SACC – Page 2 – Digital Finance Analytics (DFA) Blog

Small Amount Credit Contract Reforms: Will the Affordability Cap Achieve Its Intended Objectives?

The law applying to small amount credit contracts (a.k.a Pay Day Loans) was reviewed by Government in late 2015 and a final report was released in March 2016.

In November 2016, essentially the Government accepted many of the recommendations, and said it will legislate the changes in 2017, with some grandfather provisions for existing contracts. A further review is proposed in 3 years time.

A key recommendation was to establish a new affordability cap. But will this be effective?

Gill North, Professorial Research Fellow, Law School, Deakin University has published an academic article which reviews the state of play- Small Amount Credit Contract Reforms: Will the Affordability Cap Achieve its Intended Objectives Without Unintended Adverse Consequences?

Specifically she questions the efficacy of the proposed affordability cap and calls for for an independent review of the business model and practices of small amount lending.

The stated objectives of the review were to allow consumers to access credit fairly and without excessively large debt burdens, and to establish regulatory settings that allow the industry to remain commercially viable. In November 2016, the Coalition Government accepted most of the review recommendations, including recommendation one that establishes a new affordability cap for all consumers seeking small amount credit contract loans.

Recommendation one is the central reform to enhance consumer protection, but is highly contentious. Consumer groups support it, but the industry body argues that consumers will be disadvantaged due to more limited access to credit and higher fees than at present.

The article explores these arguments and highlights possible outcomes that may arise from the introduction of a broad affordability cap. It ultimately concludes that available information is inadequate to properly assess the risks and likely impacts of enacting recommendation one.

Consequently, it calls for an independent review of the business model and practices of small amount lending to confirm that the affordability cap reform will achieve its stated objectives and will lead to better long-term consumer outcomes without unintended adverse consequences.

The article is available for download.

DFA had previously completed detailed analysis of households and their use of small amount credit contracts, a.k.a. payday lending. That report is still available.

Note this is looking at short term credit. If you are after our recent work on mortgage defaults and household financial stress, please follow this link:

Fair Disclosure: I am related to Gill North.

Small Amount Credit Contract Reforms in Australia: Household Survey Evidence and Analysis

Last year we published a report on financially stressed households, including coverage of small amount credit contracts, using data from our household surveys.

Now Professor Gill North has published an important academic paper – see this link – “Small Amount Credit Contract Reforms in Australia: Household Survey Evidence and Analysis” which takes the analysis of the survey data much further. Here is the abstract.

A review of small amount credit contract regulation in Australia began in 2015 as mandated under section 335A of the National Consumer Credit Protection Act 2009 (Cth). The review panel sought comprehensive data on industry and consumer characteristics and trends. To provide such evidence, consumer groups commissioned original empirical research using data collected from a longitudinal survey that monitors the financial position and attitudes of Australian households. This data on household use of small amount credit contract loans was extracted for the last decade, allowing detailed analysis of the historical patterns and developing trends. The data indicates that overall demand for small amount short duration credit is growing in Australia, the consumer base is broadening, and the predominant form of lending today is online. Deeper analysis highlights the varying motivations of borrower households and their different stages and levels of financial difficulty. It also confirms the socio-economic, employment, educational and financial disadvantages of most households using these loans and their vulnerability to adverse changes in personal circumstances and negative external shocks.

SACC Lending Market Evolving Fast

We have updated our Small Amount Credit Contract (SACC) models to include data to end September 2016. SACC is of course the new name for what were pay day loans, before the last round of regulatory changes. In fact we are still waiting on Government for their response to the review which was completed earlier in the year.

We published detailed analysis of the market last year. The report “The Stressed Finance Landscape” is available here. Our model is based on responses from our household surveys, and we also overlay economic growth factors and other data, to estimate potential future growth.

So looking at the new data, our first observation is that growth in SACC loans (under $2,000 and 1 year) is significantly faster than personal credit as reported by the RBA personal credit data. The overall value of these SACC loans is still small, under $1 billion compared with the $145 billion for personal credit (cards and personal loans).

