A Guide to the Law of Securitisation in Australia - Clayton Utz

6 The Consumer Credit Code andsecuritisation426.1 IntroductionThe Consumer Credit Code (the Code) commenced operation inall States and Territories of Australia (other than Tasmania) on 1November 1996. The Code commenced operation in Tasmania on1 March 1997.With few exceptions, the Code regulates all personal, domesticand household credit, including personal loans, housing loans,overdrafts, credit card facilities, credit and debt facilities (to theextent credit is provided), consumer leases, consumer hirepurchase and retail credit. As a result, it affects many Australiansecuritisations including mortgage-backed programs.6.2 The credit providerThe Code is directed primarily towards, and imposes obligationson, the actual provider of the regulated credit. In addition, but toa lesser extent, it also imposes obligations on and affects otherparties involved in the lending process (eg. agents of creditproviders, suppliers of goods and services purchased with creditand insurers).The Code defines a credit provider as a “person that providescredit and includes a prospective credit provider”. Section 4 ofthe Code defines credit in the following terms:“(1) For the purposes of this Code, credit is provided if under acontract:(a) payment of a debt owed by one person (the debtor) toanother (the credit provider) is deferred; or(b) one person (the debtor) incurs a deferred debt to another(the credit provider).”In securitisation programs using trusts or special purposevehicles, a loan may be originated in two ways:• conduit programs which involve an originator originating aloan with funds provided by a trustee or special purposevehicle. The trustee or special purpose vehicle is the lender(or mortgagee) and under this arrangement is the creditprovider for the purposes of the Code; or• assignment programs where a lender lends money to aborrower and equitably assigns the resulting debt to atrustee or special purpose vehicle. The original lender in thecredit provider. But does it remain the credit provider afterthe assignment or does the trustee or special purpose vehiclebecome the credit provider? This is answered by section 166of the Code which provides:“(1) If the rights of a credit provider under a credit contract,mortgage or guarantee are assigned or pass by law toanother person, this Code from then on applies to that otherperson and does not impose any further obligation on thecredit provider.(2) The debtor, mortgagor or guarantor has and may exercise thesame rights in respect of the credit contract, mortgage orguarantee against the assignee as the debtor, mortgagor orguarantor has against the credit provider.(3) Subsection (1) does not apply while the credit providercontinues to receive payments from the debtor, or wouldcontinue to do so if the debtor complied with the creditcontract.”Typically, the original lender remains the servicer of the assignedloans and the debtors are unaware of the assignment. As aresult, section 166(1) will not apply to make the trustee orspecial purpose vehicle the credit provider (see section 166(3)).Debtors are normally only be given notice of the assignment ifthe trustee or special purpose vehicle perfects its title to theloans (ie. it takes a legal assignment of the loans). If it does so,the trustee or special purpose vehicle will then become the creditprovider.6.3 Failure to comply with the CodeThe consequences to a credit provider for failing to comply withthe requirements of the Code can be divided into five categories:6.3.1 Criminal consequencesThe commission of an offence exposes the credit provider, certainofficers of a corporate credit provider and persons or corporateswho aided and abetted the commission of the offence tomonetary penalties. The maximum penalty currently provided forin the Code is $10,000.6.3.2 Part 6 – Civil consequencesKey requirements: Division 1 of Part 6 sets up a regime underwhich, if a key requirement is breached, civil consequences mayflow. Put simply, those civil consequences are that the debtor maynot be required to pay any interest under the credit contract orthe credit provider may be required to make a payment (of up to$500,000 per type of breach) to consolidated revenue or into astatutory trust fund.Other contraventions: Division 2 of Part 6 provides that a courtmay order the credit provider to make restitution or paycompensation to any person affected by a contravention, other thanone for which a civil effect is specifically provided for in the Code.