Baker, Clifton; Baker, Cerilea --- "Warning: do you really need a loan today?' Reforming payday lending" [2016] PrecedentAULA 32; (2016) 134 Precedent 24

‘WARNING: DO YOU REALLY NEED A LOAN TODAY?’

REFORMING PAYDAY LENDING

By Cliff and Cerilea Baker

NATIONAL CONSUMER CREDIT REGULATION

National regulation of consumer credit arrived only at the end of the first decade of the 21^st century, Although a measure of uniformity had previously been achieved by agreement between the states and territories to adopt and apply in each jurisdiction the provisions of the Queensland Uniform Consumer Credit Code from 1996 onwards. As a result of the Council of Australian Governments (COAG) agreements of 26 March and 3 July 2008, responsibility for regulating consumer credit and related financial services was transferred from the states and territories to the Commonwealth with effect from 1 July 2010, using Commonwealth constitutional power and referred state powers.^[1] The National Consumer Credit Protection Act 2009 and the associated National Credit Code came into operation on that date. The approach adopted in the first stage of this legislation was the limited objective of harmonising the existing laws, and giving administrative and enforcement powers to the Australian Securities and Investment Commission (ASIC).

A second stage of legislation followed to extend the scope of coverage of national credit legislation to consumer lease lending, reverse mortgages, and to make specific provision for small amount credit contracts (SACCs), commonly referred to as ‘payday loans’.

The strategies adopted in the first stage of national regulation focused on licensing, disclosure in relation to credit information and the suitability of the type of credit provided, and mandatory contractual terms. In the second stage, this approach was extended to restrictions on lending charges and interest, as well as specific provisions addressing the particular concerns with SACCs.^[2]

SMALL AMOUNT CREDIT CONTRACTS: ‘PAYDAY LENDING’

During the 2000s, there was increasing public concern about the harmful social and financial effects of short-term loans, commonly referred to as ‘payday lending’. Payday lending from non-traditional lenders expanded substantially in Australia in the late 1990s.^[3] Current data indicates that the SACC market involves $700 million to $1.2 billion each year, with 500,000 to 1 million customers annually, and 1,036 licence-holders operating in this sector.^[4] Studies of payday lending were made by the Consumer Law Centre in Victoria in 2002 and 2010; the Social Policy Unit, University of Queensland, in 2010; and Financial Counselling Australia in 2011.^[5] The Financial Counselling Australia Report is reflective of what consumer advocates consider to be the effect of payday lending.

‘The majority of financial counsellors (62 per cent) said that where a client had borrowed from a payday lender, either “most of” or “all of” them were repeat borrowers. The majority of financial counsellors (79 per cent) said payday lending ”never” improved their financial situation. While 21 per cent said there was “sometimes” improvement, later qualitative comments made it clear that any relief of financial difficulty was short-lived.

Financial counsellors provided some examples of client stories from their casework experience (101 in total). There were a number of common themes: that payday lending was a debt trap, clients are generally on low incomes (particularly Centrelink) and can be vulnerable to exploitation, and there is evidence of irresponsible lending practices and avoidance of current laws.’^[6]

The Report concluded, ‘Payday loans do not solve financial difficulty, they exacerbate it. Regulatory reform is needed.’^[7]

RESPONSIBLE LENDING PRACTICES: GENERAL PROVISIONS

A central part of the first stage of the national regulatory regime was the responsible lending obligations provisions contained in Chapter 3 of the National Consumer Credit Protection Act 2009 (NCCPA). They were designed to reduce the instances of prejudicial or inappropriate loans granted to consumers through the imposition of obligations on credit providers and other agents. The central obligation under the National Consumer Credit Protection Act in relation to responsible lending is the requirement under s128 to make an assessment of whether a credit contract will be unsuitable for a consumer not more than 90 days prior to entering into or increasing the credit limit under that contract. In making that assessment, a credit provider is required to:

(1) make reasonable enquiries about the consumer’s requirements and objectives in relation to the credit contract;

