Social Trends – Page 119 – Digital Finance Analytics (DFA) Blog

DFA Highlights Payday Lending Is Driving Australians Into Debt

DFA provided data from our household surveys to inform an important report “The Debt Trap” released by more than 20 agencies helping consumers with their financial pressure. Our research, based on our rolling 52,000 households reveals that more households are using short term loans to try and manage their budgets, but many get trapped into debt. This is important given the rise in mortgage stress across the country.

The report also contains case studies which bring home the risks involved.

Worse, the recommendations from an earlier Government review are apparently in a holding pattern, and as a result more are being sucked in due to Government inaction.

Finally, the rise of apps and online lenders is making is easier for desperate households to get caught up with high cost short term debt.

Here is the official release.

Over 20 consumer advocacy bodies from around the country have released new data revealing that predatory payday lenders are profiting from vulnerable Australians and trapping them in debt, as they call for urgent law reforms.

The Debt Trap: How payday lending is costing Australians projected that the gross amount of payday loans undertaken in Australia will reach a staggering 1.7 billion by the end of 2019. It also found that:

Over 4.7 million individual payday loans were taken on by around 1.77 million households between April 2016 and July 2019, worth approximately $3.09 billion.
Victoria is the state leading the country with the highest number of new payday loans
Digital platforms are adding fuel to the fire, with payday loans that originate online expected to hit 85.8% by the end of 2019.
The number of women using payday loans has risen from 177,000 in 2016 to 287,000 in 2019, representing a rise to 23.13% of all borrowers. Close of half are single mothers.

The report was released today by over 20 members of the Stop the Debt Trap Alliance – a national coalition of consumer advocacy organisations who see the harm caused by payday loans every day through their advice and casework.

Read the full report here [PDF]

“The harm caused by payday loans is very real, and this newest data shows that more Australian households risk falling into a debt spiral,” says Consumer Action CEO and Alliance spokesperson, Gerard Brody.

“Meanwhile, predatory payday lenders are profiting from vulnerable Australians to the tune of an estimated $550 million in net profit over the past three years alone.”

Brody says that the Federal Government has been sitting on legislative proposals that would make credit safer for over three years, and that the community could not wait any longer.

“Prime Minister Scott Morrison and Treasurer Josh Frydenberg are acting all tough when it comes to big banks and financial institutions, following the Financial Services Royal Commission. Why are they letting payday lenders escape legislative reform, when there is broad consensus across the community that stronger consumer protections are needed?”

The Alliance is calling on the Federal Government to put people before profits and pass the recommendations of the Small Amount Credit Contract (SACC) review into law. This legislation will be critical to making payday loans and consumer leases fair for all Australians. There are only 10 sitting days left to get it done.

“The consultation period for this legislation has concluded. Now it’s time for the Federal Government to do their part to protect Australians from financial harm and introduce these changes to Parliament as a matter of urgency.”

Home Price Expectations Held Up By Hot Air!

In the final part of our October 2019 Household Survey we look at the results through the lens of our segmentation models. What is clear is there is a disconnect between future home price expectations (much more positive) and proposed activity (lower demand for credit, and intentions to transact). This is at the heart of the weirdness in the market at the moment, and it helps to explain the low levels of listings and transactions (and hence the high auction clearance rates on those low volumes). There is nothing in the latest results however which flags significant momentum increases ahead.

We start with the cross-segment trends. First there is a significant hike in those expecting home prices to be higher in the next 12 months. It reached a low around the election, and has been rising since the cash rate cuts. Portfolio Investors (those with multiple investor properties are the most bullish). But the expectations are there across the board.

However, this does not necessarily translate into intention to transact. First Time Buyers and Down Traders (around 900k) are most likely to be in the market, the former aided by the extra incentives available and the latter by the need to pull equity from existing properties. Property investors remain largely on the sidelines. There is also a slight downward inflection in the past quarter.

Another lens is demand for credit which shows stubborn resistance other than from First Time Buyers ~around 150k actively looking) and Up Traders (around 550k actively looking). Refinancing is tracking at levels we have seen for some time. This suggests that banks will have to compete hard for meager pickings, and refinancing and first time buyers will be the targets for special deals.

Those Wanting to Buy say that availability of finance (40%) and costs of living (30%) are the main barriers, although high home prices at 16% still registers. Interest rates and fear of unemployment are low relatively speaking.

First time buyers are being driven by a range of factors including the need for shelter and a place to live (28%), greater security (14%), tax advantage (17%) and to take advantage of the FHOG (12%). But that said there are significant barriers as well.

Barriers include home prices too high (26%), availability of finance (39%) and costs of living (24%). On the other hand finding a place to buy and rising interest rates hardly registered.

Household seeking to refinance are being driven by reducing monthly repayments (50%), for a better rate (22%) and extra capital withdrawal 20%.

Down Traders are driven by the desire to release capital for retirement (50%), increased convenience (30%) and illness or death of spouse (11%). Interest in investment property has faded to 6%.

Up Traders are being driven by the desire for more space (41%), job change (16%), property investment (22%) and life-style changes 20%).

