Risks arise from patchy commercial lending laws

by Miklos Bolza01 Dec 2017
Bare bones regulation of the commercial lending space is disadvantaging borrowers and giving an inordinate amount of power to the lenders if something goes wrong, one legal expert has said.

The various laws covering credit reporting – Part 3A of the Privacy Act 1988, Privacy Regulations 2013 and Privacy Credit Reporting Code of Conduct 2014 – only cover consumer credit, ie that which is domestic or household by nature, Joseph Trimarchi, solicitor at Joseph Trimarchi & Associates told Australian Broker.

“It doesn’t cover commercial credit. Now that in itself is quite an intrinsic problem only because commercial credit in some instances crosses over to be consumer credit.”

This is because small businesses that apply for loans on small scales are not covered by the same legislation as mum and dad borrowers when it comes to credit reporting, he said.

“That is problematic in itself. No one wants to default on a loan but in the event they do, they really don’t have too much ammunition to fire at credit providers in the event that something goes wrong.”

While the Privacy Act provides a rigid structure for the regulation of consumer credit within Part 3A’s 74 pages, commercial credit is governed by a much smaller piece of quasi-legislation: three pages within the Australian Privacy Principles.

“The problem with that is it’s very broad. It’s a brushstroke sort of approach towards commercial credit.”

Pushing back progress

The suggestion to create an equal playing field between consumer and commercial lending within the credit reporting space was made by the Privacy Commissioner during the Australian Law Reform Commission’s (ALRC’s) inquiry into privacy law and practice which took place from 2006 to 2008.

However, Trimarchi said that this recommendation was rejected by the ALRC after pushback from credit providers including the banks and telecommunication companies.

“[They] argued that if you open up the scope of credit under the Act, incorporating commercial credit, there will be an increased burden placed upon the credit providers to get it right and monitor more things you have to do under the Privacy Act.

“From my point of view, who cares? If you’re going to play in that sandbox, you need to comply and have an obligation towards people to ensure that whatever’s being collected is current, up-to-date and accurate to some extent.”

Presently, for consumer credit to be listed as a default, the credit provider needs to follow a number of steps beforehand including establishing that the account is 60 days or more in arrears and providing the borrower with a notice of the intention to default at their last known address.

Under commercial lending, these rules do not apply, Trimarchi said.

“Technically if you’re a month late, they can list you [as a default]. That’s where it becomes quite onerous on the punter because you’re playing with an area of credit reporting that is to some extent non-regulated.”

Reduced risk through vigilance

While Trimarchi believes that extending legislation to make commercial and consumer credit equal from a credit reporting standpoint would significantly increase costs for credit providers, he said it was more important to protect the individuals using these services.

He advised that individuals taking out something resembling a commercial loan should be cautious, document everything and build evidence in case of a future dispute.

“If something needs to be challenged, we have the onus to actually challenge that. We have to prove what’s going on.”

While, for brokers, ideally clients should be given consumer products instead of commercial, Trimarchi admitted that this will not always be the case.

“So what brokers need to do is identify the fact it’s a commercial loan and tell the client that they need to be super vigilant with their payments and the upkeep of that obligation.”

This applies to loans borrowed from financial institutions, trade accounts, phone accounts and any other form of commercial credit, he said.

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