(2) make reasonable enquiries about the consumer’s financial situation; and

(3) take reasonable steps to verify the consumer’s financial situation: s130.^[8]

The ASIC guide on responsible lending conduct advises that the level of enquiry will vary depending on the circumstances of the transaction, and emphasises that information given by a borrower must now be independently verified.^[9] The ASIC Guide states that relevant factors for the assessment involve the potential impact on the consumer of entering into an unsuitable credit contract, the complexity of the credit contract, the capacity of the consumer to understand the credit contract and whether the consumer is an existing customer of a credit provider or a new customer.^[10]

Under s131 of the NCCPA, a lender must assess a credit contract as unsuitable if it is likely that (1) the consumer will be unable to comply with the consumer’s financial obligations under the contract, or could only comply with substantial hardship; or (2) the contract will not meet the consumer’s requirements or objectives. Section 133 prohibits a lender from entering or increasing a credit limit under a credit contract that is unsuitable, with similar principles to those applicable under s131. The ASIC Guide indicates that appropriate verification could take the form of payroll receipts, employment confirmation, financial statements, income tax returns, accounting certification for the self-employed, credit reports information or reports from other credit providers and bank account and credit card records.^[11]

RESPONSIBLE LENDING PRACTICES: PAYDAY LOANS

The second stage of legislation dealing specifically with small amount credit contracts is contained in the Consumer Credit Legislation Amendment (Enhancements) Act 2012 (Enhancements Act). A definition of small amount credit contract is included in s5 of the NCCPA. A SACC is a contract which is not a continuing credit contract, where the credit provider is specified to not be an approved deposit-taking institution (ADI); the debtor’s obligations are not secured by a mortgage; the credit limit is $2,000 or less; the term is two years or less and any other prescribed requirements are met. Certain additional restrictions are applicable to the credit contract under the Enhancements Act. These include most importantly that only an establishment fee, a monthly fee and a default charge are permitted (s31A(1)); the establishment fee must not exceed 20 per cent of the adjusted credit amount under the contract (s31A(2)); the monthly fee must not exceed 4 per cent of the adjusted credit amount (s31A(3)); if there is default in payment, the maximum amount which may be recovered is twice the adjusted credit amount and enforcement expenses (s39B); no interest or any other fee or charge may be imposed (s23A); and short-term credit contracts, being contracts for less than 16 days, are prohibited (s133CA).

There are additional, responsible lending requirements on collecting information and assessing credit applications in the Enhancements Act for small amount credit contracts. The credit provider is required to obtain and consider any account statements for the credit applicant in the immediately preceding period of 90 days (s130(1A)). If in the preceding 90-day period the consumer is in default under an SACC, or has two or more such contracts, then there is a presumption that the credit is not suitable for the purposes of s131 (s131(3A)). Additional requirements related to responsible lending applicable to small amount lenders require (1) a warning to be displayed at the credit provider’s premises and on its website: ‘Warning: Do you really need a loan today?’ (s133CB and Reg 28XXA); and (2) prohibit the making of a loan to a person who receives more than 50 per cent of their income from social security benefits, where the loan repayments would amount to more than 20 per cent of the consumer’s gross income for that benefit cycle: (s133CC and Reg 28S).

WATERING DOWN THE INITIAL PROTECTIONS

While these provisions may appear to provide a substantial measure of protection to borrowers, in fact they represent a considerable watering down of the original legislative proposals. The original Enhancements Bill contained a simple demarcation between ‘small amount credit contracts’ for two years or less, which was revised prior to enactment with the s5 definition noted above, and a ban on credit for 15 days or less.^[12] The original Enhancements Bill capped the establishment fee at 10 per cent of the loan (and provided that the establishment fee should reasonably reflect the costs of the credit approval process); a monthly fee of 2 per cent; and a default fee at double the amount of the loan (including enforcement expenses). As enacted, however, it provided for an establishment fee of 20 per cent of the loan with no qualification as to reflection of the actual costs; a 4 per cent monthly charge; and a default fee capped at double the amount of the loan, but now excluding enforcement costs.