Turning to investors 45% are driven by tax benefits, better returns than deposits (25%) and appreciating property values (14%).

On the other hand, investors face a number of barriers including cannot getting finance (49%), and they have already bought (13%).

And finally across the segments the prime selection point is price, although it varies, and loyalty is not seen as significant or rewarded.

Standing back, it appears that property sector momentum is likely to remain patchy at best, with more action at the more expensive end of the value spectrum, and first time buyers remaining as the primary “canon fodder” with regards to new transactions. It will be interesting to see how the Government scheme due in January changes the picture.

$185 million in compensation awarded to consumers in AFCA’s first 12 months

Australians in dispute with their bank, insurance provider, super fund, or other financial firms have lodged 73,000 complaints with the financial sector’s new ombudsman and have been awarded $185 million in compensation, in the first 12 months of its operation.

The Australian Financial Complaints Authority (AFCA) is celebrating 12 months since it opened its doors as the nation’s one-stop-shop for complaints about financial firms, replacing three former external dispute resolution schemes.

People made 73,272 complaints to AFCA between 1 November 2018 and 31 October 2019. This represents a 40 percent increase in complaints received compared to AFCA’s predecessor schemes, which in the 2017/18 financial year received a combined total of 52,232 complaints.

Of the complaints made, 56,420 have been resolved with the majority resolved in 60 days or less.

Research conducted in July this year showed that just three percent of Australians knew about AFCA. Yet, despite the need to raise awareness, Australians are making nearly 200 complaints a day.

AFCA Chief Executive Officer and Chief Ombudsman David Locke said AFCA was a fair, free and independent service that was fast becoming valued by the public and its members for its approach to dispute resolution.

“Every day we continue to hear from people who are dissatisfied with the way their financial firm has handled their complaint. These matters have not been resolved internally by financial firms and so the individual then brings their complaint to AFCA,” Mr Locke said.

“We take our commitment to fairness and independence very seriously, and where possible we encourage the financial firm and complainant to resolve the matter among themselves. The statistics show that this happened with 70 percent of all claims resolved in the past 12 months.

“Still, the increase in complaint numbers we are witnessing at AFCA indicates that there is still work to be done by firms to improve their practices and restore public faith in financial firms. AFCA will continue to focus on member engagement to help firms to enhance their own internal dispute resolution procedures.”

Mr Locke said he was proud of the significant milestones that AFCA and its people had achieved in its first year of operation.

“Establishing AFCA as a new organisation and handling a 40 percent increase in complaints was never going to be easy and we are still improving the way we operate,” he said.

“I am very proud of the AFCA team and what has been achieved so far. I am fortunate to work with a great team of people who are professional, passionate about fairness and independence, and who care about our customers.

“AFCA has also been in a major growth phase of staff to meet demand and has launched the first leg of a national roadshow to promote its service across the country.

“The Financial Fairness Roadshow has been a great success. So far we’ve been to 26 locations across Tasmania, Victoria, the ACT and regional New South Wales, where we’ve spoken with more than 7,000 people.

“We plan to tour the rest of the country in the first half of 2020.”

Mr Locke said AFCA had also hosted forums for small business, consumer advocates and AFCA members in 10 locations coinciding with the Roadshow’s itinerary.

The Fall Of Pay Day?

There have been some interesting developments in the short-term lending market in the UK recently. The Financial Conduct Authority in the UK recently published data on the so called high-cost short-term credit (HCSTC) market. HCSTC loans are unsecured loans with an annual percentage interest rate (APR) of 100% or more and where the credit is due to be repaid, or substantially repaid, within 12 months. In January 2015, The FCA introduced rules capping charges for HCSTC loans.

Just over 5.4 million loans originated in the year to 30 June 2018, and that lending volumes have been on an upward trend over the last 2 years. Despite some recovery, current lending volumes remain well down on the previous peak for this market. Lending volumes in 2013, before FCA regulation, were estimated at around 10 million per year.

These data reflect the aggregate number of loans made in a period but not the number of borrowers, as a borrower may take out more than one loan. They estimate that for the year to 30 June 2018 there were around 1.7 million borrowers (taking out 5.4 million loans).

The market is concentrated with 10 firms accounting for around 85% of new loans. Many of the remaining firms carry out a small amount of business – two thirds of the firms reported making fewer than 1,000 loans each in Q2 2018.

For the year to 30 June 2018, the total value of loans originated was just under £1.3 billion and the total amount payable was £2.1 billion. Figure 2 shows that the Q2 2018 loan value and amount payable mirrored the jump in the volume of loans with loan value up by 12% and amount payable 13% on Q1 2018.

The average loan value in the year to 30 June 2018 was £250. The average amount payable was £413 which is 1.65 times the average amount borrowed. This ratio has been fairly stable over the past 2 years. A price cap introduced in 2015 stipulates that the amount repaid by the borrower (including all charges) should not exceed twice the amount borrowed.

Over the past 2 years the average Annual Percentage Rate (APR) charged for HCSTC has been consistent, hovering around 1,250% (mean value). The median APR value is slightly higher at around 1,300%. Within this there will be variations of APR depending on the features of the loan. For example, the loans repayable by installments over a longer period may typically have lower APRs than single installment payday loans.

