Mortgage misconceptions
Even if you go through the contract with a fine-tooth comb and understand all the fees, charges, and conditions, it doesn’t mean you are fully protected. This is because of a feature known as the “unilateral variation clause”. Check the terms and conditions of your loan and you are very likely to find this clause in the fine print.  Basically this clause states that banks and finance companies can change any of the terms and conditions at any time without giving you any notice. Some of the things they are able to do is to increase the interest rate charged on your loan or even call in the loan at any time.  Experts say you really can’t do much about this clause which is basically standard in every credit contract. However, you should make sure your lender is part of an industry dispute resolution scheme as if you think your lender has done something unfair, this will assist you if you want to take action.


Fairness and EDR Schemes
COSL, like ASIC’s other approved EDR schemes, is mandated to consider complaints primarily on the basis of what is “fair and reasonable in the circumstances”, with the “applicable law” as only one of its decision-making criteria.  It is therefore in a position to redress substantive unfairness in contracts in a more complete way than the courts which have focussed on procedural unfairness.  We are very aware that many terms in credit contracts can be characterised as “unfair”. We quite understand the reasoning behind the proposed introduction of a national unfair contract terms law.1 We will not labour this point.

Unfair Terms and consumer credit – a word of caution
A word of caution, however, about the costs of applying this legislation to credit.  There are not just the costs to industry of redrafting documents, changing procedures and training. Although real, these costs, which are ultimately borne by consumers, are sometimes exaggerated by industry and confused with the costs of product development which would be incurred by industry.  The other cost is what Chris Field, the WA Ombudsman, Adj Pr  f of Consumer Law at LaTrobe University and former Director of the Consumer Law Centre of Victoria, calls “the complex balance of the contractual bargain.”2   Put simply, the deletion of one term as unfair may see another term, which the consumer values, affected adversely. What, of course, then seems on its face attractive, which is the protection of powerless consumers from the excessive power of business, may in fact upset the complex balance of the contractual bargain in a way that's harmful to consumers.  Industry would argue that DEFs are primarily used in two ways:

1.  to recoup upfront costs not necessarily limited to what might be considered administrative costs on a narrow interpretation; and
2. to compensate for initial discounted interest rates.

Unilateral Variations
A unilateral variation clause is specifically mentioned in the Consultation Paper as an example of unfair terms. We agree that both as a matter of principle and in practice such a clause can be potentially unfair.  COSL recognises, however, that some loan contracts, particularly home loans, can last long periods of time (up to 30 years) and that the “risk profile” for a credit provider is susceptible to changes in market conditions during that time. Credit providers, therefore, give themselves an option in the contract to vary terms to cater for changes in conditions which were not foreseen (note, not necessarily completely unforeseeable) at the time of entering the contract. Provided they are disclosed in accordance with sections 14 and 15 of the Consumer Credit Code and the equivalent provisions of the proposed National Credit Code, there is little Excessive


“Deferred Establishment Fees applied too long after establishment would likely be ruled “unfair”. However, the market consequence of such intervention may be to shift the establishment costs to the beginning of the loan at the time they are actually incurred.  There are three possible consequences of this.


Firstly, at that point, namely prior to the consumer entering into the credit contract, the amount of such fees and charges is largely unregulated and not susceptible to scrutiny by the Consumer Credit Code or the proposed National Consumer Credit Protection legislation, and, as is quite likely, the unfair contract terms legislation itself.


Secondly, it will add substantially to the initial costs of starting a home loan at a time for consumers when they are incurring many other costs, e.g. construction, relocation, stamp duty etc.


Thirdly, establishment fees would become a dimension for competition in the market place. The larger participants in the market are more likely to have the capacity to absorb these costs in part or in whole than the smaller participants. The ultimate consequence may be to reduce competition which will have adverse consequences for consumers.


‘Force majeure’ in favour of borrower?
The purchase of a home is likely to be the largest ‘investment’ an average person will make. It will also involve the largest debt they are likely to take on in their lifetime.  Loan agreements are typically for 25 to 30 years, even although the average loan is refinanced every 3 to 4 years.  A lot can of course happen in 25 years. While credit providers are keen for this reason to make sure that they reserve for themselves in their loan agreements the right to make unilateral changes to interest rates and fees throughout the life of the loan, no concession is afforded to the borrower for changes in their circumstances and events over which they have no control.  In commercial contracts where there may be parity in the respective bargaining positions of the parties, there is often included a force majeure clause. Such a clause essentially frees one or both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties occurs, such as a war, natural disasters, bush fires, draught or strike. The presence of a force majeure clause therefore saves the defaulting party from the consequences of anything over which they had no control.  By analogy, it seems to us that loan agreements could be required to expressly provide, or law passed to ensure, that unemployment and other genuine events beyond the control of the borrower are essentially force majeure events which entitle a borrower experiencing financial hardship or in default of their loan to a temporary reprieve from their loan obligations. This should provide the borrower with the time necessary to secure alternative employment, for example.  Indeed, the Federal Government has asked the major banks and others to subscribe to a set of principles that have the same effect, although it is questionable how binding such commitments are.

A similar outcome may already be available under case law, which suggests that:
(a)  a party to a contract may have an implied duty to facilitate the performance of the contract;4 and
(b)  one party to a contract should comply with the reasonable requests of the other party.5


We have not addressed each of the draft unfair contract terms provisions. We will leave this to others who will have a far better appreciation of the likely impact of these on their operations.   We do however strongly make the point that the proposed legislation in its current form is likely to undermine the principle of certainty of contract.