These revised amounts were closer to the position of the payday lending industry.^[13] The payday lending industry sought these increased caps on the basis that borrowers were increasingly middle class, who were exercising choice in covering unexpected expenses or a large purchase, but were having difficulty in accessing traditional finance.^[14] The inference that such borrowers were not vulnerable is contradicted by their experiencing difficulty in accessing traditional finance, and is also refuted by the consumer reports preceding enactment of the Enhancements Bill.^[15]

The initial Enhancements Bill provided for an absolute prohibition on lending where there was default on two or more loans in the preceding 90 days, or where the loan was refinancing an existing loan, and replaced it by the presumption of unsuitability of such loans.^[16]Again, that position was consistent with the submissions of payday lenders, and can only be seen as providing less protection to vulnerable borrowers.^[17] The warning, which was included in the Regulations to alert borrowers to the high costs involved, was regarded by consumer advocates as unlikely to deter borrowers with limited financial options and a practical lack of choice when faced with a cash flow crisis.^[18]

RESPONSIBLE LENDING PRACTICES UNDER REVIEW

The responsible lending provisions from the 2009 legislation were examined in Australian Securities and Investment Commission v The Cash Store Pty Ltd.^[19] Davies J found that ‘there was a systemic failure on the part of [The Cash Store] to comply with its obligations under [the responsible lending provisions]’.^[20] A total penalty of $18.975 million was ordered.^[21]

In March 2015, ASIC conducted a review of 288 lending files from 13 payday lenders. Key findings from that review were that in over three-fifths of the files reviewed, there were indications of a presumption of unsuitability being present, with 8 per cent being the presumption arising from default and 54 per cent the presumption arising from multiple lending. However, only one of the 13 lenders surveyed had procedures and documentation relating to how the presumption could be rebutted.^[22] The stated purpose of the loan frequently lacked specificity, and ASIC queried whether a provider could then discharge its obligations in assessing suitability. Inconsistent information provided by borrowers clearly indicates a need for further enquiries as to suitability, but not all lenders followed up adequately or at all. Good practice consisted of contacting consumers about conflicting information, making file notes of that discussion, and relying on the lower income amounts where the disclosed information showed a fluctuating income.^[23] The 90 days of financial statements accessed by lenders through third-party software providers had data quality problems, such as a loan payment from another payday lender being identified as ‘salary’.^[24]

Peter Kell, Deputy Chairman of ASIC, stated that the two largest payday lenders, Cash Converters and Money3, were among the lenders that the regulator was concerned about. Payday lending industry figures claimed that, unless the current caps were maintained, lenders would cease business in this area. The National Credit Providers Association interpreted the report selectively by claiming that the majority of lenders in the sector were meeting their responsible lending obligations, but again expressed concern about the viability of the industry with additional regulation. Consumer advocates sought increased protection for borrowers and noted that loans were structured to maximise fees, thus pointing to a need for effective anti-avoidance provisions.^[25]

With media attention focusing on payday lending in early 2015 as a result of The Cash Store penalty and ASIC Report 426, a whistleblower at Good to Go Loans spoke to Four Corners in a report on 30 March 2015, stating in detail how responsible lending practices were disregarded, and how management instructed staff to make loans where they were clearly unsuitable. Practices were also identified where loans were written to exceed the two-year period for small amount credit contracts and then the term was reduced by SMS notification, again highlighting the need for robust anti-avoidance provisions. ^[26] Good to Go Loans also had issues with ASIC over the appointment of a responsible manager. Declarations were sought against ASIC concerning the extent of its powers to require a responsible manager with particular qualifications and experience; the non-acceptance by ASIC of nominated persons as responsible managers; and in relation to its credit licence and its conditions. The Federal Court gave summary judgment to ASIC on the basis that each of the declarations sought were abstract, hypothetical or might never arise.^[27]

