Section 144 of the National Credit Code – Novated Leases & the PPSA

Summary

• This paper examines the implications of the National Credit Code (“Code”) for the financing of insurance over property that is the subject of a novated lease.
• Section 144 of the Code prohibits a credit provider knowingly financing insurance of more than one year’s term over property that is mortgaged to repay that finance.
• This paper concludes that, a security interest held by a lessor of property under the Personal Property Securities Act 2009 (Cth) (“PPSA”) constitutes a mortgage for the purpose of the Code.
• Accordingly, it is possible for Section 144 of the Code to apply to the financing of insurance of property under a novated lease, if the security interest of the lessor secures the repayment of that finance and the other elements of Section 144 are present.

The Code and Section 144

• The Code directly regulates what might be generally called consumer credit contracts.
• The Code also indirectly regulates other forms of contracts, including insurance contracts and certain leases of goods.
• Section 144 of the Code seeks to protect consumers borrowing money to buy insurance for a term of more than one year over property that is mortgaged to repay that borrowing.
• The concern is to allow consumers to be able to shop around for property insurance each year and not pay interest on purchases that need not be made until later.
• Section 144 bears the heading, ‘Related Insurance Contracts’ and provides that:

“144. Financing of insurance premiums over mortgaged property

(1) A credit provider must not knowingly provide credit to the debtor to pay the premium or finance the premium on insurance taken out by the debtor over mortgaged property for a period of insurance exceeding 1 year, but may provide credit for or finance successive premiums for periods of 1 year or less.

(2) The credit provider must not knowingly debit the premium to the debtor’s account more than 30 days before the beginning of the period of insurance to which it relates.

Civil effect

(3) If a credit provider contravenes subsection (1), the insured is entitled to recover the whole of the premium paid under the contract from the credit provider. If a credit provider contravenes subsection (2), the insured is entitled to recover the amount of premium debited in contravention of the subsection.”

• A common transaction of the kind caught by Section 144 is financing tyre and rim insurance of greater than one year’s term.
• This kind of insurance product has become popular in recent years given the frequency of tyre and rim upgrades and the fact that these items are usually not covered by comprehensive car insurance.
• In June 2012, ASIC, which enforces the Code, announced that more than 2,400 tyre and rim insurance customers of BMW Finance Limited will be refunded nearly $1.4 million in premiums paid following a breach of Section 144. As a result, ASIC is conducting an industry wide review of tyre and rim insurance financing to ensure compliance with the Code.
• A key feature of Section 144 is the requirement that the insurance be over ‘mortgaged property’. If there is no mortgage, then Section 144 will not apply to the insurance loan even if the other elements of Section 144 are in the loan transaction.
• The meaning of ‘mortgaged property’ is set out in Section 142(2)(b) of the Code.
• Whilst the language of that section is difficult, it effectively provides that property is mortgaged property if the mortgage over it secures the repayment of the loan taken to finance the insurance over that property.
• A typical scenario and transaction caught by Section 144 is where a credit provider knowingly finances a consumer to buy and insure a car, the insurance is more than one year and the car is mortgaged by the consumer to secure that finance.
• In this scenario, the consumer is the owner of the mortgaged property, namely the car, and as owner, grants the mortgage to the credit provider who has advanced the credit with the knowledge that it will be used to buy insurance of a period greater than one year.
• The question arises of what other transactions, in particular what mortgages, might also fall within Section 144 of the Code.

Section 144 and Novated Leases

• Part 11 of the Code regulates certain aspects of consumer leases, that is leases of goods having a personal, domestic or household purpose, where the consumer has no option to purchase the goods.
• Part 11 does not apply to novated leases, that is a lease, originally taken by an employee to hire goods (typically a motor vehicle), as part of a remuneration package and novated to the employer.
• In some novated lease transactions, the lessor also provides finance to the employee to fund the purchase of insurance over tyres and rims.
• Where the period of that insurance is greater than one year, the possible application of Section 144 arises.
• Assuming that the lessor knowingly makes the finance available to purchase the insurance, the question of whether Section 144 applies comes down to a question as to whether the tyres and rims are mortgaged property, that is, property mortgaged to repay the insurance finance.
• It is here that the PPSA needs to be considered.

PPSA, Novated Leases and Section 144 of the Code

• In January 2012, the PPSA came into effect and with it a new definition of security interest.
• According to the PPSA, a ‘security interest’ is an interest in personal property that secures payment or performance of an obligation regardless of the identity of the person who has title to the property. It includes the interest of a lessor of goods.
• The PPSA security interest would meet the definition of ‘mortgage’ under Section 204 of the Code, which is ‘an interest in, or power over property, that secures an obligation’.
• Neither of these definitions makes any reference to the party granting the security or to the owner of the property over on in which the interest subsists.
• Indeed, the PPSA renders the identity of the owner of the ‘secured property’ irrelevant.
• It is therefore possible for property leased under a novated lease to be ‘mortgaged property’ for the purposes of Section 144 of the Code.
• Typically novated leases contain an acknowledgement by the employer and the employee that the lessor holds a PPSA security interest, which secures the performance of their obligations under the lease.
• With the security interest or mortgage in place as it were, any loan made to an employee to buy insurance over the leased motor vehicle (and/or its tyres and rims) will be a loan secured by a mortgage over the leased property.
• Section 144 will apply to that loan if, to the knowledge of the lessor/credit provider, the period of the insurance is greater than one year.
• The fact that the ‘mortgaged property’ is under a novated lease is irrelevant. The exclusion of novated leases under Section 171 of the Code excludes only Part 11 of the Code. The rest of it, including Section 144, may still apply.
• In that event, the lessor will be liable to prosecution by ASIC and to the loan repayments being refunded under Section 144 of the Code.