This article from 2016 discusses a claim in which a practitioner prepared a business purpose declaration that was based on an outdated precedent.
Most of the loan was intended to be used for business purposes or investment other than residential property. However, the borrower’s declaration that credit was provided for business and investment purposes was arguably insufficient to exclude operation of the National Credit Code (Code) because that description could include the Code purpose of residential property investment.
In 2010 the Code extended regulation to provision of credit for residential property investment purposes. This was not the case under the previous state-based consumer credit codes.
Section 5(1) of the Code provides:
This Code applies to the provision of credit (and to the credit contract and related matters) if when the credit contract is entered into or (in the case of precontractual obligations) is proposed to be entered into:
- the debtor is a natural person or a strata corporation; and
- the credit is provided or intended to be provided wholly or predominantly:
- for personal, domestic or household purposes; or
- to purchase, renovate or improve residential property for investment purposes; or
- to refinance credit that has been provided wholly or predominantly to purchase, renovate or improve residential property for investment purposes; and
- a charge is or may be made for providing the credit; and
- the credit provider provides the credit in the course of a business of providing credit carried on in this jurisdiction or as part of or incidentally to any other business of the credit provider carried on in this jurisdiction.
Where a business purpose declaration does not specifically exclude the Code purpose of residential property investment, there is a risk the Code would be held to apply to the loan.
Practitioners arranging investment loans need to ensure their standard form business purpose declaration has been updated to take account of the Code. Always use the prescribed form of the declaration contained in regulation 68 of the National Consumer Credit Protection Regulations 2010, which makes it clear that credit is being provided wholly or predominantly for business purposes or investment purposes other than investment in residential property.
Practitioners should also be aware that under section 13(3) of the Code, a business purpose declaration will be ineffective if the lender, upon making reasonable inquiries, would have had reason to believe the loan was to be applied predominantly for a Code purpose.