An earlier report in The Saturday Paper had highlighted the ease with which payday loans were granted by lenders, and the financial crises experienced by repeat borrowers.^[28]

Borrowers from Cash Converters, who entered into credit contracts where a ‘deferred establishment fee’ was imposed after a borrower had elected to make early repayments, brought a class action in the Federal Court. Some 38,000 borrowers affected by this practice were group members in the class action. It was claimed in the proceedings that the relevant fee was either unlawful, or had resulted in charges that exceeded 48 per cent per annum. The proceedings were settled in July 2015 for $25 million.^[29]

Most recently, payday lender Nimble gave enforceable undertakings to ASIC and agreed to refund $1.5 million to customers for breach of responsible lending laws relating to assessment of financial circumstances, recognising where borrowers had obtained repeat loans, and they failed to properly enquire into borrowers’ requirements.^[30] The media release contains a summary of ASIC enforcement activity on responsible lending.

ALTERNATIVES TO PAYDAY LENDING

When the original Enhancements Bill was released, the Financial Services Minister announced the need for complementary policies to encourage alternatives to payday loans and promote financial inclusion. A discussion paper was released and submissions made. However, no further steps were taken.^[31]

Nonetheless, there are still two options available for Centrelink recipients. One is in relation to Centrelink advance payments, where an income support payment of up to $1,237.35 may be made for a single person and $932.70 for one who is partnered.^[32] The other, innovative scheme is the No Interest Loans Scheme (NILS), an initiative of Good Shepherd Microfinance. Its website is headlined by ‘Speak to Us Before Taking Out a Payday Loan’ and ‘Danger! Payday Loans’. The scheme is made available through 250 local community organisations in 650 locations, for the purchase of essential goods and services, particularly whitegoods, furniture and medical and dental expenses. Loan amounts are from $300-$1,200 and are repayable over 12-18 months.^[33] This scheme represents an affordable, community-based and responsible alternative to expensive profit-oriented payday lending.

SMALL AMOUNT CREDIT CONTRACT REVIEW

Under s335A of the Enhancements Act, the responsible Minister (currently the Assistant Treasurer) was required, after 1 July 2015, to commission a review of the small amount credit contract provisions, including the caps on costs. That was done on 7 August 2015, and a Review Panel appointed.^[34]

In the December 2015 Interim Report of the Review of the SACC laws, a number of observations were made by the Panel for policy approaches to SACCs and related issues.

In the Interim Report, significant data about the payday lending industry and borrowers was provided. Online lending was increasing, loans were typically for a period of three months and around $500. Borrowers’ income was generally below the Australian average, but had increased since the passing of the Enhancements Act. It was noted that sole male households accounted for 53 per cent of contracts, family groups 32 per cent and sole female households 15 per cent. The average age of borrowers was mid-30s to early 40s. The Review Panel stated that further information was required on both lenders and borrowers.^[35] This was essential if there was to be effective regulation addressing the situation of borrowers with small amount credit contracts. An unanticipated issue, now of emerging importance, is the vulnerability and financial exclusion of older women.^[36]

The Final Report of the Review Panel was submitted to the Treasurer on 3 March 2016 and was released after tabling in Parliament on 19 April 2016. It made 24 recommendations, 8 of which related to extension of the NCCPA to consumer leases. Recommendations 1-10 applied specifically to SACCs, while Recommendations 19-24 related to both SACCs and consumer leases.^[37]

The Final Report noted that a key objective of the SACC laws was to facilitate financial inclusion, but that the current fee structure was a concession for credit providers of SACCs, which could be justified only if it promoted financial inclusion. The Panel stated emphatically that access to finance, irrespective of the cost, does not mean a consumer is financially included.^[38]