In the UK, the North West has the largest number of loans originated per 1,000 adult population (125 loans), followed by the North East (118 loans). In contrast, Northern Ireland has the lowest (74 loans).

Borrowers between 25 to 34 years old holding HCSTC loans (33.4%) were particularly over-represented compared to the UK adults within that age range (17.5%). Similarly, borrowers over 55 years old were significantly less likely to have HCSTC loans (12.2%) compared to the UK population within that age group (34.8%). The survey also found that 60% of payday loan borrowers and 45% for short-term installment loans were female, compared with 51% of the UK population being female.

61% of consumers with a payday loan and 41% of borrowers with a short-term installment loan have low confidence in managing their money, compared with 24% of all UK adults. In addition, 56% of consumers with a payday loan and 48% of borrowers with a short-term installment loan rated themselves as having low levels of knowledge about financial matters. These compare with 46% of all UK adults reporting similar levels of knowledge about financial matters.

But now the top PayDay lenders are out of business. In August 2018, Wonga, once the biggest payday lender in the UK collapsed and now administrators for the lender have revealed that 389,621 eligible claims have been made since Wonga’s demise. Despite being vilified for its high-cost, short-term loans, seen as targeting the vulnerable, it became a household name and was enormously successful until stricter regulation curtailed its, and other payday loan companies’, lending.

It collapsed in the UK following a surge in compensation claims from claims management companies acting on behalf of people who felt they should never have been given these loans. So far, the compensation bill is £460m, with the average claim £1,181.

Another lender, The Money shop closed earlier this year.

Now QuickQuid, UK’s largest payday lending firm is to close with thousands of complaints about its lending still unresolved. QuickQuid’s owner, US-based Enova, says it will leave the UK market “due to regulatory uncertainty”.

QuickQuid is one of the brand names of CashEuroNet UK, which also runs On Stride – a provider of longer-term, larger loans and previously known as Pounds to Pocket. The UK’s Financial Ombudsman Service said that it had received 3,165 cases against CashEuroNet in the first half of the year. It was the second most-complained about company in the banking and credit sector during that six months.

Back in 2015, CashEuroNet UK LLC, trading as QuickQuid and Pounds to Pocket, agreed to redress almost 4,000 customers to the tune of £1.7m after the regulator raised concerns about the firm’s lending criteria.

More than 2,500 customers had their existing loan balance written off and more almost 460 also received a cash refund. (The regulator had said at the time that the firm had also made changes to its lending criteria.)

“Over the past several months, we worked with our UK regulator to agree upon a sustainable solution to the elevated complaints to the UK Financial Ombudsman, which would enable us to continue providing access to credit,” said Enova boss David Fisher.

“While we are disappointed that we could not ultimately find a path forward, the decision to exit the UK market is the right one for Enova and our shareholders.”

So this could be the twilight of the PayDay industry in the UK, as better education, and other lending options, plus tighter regulation bite.

Meantime in Australia its worth reflecting that proposed changes to SACC loans here (Small Amount Credit Contracts) have not progressed despite an earlier investigation, and we will be talking about the impact of this inaction in a later post.

Given the pressures on households here, we are concerned that more will reach for short term loans to tide them over, despite the high costs and risks from repeat borrowing, all made easier still via the proliferation of online portals. The debt burden on households is high and rising.

Liar Loans Not Gone Away

The latest UBS study, the fifth in their series looking at lending standards, and based on a survey of around 900 home loan applicants reveals that (perhaps surprisingly) there was a rise in “porkys” being told as part of the mortgage application, despite the Banking Royal Commission.

As a result, more than a third of Australian home loans could have ‘liar loans’ based on inaccurate information.

UBS Analyst Jonathan Mott said:

While asking detailed questions appears to be prudent, it does not appear to be effective as many factually inaccurate mortgages are still working their way through the process.

Of the borrowers who said their application was not completely factual in the past year, 20 per cent overstated their income, 23 per cent understated debts, 34 per cent understated their living costs, and 23 per cent misstated multiple categories.

Now, this is consistent with the DFA surveys where true incomes and costs are often higher than might be expected. And the extra granularity now required by the banks (many categories of costs, more detail on incomes etc) can create a false sense of accuracy – especially when many households are making best guesses to provide information to support their applications.

And financial intermediaries still appear to be part of the story, with a higher percentage of borrowers who misstated information on applications through a mortgage broker (40 per cent) than through the banks (27 per cent).

UBS said that a “large number” of survey respondents indicated their mortgage consultant advised them to misrepresent elements of their application.

At a time when the mortgage growth stops are being pulled, and lower rates are expected in a highly competitive market, this will simply create a bigger bust later.

And remember that on an international basis, we are right at the top of the international benchmarks in terms of household debt.

In fact according to the latest BIS data we lead in terms of debt servicing ratios.

And the falls in prices have created a significant gap which highlights the risks in the system.

You can watch our recent show where we look at household debt in more detail including the data above.