Tag: Payday Lending

The Government is establishing a review of the small amount credit contract (SACC) laws and related provisions in the National Consumer Credit Protection Act 2009 (Credit Act). This is much needed given the projected rise in the number of financially distressed household, and the rise in the size of the payday sector, especially delivered online.

The establishment of the review fulfils a statutory requirement under the Credit Act, to examine and report on the effectiveness of the law relating to SACCs.

Terms of reference

1. The review will make recommendations about the effectiveness of, and where necessary recommend changes to, the following:1.1  the requirement to obtain and consider a consumer’s bank account statements in subsections 117(1A) and 130(1A) of the Credit Act;1.2  the rebuttable presumption that a loan is unsuitable where the consumer is in default under another SACC or has held two other SACCs in the past 90 days in subsections 118(3A), 123(3A), 131(3A) and 133(3A) of the Credit Act;

   1.3  the prohibitions on entering into, or increasing the credit limit of, a loan contract that has a term of 15 days or less with a consumer, and on suggesting or assisting a consumer to do so in sections 124A, 133C and 133CA of the Credit Act;

   1.4  the requirement to display a warning statement about the alternatives available to SACCs in sections 124B, 133C and 133CB of the Credit Act;

   1.5  the cap on fees and charges (including the maximum of a 20 per cent establishment fee and of a monthly 4 per cent fee) in sections 23A, 31A, 31B and 39A of the National Credit Code;

   1.6  the requirement that consumers who default under a SACC must not be charged an amount that exceeds twice the amount of the relevant loan in section 39B of the National Credit Code; and

   1.7  the power to introduce specific protections for particular groups of consumers in sections 133C and 133CC of the Credit Act and the protections for consumers who receive 50 per cent or more of their income under the Social Security Act 1991 in regulation 28S of the National Consumer Credit Protection Regulations 2010.

2. The review will make recommendations on:2.1  whether a national database of SACCs should be established and if so, by whom and how it should be funded; and2.2  whether any additional provisions relating to SACCs should be included in the Credit Act, the accompanying regulations, or the National Credit Code.
3. The review will make recommendations on whether any of the provisions which apply to SACCs should be extended to regulated consumer leases.
4. The review will make recommendations that take into account:
   • competition;
   • fairness;
   • innovation;
   • efficiency;
   • access to finance;
   • regulatory compliance costs; and
   • consumer protection.
5. In examining the issues set out above, the review should also consider whether the laws relating to SACCs and regulated consumer leases are appropriate for the current economic climate and whether they will continue to meet Australia’s evolving needs.
6. The review should conduct consultations with stakeholders, and hold public meetings where appropriate.
7. The review will not recommend the establishment of an additional body or the establishment of a further review(s).
8. The review will not recommend changes to any area of the law that the Commonwealth does not have the direct power to regulate.

In their statement, the Government recognises that small amount lenders can play an important role in the economy by providing credit to consumers who are excluded from mainstream forms of finance. The Government wants to ensure that the regulatory framework strikes the right balance by protecting vulnerable consumers without imposing an undue regulatory burden on industry.

SACCs are loans of less than $2,000 to the consumer with a maximum term of 12 months. Since 2013, the Credit Act has placed specific obligations on SACC providers, including a cap on costs and a rebuttable presumption that a loan is unsuitable where the customer is in default under another small amount loan.

The Government’s review also provides an appropriate opportunity to consider the laws that apply to regulated consumer leases. A consumer lease allows a customer to lease an item (for example, a fridge), until the term of the lease finishes, when the item is returned to the lease provider. Consumer leases regulated under the Credit Act include those that are for a set period of four months or longer.

While the customer base for small amount loans and regulated consumer leases is similar, many of the regulatory requirements for SACCs do not apply to consumer leases. The review will consider whether the provisions that apply to SACCs should be extended to consumer leases.

The review will be chaired by Ms Danielle Press, the CEO of Equipsuper, who will be joined by panel members Ms Catherine Walter AM, Deputy Chair of Funds Management Victoria, and Mr Stephen Cavanagh, Partner at HWL Ebsworth.

As part of the consultation process, the panel will call for submissions from interested parties and will consult widely with stakeholders. The terms of reference for the review are attached.

The panel will report by the end of this year.

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.