However, the growth in SACC loans appears to be directly linked with the rise on online usage, as more lenders, and borrowers go digital. We think about 70% of new SACC loans were originated via the online channels. We are also expecting the momentum to slow, as market participants tweak their business models and players leave, or enter the market.

One clue is the mix of households. We identify households who have no choice but to use SACC loans (financially distressed) and those who choose to use these loans for convenience (financially stressed). The mix is changing, with more financially stressed using SACC, whilst distressed households are static, and we think will reduce over time, as lenders change the focus of their business models. In a nutshell, the new focus of the industry is convenient loans to more affluent households, rather than those struggling to make ends meet, and probably on Centrelink payments.

The final clue is that the larger proportion of households with digital capabilities are those stressed, not distressed, so there is strong alignment with online origination. We conclude that it is online which is changing the game. This has profound implications for those seeking to work with households under pressure financially and how digital offerings should be regulated.

Small Amount Credit Review Recommends Tighter Controls

The final report of the Review of Small Amount Credit Contracts (SACCs) has been released. A range of recommendations tighten regulation of short term small loans and consumer leases. Of note is the need to disclose the actual APR of the transaction, be it a small amount credit contract or consumer lease. In the latter case, the cost of the relevant household good must be disclosed.

The review panel provided the Final Report to the Government on 3 March 2016.

The review was silent on mandating better collection of transaction data so the true volume of loans could be recorded. As highlighted in the report accurate data is an issue.

Small Amount Credit Contracts (SACCs)

Recommendation 1 – Affordability – Extend the protected earnings amount regulation to cover SACCs provided to all consumers.
Reduce the cap on the total amount of all SACC repayments (including under the proposed SACC) from 20 per cent of the consumer’s gross income to 10 per cent of the consumer’s net (that is, after tax) income. Subject to these changes being accepted, retain the existing 20 per cent establishment fee and 4 per cent monthly fee maximums.
Recommendation 2 – Suitability – Remove the rebuttable presumption that a loan is presumed to be unsuitable if either the consumer is in default under another SACC, or in the 90-day period before the assessment, the consumer has had two or more other SACCs.
This recommendation is made on the condition that it is implemented together with Recommendation 1.
Recommendation 3 – Short term credit contracts – Maintain the existing ban on credit contracts with terms less than 15 days.
Recommendation 4 – Direct debit fees – Direct debit fees should be incorporated into the existing SACC fee cap.
Recommendation 5 – Equal repayments and sanction – In order to meet the definition of a SACC, the credit contract must have equal repayments over the life of the loan (noting that there may need to be limited exceptions to this rule). Where a contract does not meet this requirement the credit provider cannot charge more than an annual precent rate (APR) of 48 per cent.
Recommendation 6 – SACC database – A national database of SACCs should not be introduced at this stage. The major banks should be encouraged to participate in the comprehensive credit reporting regime at the earliest date.
Recommendation 7 – Early repayment – No 4 per cent monthly fee can be charged for a month after the SACC is discharged by its early repayment. If a consumer repays a SACC early, the credit provider under the SACC cannot charge the monthly fee in respect of any outstanding months of the original term of the SACC after the consumer has repaid the outstanding balance and those amounts should be deducted from the outstanding balance at the time it is paid.
Recommendation 8 – Unsolicited offers – SACC providers should be prevented from making unsolicited SACC offers to current or previous consumers.
Recommendation 9 – Referrals to other SACC providers – SACC providers should not receive a payment or any other benefit for a referral made to another SACC provider.
Recommendation 10 – Default fees – SACC providers should only be permitted to charge a default fee that represents their actual costs arising from a consumer defaulting on a SACC up to a maximum of $10 per week. The existing limitation of the amount recoverable in the event of default to twice the adjusted credit amount should be retained.

