercial mortgages, and investment services operating one of Australia's largest Mortgage Funds under AFSL 222213. It employs over 145 staff and has raised over AUD$10Billion to assist over 100,000 customers since inception in 1952.
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