ASIC's Green County Ruling: A Critical Reminder for Private Lenders on 'Business Purpose' Loans

The Australian Securities and Investments Commission (ASIC) recently secured a Federal Court finding against Green County Pty Ltd and Max Funding Pty Ltd for engaging in unlicensed credit activity. This case serves as a crucial reminder for all non-bank lenders, mortgage brokers, and property developers operating in Australia regarding the critical importance of verifying the true purpose of a loan, particularly when relying on ‘business purpose’ declarations.

The Pitfall of Relying Solely on Declarations

The core of ASIC’s successful action lay in the Court’s finding that Green County and Max Funding could not simply rely on a ‘Business Purpose Declaration’ obtained from a borrower. Instead, they had an obligation to undertake reasonable inquiries about the intended use of the credit. Had these inquiries been made, the Court determined, the lenders would have known, or had reason to believe, the loans were not for a business purpose.

This finding directly challenges the practice of some lenders who view a signed declaration as an impenetrable shield against consumer credit regulation. The Court unequivocally stated that such declarations are ineffective where a credit provider would have known, through reasonable diligence, that the credit was for personal use.

The Presumption of Consumer Credit

Under the National Consumer Credit Protection Act (NCCP Act) and the National Credit Code (NCC), loans to individuals are generally presumed to be consumer loans. The onus rests squarely on the lender to establish that a loan is for a business purpose, thereby exempting it from the NCCP Act’s consumer protections.

In the Green County case, the entities failed to discharge this burden of proof. This meant the consumers were deprived of important protections, including disclosure requirements, restrictions on fees and interest rates, hardship provisions, and access to external dispute resolution services.

Key Takeaways for Non-Bank Lenders

This enforcement action underscores several vital points for those in private lending in Australia:

• Beyond the Declaration: A ‘Business Purpose Declaration’ is a starting point, not a conclusion. Lenders must conduct genuine, reasonable inquiries to ascertain the real purpose of the funds.
• Document Due Diligence: Thoroughly document all inquiries made and the information gathered. This evidence is critical if ASIC ever questions the loan’s purpose.
• Understand the Borrower: Gain a clear understanding of the borrower’s circumstances and how the loan aligns with their stated business activities. If a borrower has no discernible business, or the loan amount far exceeds any plausible business need, alarm bells should ring.
• The Role of Solicitor Certificates: Engaging a private mortgage lawyer to provide solicitor certificates Victoria can add an additional layer of diligence, ensuring the borrower has received independent legal advice regarding the loan’s nature and purpose. While not a complete defence against a finding of unlicensed activity, it demonstrates a commitment to due process.
• Robust Loan Agreements: Ensure your loan agreement lawyer drafts comprehensive agreements that clearly articulate the declared purpose and the borrower’s representations.

Navigating the Regulatory Landscape

ASIC Deputy Chair Sarah Court emphasised that “engaging in unlicensed credit activities undermines consumer protection and can lead to significant financial harm for vulnerable individuals.” While the regulatory burden on non-bank lenders can feel extensive, compliance is not optional. The consequences of failing to meet licensing requirements and consumer protection provisions are severe, including significant penalties and reputational damage.

For those involved in non-bank lending Australia, proactive measures are essential. This includes reviewing current lending practices, training staff on due diligence requirements, and establishing robust internal processes to identify and manage the risks associated with loan purpose declarations.

Navigating the intricacies of credit licensing and consumer protection requires specialist knowledge. Do not leave your business exposed to ASIC enforcement actions.

If you are a private lender, mortgage broker, or property developer seeking advice from a private lending lawyer Victoria on compliant lending practices, including structuring caveat loans or other private lending arrangements, ensure your processes align with regulatory expectations. We provide expert guidance to protect your interests and ensure compliance.