Consumer Leases

Recommendation 11 – Cap on cost to consumers – A cap on the total amount of the payments to be made under a consumer lease of household goods should be introduced. The cap should be a multiple of the Base Price of the goods, determined by adding 4 per cent of the Base Price for each whole month of the lease term to the amount of the Base Price. For a lease with a term of greater than 48 months, the term should be deemed to be 48 months for the purposes of the calculation of the cap.
Recommendation 12 – Base Price of goods – The Base Price for new goods should be the recommended retail price or the price agreed in store, where this price is below the recommended retail price. Further work should be done to define the Base Price for second hand goods.
Recommendation 13 – Add-on services and features – The cost (if any) of add-on services and features, apart from delivery, should be included in the cap. A separate one-off delivery fee should be permitted. That fee should be limited to the reasonable costs of delivery of the leased good which appropriately account for any cost savings if there is a bulk delivery of goods to an area.
Recommendation 14 – Consumer leases to which the cap applies – The cap should apply to all leases of household goods including electronic goods.
Further consultation should take place on whether the cap should apply to consumer leases of motor vehicles.
Recommendation 15 –Affordability – A protected earnings amount requirement be introduced for leases of household goods, whereby lessors cannot require consumers to pay more than 10 per cent of their net income in rental payments under consumer leases of household goods, so that the total amount of all rental payments (including under the proposed lease) cannot exceed 10 per cent of their net income in each payment period.
Recommendation 16 – Centrepay implementation – The Department of Human Services consider making the caps in Recommendations 11 and 15 mandatory as soon as practicable for lessors who utilise or seek to utilise the Centrepay system.
Recommendation 17 – Early termination fees – The maximum amount that a lessor can charge on termination of a consumer lease should be imposed by way of a formula or principles that provide an appropriate and reasonable estimate of the lessors’ losses from early repayment.
Recommendation 18 – Ban on the unsolicited marketing of consumer leases – There should be a prohibition on the unsolicited selling of consumer leases of household goods, addressing current unfair practices used to market these goods.

Combined recommendations

Recommendation 19 – Bank statements – Retain the obligation for SACC providers to obtain and consider 90 days of bank statements before providing a SACC, and introduce an equivalent obligation for lessors of household goods. Introduce a prohibition on using information obtained from bank statements for purposes other than compliance with responsible lending obligations. ASIC should continue its discussions with software providers, banking institutions and SACC providers with a view to ensuring that ePayment Code protections are retained where consumers provide their bank account log-in details in order for a SACC provider to comply with their obligation to obtain 90 days of bank statements, for responsible lending purposes.
Recommendation 20 – Documenting suitability assessments – Introduce a requirement that SACC providers and lessors under a consumer lease are required at the time the assessment is made to document in writing their assessment that a proposed contract or lease is suitable.
Recommendation 21 – Warning statements – Introduce a requirement for lessors under consumer leases of household goods to provide consumers with a warning statement, designed to assist consumers to make better decisions as to whether to enter into a consumer lease, including by informing consumers of the availability of alternatives to these leases. In relation to both the proposed warning statement for consumer leases of household goods and the current warning statement in respect of SACCs, provide ASIC with the power to modify the requirements for the statement (including the content and when the warning statement has to be provided) to maximise the impact on consumers.
Recommendation 22 – Disclosure – Introduce a requirement that SACC providers and lessors under a consumer lease of household goods be required to disclose the cost of their products as an APR. Introduce a requirement that lessors under a consumer lease of household goods be required to disclose the Base Price of the goods being leased, and the difference between the Base Price and the total payments under the lease.

The Government is also consulting on whether the recommendations relating to consumer leases should apply to all regulated consumer leases (including motor vehicles) rather than only leases of household goods, and how second hand goods should be treated.

Women are increasingly using payday loans, at growth rates above system

New DFA research shows that women who are most vulnerable and under the most significant financial pressure are most likely to access payday services. Those that do are quite likely to take multiple loans.

DFA, in conjunction with Monash University published a report on households in financial stress last year using data from our household surveys. It was cited by ASIC in their review of debt advice services, published yesterday.

We have now completed an extension to the analysis, commissioned by Good Shepherd Microfinance, looking in particular at how women are using payday loans. This analysis is relevant to the SACC review currently underway. Payday lending is defined as loans of $2,000 or less for terms between 16 days and 12 months, in accordance with the National Consumer Credit Protection Act 2009 definition of a small amount credit contract.

Our analysis reveals that women are increasingly using payday loans, at growth rates above system. This is explained partly by a low initial penetration rate, greater financial need and autonomy, and greater availability and ease of online loans. We expect these growth rates to continue.

