Why you should never obtain a business purpose declarations under the NCC

Loan Purpose Declarations under the old UCCC provided valuable protection for lenders by making it all but certain that the code would not apply to their loan.

Under the new code these protections have been stripped away. Now all a lender gets in return for obtaining a Loan Purpose Declaration is the potential to be jailed for two years. Accordingly Bransgroves Lawyers recommend that lenders and brokers do not, under any circumstances, obtain Loan Purpose Declaration.

Comparison of the legislation

National Credit Code – Sect 13

(2) It is presumed for the purposes of this Code that credit is not provided or intended to be provided under a contract wholly or predominantly for any or all of the following purposes (a Code purpose):

  • for personal, domestic or household purposes;
  • to purchase, renovate or improve residential property for investment purposes;
  • to refinance credit that has been provided wholly or predominantly to purchase, renovate or improve residential property for investment purposes;

if the debtor declares, before entering the contract, that the credit is to be applied wholly or predominantly for a purpose that is not a Code purpose, unless the contrary is established.

(3) However, the declaration is ineffective if, when the declaration was made, the credit provider or a person (the prescribed person) of a kind prescribed by the regulations:

  • knew, or had reason to believe; or
  • would have known, or had reason to believe, if the credit provider or prescribed person had made reasonable inquiries about the purpose for which the credit was provided, or intended to be provided, under the contract;

that the credit was in fact to be applied wholly or predominantly for a Code purpose.

(6) A person commits an offence if:

  • the person engages in conduct; and
  • the conduct induces a debtor to make a declaration under this section that is false or misleading in a material particular; and
  • the declaration is false or misleading in a material particular.

Criminal penalty: 100 penalty units, or 2 years imprisonment, or both. 

(7) Strict liability applies to paragraph (6)(c). 

UCCC  – Sect 11

(1) Credit is presumed conclusively for the purposes of this Code not to be provided wholly or predominantly for personal, domestic or household purposes if the debtor declares, before entering into the credit contract, that the credit is to be applied wholly or predominantly for business or investment purposes (or for both purposes).

 (2) However, such a declaration is ineffective for the purposes of this section if the credit provider (or any other relevant person who obtained the declaration from the debtor) knew, or had reason to believe, at the time the declaration was made that the credit was in fact to be applied wholly or predominantly for personal, domestic or household purposes. For the purposes of this subsection, a relevant person is a person associated with the credit provider or a finance broker (or a person acting for a finance broker) through whom the credit was obtained.

Analysis of the difference between the two sub-section 2s

The old UCCC set up an unassailable presumption which could not be overturned by the borrower proving that the money was used for regulated purpose. This was of great value to the lender as it meant that if the borrower declared it to be non-regulated at the time of the loan, then the borrower was estopped from arguing it was regulated. The borrower literally gave up the protections of the code.
 
The new code is quite different. All it does is set up a rebuttable presumption.

Analysis of the difference between the two sub-section 3s

Both sections reverse the presumption where the lender, or someone acting on the lender’s behalf, knew or had reason to believe, the declaration was false. However subsection 13(3)(b) of the new code effectively puts the lender on enquiry. This completely neuters the value of obtaining a declaration. The declaration under the UCCC relieved the lender of any necessity to enquire as to the purpose of the loan. Instead of making enquiries the lender would require a declaration. 13(3)(b) makes a declaration worthless unless the lender makes “reasonable enquiries”.

Value of a declaration

Because:

  1. the lender needs to make “reasonable enquiries”; and
  2. the presumption can be rebutted by the borrower establishing the loan purpose was regulated
    the lender is in no better position having a declaration than it would have been not having the declaration.

The downside of obtaining a declaration

The downside is 2 years in jail. However, even worse than threatening lenders with jail, for something which is not in the nature of a criminal offence, is the very disturbing drafting of s13(6)(b) and (7).

As drafted the lender need not deliberately induce a borrower to sign a false declaration, rather he merely needs to engage in conduct that has the effect of inducing a borrower to sign a false declaration. This is because s13(7) refers to it being a crime of strict liability.

The drafting is sloppy and ambiguous in the extreme because s13(7) refers ‘strict liability’ applying to (6)(c) but strict liability applies to offences, the mens rea (intent) of the offender to break the law, yet (6)(c) is not something a lender could intend or not intend, it simple is or is not misleading.

Conclusion

No officer of a lender in their right mind should expose themselves to an ambiguously drafted strict liability criminal offence offering two years in jail, unless there were some very strong upside. As there is no upside we recommend that Loan Purpose Declarations under the new code not be obtained. Brokers should refuse to procure the declarations for the same reason.

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