ASIC just announced they have forced a number of payday lenders to stop offering “leaseback” arrangements to consumers who want a payday loan.
ASIC was concerned that the Cash Loan Money Centres and Sunshine Loans were using business models which deliberately attempt to avoid the protections for consumers contained in the small amount lending provisions in the National Consumer Credit Protection Act 2009 (National Credit Act).
Consumers who approached a Cash Loan Money Centre for a payday loan were signed up to an arrangement where the consumer ‘sold’ a household item such as a washing machine or fridge to the business, in return for a sum of money, and simultaneously ‘leased’ the goods back from the business. In practice, the goods never changed hands, and the business never actually saw the household goods, or confirmed the current market value before ‘purchasing’ them from the consumer.
Similarly, under the model used by Sunshine Loans, a consumer would approach the business for a payday loan, and enter into an agreement to assign the rights to use their mobile phone or car to the lender for a fee, and then simultaneously lease the rights back.
ASIC was primarily concerned that, in both cases, consumers were charged considerably more than the amount allowed under the legislative cap on costs for payday loans. In one example, a consumer received $1,000 and repaid a total of $1,682.10, when the statutory maximum the consumer would have repaid for a small amount loan of the same amount was $1,280.
Deputy Chairman Peter Kell said, ‘Where we see business models or arrangements being used which are designed to avoid obligations imposed by the consumer credit legislation, we will take action’.
‘Payday lenders and their advisers need to ensure any change to their lending models are legitimate and do not seek to avoid the small amount lending provisions’, Mr Kell said.
After ASIC intervention, Cash Loan Money Centres and Sunshine Loans have ceased using these models and are now offering consumers a small amount credit contract.
Before July 2013, some states and territories had laws capping the cost of credit for small amount loans. These laws were replaced by the national cap which was introduced in July last year and is regulated by ASIC.
A small amount loan, in general terms, is a loan where the amount borrowed is $2,000 or less and the term is between 16 days and one year. From 1 July 2013, only the following fees can be charged on small amount loans:
- a monthly fee of 4% of the amount lent
- an establishment fee of 20% of the amount lent
- Government fees or charges
- enforcement expenses, and
- default fees (the lender cannot recover more than 200% of the amount lent).
Providers of small amount loans are also subject to enhanced responsible lending obligations, including providing a warning statement to the consumer which contains information about the alternatives to a payday loan.
Payday lending attracts households who are less able to access other forms of credit, and are likely to end up paying very high effective rates on small values lent.