Not all women are equally likely to access payday loans. Those in challenging financial situations, with sole charge of children are most likely to use this form of credit, and often do so as a form of emergency cash for household expenses. Solo women without children are less likely to use payday loans, and when they do, it tends to be for a specific purpose such as car repairs. Finally, the behaviour of women in family units is closely aligned to the general population, and the decision to access payday is often either a joint decision or delegated to another family member.

1. Are women increasingly using payday lending in Australia?

The short answer is “yes”; women are using payday lending more. In 2005 about 84,000 women had used payday lending, but this had grown to 177,000 in 2015, a 110% rise compared to growth in the total industry in Australia of 80% over the same period. Transactions initiated by women as the decision maker, whether in a family or other context, comprised about 27% of all payday loans in 2015.

Our analysis segments Australian households into various groups in order to identify those that are financially stressed (with a subset defined as financially distressed).

Financially stressed households are generally coping with their current financial situation (even if using unconventional means), while financially distressed households are not. By coping, we mean for example, short term borrowing from family, friends, or payday loans, as well as juggling multiple credit cards, moving debts from one credit source to another and deliberately making late payments. The distinction between financially stressed and financially distressed households is important, because the spectrum of financially stressed households in Australia using payday lending facilities has broadened significantly since 2005. During the period of analysis (and as shown in our original report) the rise in loans to financially distressed households grew only slightly, but there was a significant rise in the volume of loans made to financially stressed households. These classifications of households are, of course, dynamic, with financially stressed households moving into a position of distress and vice versa.

Across the general population, the average size of an individual payday loan fell between 2005 and 2015 from $776 to $611. Yet if we look at payday loans to women, the average loan made rose significantly from $427 in 2005 to $592 in 2015.

There are a number of reasons that may explain this. First, the proportion of loans to women has increased between 2005 and 2015. Second, more independent women are getting loans. Third, lenders have changed their lending criteria. Fourth, women have greater need of financial assistance and are borrowing more. Further research would be required to determine which of these factors have been most influential.

We conclude that women are more likely to use a payday loan today. They are able to access funds on-line, with lenders using on-line channels to attract households in less severe financial difficulty.

Some women in financial need have limited alternate options. We explore this later.

2. What are the household characteristics of women who use payday lending in Australia?

To answer this question, we have identified three discrete groups within which women may reside. Each has different drivers and needs, and uses payday lending to different degrees. This segmentation is based on analysis from our household surveys and is tailored specifically for this paper.

Using this segmentation, we can now overlay the payday lending data statistics from our surveys.

Of those women using payday lending in 2015, 47% came from the one-parent family segment, a much higher level than the 15% distribution of households with a single female parent across the general population. Conversely, while 64% of the general population falls within the family segment, the percentage of women using payday loans from this segment was only 36%.

3. How are women using payday lending in Australia?

Segmental analysis shows that one-parent women are more likely to have multiple loans over the last twelve months, compared with other female segments and the general population. Conversely, single women without children are most likely to have just one loan (87%), compared with general population (62%).

We find that one-parent women are more likely to have multiple concurrent loans, compared with other female segments and the general population.

On-line origination has become a predominant industry feature, and one-parent women are now the most likely segment to use this channel, thanks to the emergence of easy to use on-line apps.

We found broadly similar patterns of awareness of payday lending across the various segments, although families with a single female parent were far more likely to use a local shop or lender than the average, and were significantly more influenced by friends.

4. What are the motivations and drivers of women using payday lending in Australia?

Our segmental analysis highlights that families with a single female parent are more likely to use payday loans to cover emergency cash for household expenses compared with the general population, or other female segments. Solo women are more likely to use payday loans for car expenses and other one-off items rather than emergency cash scenarios. The family segment mirrors the broader population.

We now turn to the underlying reason why a household is in financial difficulty. A range of drivers is found in the sample. Once again, women in one-parent roles stand out from the general population, as they are more likely to get into difficulty because of a relationship breakdown (25%) and are experiencing a reduction in available government benefits. These women are less impacted by loss of employment than other segments and the general population.