The recommendations relating to SACCs in the Report pursue the goal of financial inclusion but can be grouped under three major themes: (1) borrower affordability, (2) consumer protection, and (3) provider compliance. Recommendation 1 is the main proposal relating to affordability. The Panel observed that repeat borrowing could promote a debt spiral leading to default or further unsustainable borrowing, resulting in financial exclusion. After considering a reduction of the establishment fees for repeat borrowing and substituting a prohibition on further lending for the presumption of unsuitability, the Panel recommended an extension of the Regulation 28S approach, by extending it to all consumers and providing for a limit of 10 per cent of net income on repayments. While this would not stop repeat borrowing, it was a simple and effective way to reduce harm from repeat borrowing and a consequent debt spiral.^[39] The Panel considered that the existing 20 per cent establishment fee and 4 per cent monthly charge should be retained, while noting that this made a SACC an expensive product.^[40] Problems had been noted with the operation of the rebuttable presumption of suitability. The Panel recommended, conditionally on the adoption of Recommendation 1, that the presumption be removed. The Panel found that this approach had not been effective in addressing repeat borrowing, and had resulted in uncertainty and complexity for SACC providers.^[41]

Other measures related to affordability are Recommendation 4, that direct debit fees are included in the fee cap and not separately chargeable; Recommendation 5, that repayments be equal over the life of a loan to prevent providers front-loading repayments, with the sanction for breach being imposition of a 48 per cent annual percentage rate for the SACC charges; Recommendation 7, proposing prohibiting further monthly charges after the early repayment of a loan; and Recommendation 10, limiting default fees to the actual costs incurred by a provider to a maximum of $10 per week.^[42]

Measures directed to consumer protection include Recommendation 3, maintaining the ban on loans for 15 days or less; Recommendation 8, prohibiting unsolicited offers for SACCs; Recommendation 9, banning SACC providers from receiving a payment or benefit for referral to another SACC provider; Recommendation 21 relating to warning statements; and ASIC’s power to vary the warning to maximise the impact on consumers, and Recommendation 22, to disclose the annual percentage rate to borrowers, consistently with lending requirements for ordinary loans under the National Credit Code.^[43]

The final set of recommendations relates to compliance measures. The Panel did not support the creation of a SACC database in Recommendation 6. Although this would facilitate responsible lending obligations, it would be expensive and much information was already available through bank statements. The Panel considered the comprehensive credit reporting regime, introduced in March 2014, to be a suitable alternative to a SACC database.^[44] Other compliance measures included Recommendation 19, retaining the obligation to consider 90 days of bank statements, and enhancing security and privacy for customers in this process; Recommendation 20, the proper documentation of suitability assessments by providers, a problem noted in ASIC Report 426; and Recommendation 23, proposing the civil penalty regime in the National Credit Code for other credit contracts be extended to SACCs.^[45] The final recommendation is for an anti-avoidance provision. Recommendation 24 indicates that such a provision should cover indefinite term leases, avoidance through entities using business models nominally outside the Credit Act, practices which seek to avoid the restrictions on the maximum charges applicable to a SACC, or any of the conduct obligations applicable to a SACC.^[46]

The regulatory regime for SACCs introduced by the Enhancements Act has been shown, particularly by ASIC Report 426, to have significant shortcomings. Much will depend on the response of the Commonwealth government to the Review Panel Final Report. If it is adopted, the operation of the untried provision in Recommendation 1, making the 10 per cent protected earnings provision the principal means of avoiding consumers taking out repeat and multiple loans, and the anti-avoidance provision in Recommendation 24, will be critical in ensuring improved provider practices and consumer outcomes. Genuine financial inclusion is dependent, not only on the content of the legislative regime, but also on how it is applied and enforced.

Cliff Baker is a lawyer in Toronto, NSW. PHONE [phone] EMAIL [e-mail].

Cerliea Baker is a social worker in Newcastle, NSW. EMAIL [e-mail].

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^[1] Explanatory Memorandum, National Consumer Credit Protection Bill 2009, p11. http://www.austlii.edu.au/au/legis/cth/bill_em/nccpb2009387/memo_0.html accessed 5 March 2016.

