All lenders need to review their loan agreements following the release of ASIC’s Report 565 into ‘Unfair Contract Terms and Small Business Loans’.
Unfair contract term protections for consumers were extended to cover standard form small business contracts entered into, or renewed, on or after 12 November 2016.
REP 565 sets out the changes made by the big four banks to remove unfair terms from their small business loan contracts of up to $1 million – see the table below.
ASIC intends to examine other lenders' loan contracts to ensure that their contracts do not contain terms that raise concerns under the unfair contract terms law. Although these initiatives relate to small business contracts, it is likely that courts, EDRs and ASIC will have similar expectations in relation to consumer loans, and so it is timely for lenders’ to also consider reviewing those contracts.
|Entire agreement clauses||Clauses that state that the contract represents all of the rights and obligations between the parties.||Delete this clause. This recognises that customers often rely on other agreements or representations made by lenders.|
|Broad indemnification clauses||Clauses that require borrowers to cover losses, costs and expenses incurred due to the fraud, negligence or wilful misconduct of the lender, its employees or agents or a receiver appointed by the lender.||Delete this clause. Often existing general indemnity clauses in loan agreements will need amendment so that the indemnity does not apply in these cases.|
|Event of default clauses||Material adverse change default clauses and some other non-monetary default clauses.||Delete material adverse change default clauses. Consider limiting other non-monetary default clauses.|
|Financial indicator covenants||Clauses that entitle the lender to call a default based on a breach of some financial indicator covenant such as loan-to-valuation ratio (LVR).||Limit or remove financial indicator covenants except for specialised loans such as property development, margin lending and foreign currency loans. Qualify other such covenants by agreeing not to call a default unless that breach creates a material credit risk for the lender.|
|Unilateral variation clauses||Clauses that give lenders a broad ability to vary contracts without agreement from the borrower.||Limit variation clauses to specific defined circumstances set out in the contract (eg interest rate changes). Where such a variation would cause the borrower to want to exit the contract by repaying or refinancing, provide a period of between 30 and 90 calendar days for the borrower to do so before the variation takes effect.|
Dentons have established a system to cost effectively review loan contracts. Lenders should act promptly to reduce the risk of complaint and reputational damage. If a provision is found unjust, it will be void.