Treasury has released a draft National Consumer Credit Protection Amendment (Credit Reform Phase 2) Bill 2012 for consultation.

UPDATE 18 February 2013: The Commonwealth Government has decided that any reforms to small business finance will be deferred. This decision is limited to the small business reforms in Phase 2 of the consumer credit reforms.

The exposure draft Bill introduces reforms in relation to:

• credit provided to small business, including the introduction of a ‘Credit Permit’ regime;
• credit provided for investment purposes (the introduction of limited responsible lending obligations);
• private lenders who provide credit contracts or consumer leases through an intermediary;
• short-term and indefinite term consumer leases, where there is an expectation the consumer will want the use of the leased goods for a period which means they will pay more than the cash value of the goods;
• anti-avoidance practices.

A 6 month transition period is proposed from the time the Bill is passed.

Lending to small business
The Act will apply to lending to a small business.

A person will be prohibited from engaging in small business credit activities unless they hold a credit permit.

In order to obtain a credit permit from ASIC a lender must be a member of an ASIC-approved external dispute resolution scheme.

Small business means a business that:
(a) has less than the following number of employees:
(i) if the business is or includes the manufacture of goods—100 people;
(ii) otherwise—20 people; or
(b) has no employees.

It is also proposed that contracts where the maximum amount of credit exceeds the sum of $5 million will be excluded.

The bill introduces a definition of a “protected small business credit contract”. It is proposed to introduce specific responsible lending obligations in relation to this class of contracts to address equity stripping practices through the provision of credit to small businesses in financial distress.

A protected small business credit contract is defined as a credit contract that meets each of the following three criteria:
• the predominant use of the credit is to refinance the liability under an existing small business credit contract;
• the borrower has defaulted in respect of the repayments due under that contract; and
• the contract is secured by a mortgage over residential property.

As the borrower is in default of an existing credit contract, the provider of credit assistance is to be under an onus, in respect of a proposed refinance, to make inquiries to ensure the credit contract is suitable. These inquiries are intended to ensure the borrower has an exit strategy in respect to discharging their liability under the protected small business credit contract.

Investment lending
These reforms are designed to impose limited responsible lending rules to two particular classes of transactions that have particular risks for consumers:
• Loans secured over the family home where the borrower does not appreciate that if the investment does not generate the expected returns, they will need to meet the repayments from other resources and may be at risk of losing their home, depending on their overall financial position.
• Loans to finance investments in products being offered illegally, by a person who does not hold an Australian Financial Services Licence (where there is a consequent risk the entire investment proceeds will be lost by the consumer).

Private lending
The bill will regulate a “credit activity investor” who is an individual (or other small entity) who only engages in credit activities as a credit provider or lessor in accordance with a servicing agreement with an intermediary.

Under this model a credit activity investor would be exempt from the need to hold an Australian credit licence provided:
• They are a member of an ASIC-approved External Dispute Resolution scheme (so that they will be contractually obliged to comply with decisions of the scheme).
• The intermediary is the holder of an Australian credit licence.
• There is an agreement between the intermediary and the private credit providers and private lessors.

A credit contract will still be unregulated when a private individual who is not in the business of providing credit arranges a credit contract directly with the borrower.