^[2] Consumer Credit Legislation Amendment (Enhancements) Act 2012. This legislation also dealt with reverse mortgages, consumer leases and hardship provisions.

^[3] P Ali, C McRae and I Ramsay, ‘The Politics of Payday Lending Regulation in Australia’ [2013] MonashULawRw 15; (2013) 39 Monash University Law Review 411, 418.

^[4] Treasury, Review of the small amount credit contract laws: Interim Report (Canberra, 2015).

^[5] P Ali, C McRae and I Ramsay, note 3, 412.

^[6] Financial Counselling Australia, What Financial Counsellors Say about Payday Lending, Research Report, October 2011, p1.

^[7] Ibid.

^[8] Legal Services Commission, Online Law Handbook, ‘Responsible Lending and Other Obligations of Licensed Credit Providers’, p4, accessed 10 March 2016.

^[9] Australian Securities and Investment Commission, Regulatory Guide 209 Credit licensing: Responsible lending conduct (Canberra, 2014) RG209, 19-21.

^[10] Ibid, Table 3.

^[11] Australian Securities and Investment Commission, Regulatory Guide 209 Credit licensing: Responsible lending conduct (Canberra, 2014) Table 4.

^[12] P Ali C McRae and I Ramsay, note 3, 432-3. This article gives a detailed account of the political and lobbying processes giving rise to the alterations which occurred between the Enhancements Bill as introduced and enacted.

^[13] Ibid, 435-7.

^[14] Ibid, pp 429.

^[15] Ibid, pp 411,420-1 and text and references at notes 5-7 above.

^[16] Ibid, pp 411, 439-41.

^[17] Ibid, 411.

^[18] Ibid, 411, 443-4.

^[19] [2014] FCA 926.

^[20] Ibid, [62].

^[21] Australian Securities and Investment Commission, 15-032MR ‘Federal Court orders record penalty’ 19 February 2015.

^[22] Australian Securities and Investment Commission, Report 426: Payday lenders and the new small amount lending provisions (Canberra, 2015).

^[23] Ibid.

^[24] Ibid, p17.

^[25] James Eyers, ‘Payday lending standards too low: ASIC’, Australian Financial Review, 18 March 2015, p14.

^[26] ABC News, ‘Payday lender Good2Go Loans under ASIC microscope’ 31 March 2015.

^[27] Good to Go Loans Pty Ltd v Australian Securities and Investment Commission [2015] FCA 1350, [67].

^[28] Jonathan Pearlman, ‘Life after debt with payday lending’, The Saturday Paper, 26 July 2014.

^[29] James Eyers, ‘Cash Converters to stump up $23m to settle actions’, Australian Financial Review, 19 June 2015, p18. The difference in amount represented the anticipated costs of the settlement distribution scheme referred to in the settlement approval: Gray v Cash Converters International Ltd (No, 2) [2015] FCA 1109. A further class action has been brought against Cash Converters by Queensland borrowers: Cameron Atfield, ‘Cash Converters faces $17m Queensland class action lawsuit’, The Age, 27 April 2016.

^[30] Australian Securities and Investment Commission, 16-089MR ‘Payday Lender Nimble to refund $1.5million following ASIC probe’, 23 March 2016.

^[31] P Ali, C McRae and I Ramsay, note 3, 411, 414.

^[32] www.humanservices.gov.au/customer/enablers/advance-payment-options accessed 15 March 2016.

^[33] nils.com.au, accessed 15 March 2016.

^[34] Ibid, p3.

^[35] Treasury, Review of the small amount credit contract laws: Interim Report (Canberra, 2015).

^[36] Lord Mayor’s Charitable Foundation, Time of our Lives? Building Opportunity and Capacity for the Economic and Social Participation of Older Australian Women (Melbourne, 2016) p21, 23.

^[37] Treasury, Review of the small amount credit contract laws:Final Report (Canberra, 2016).

^[38] Ibid, pp2-3.

^[39] Ibid, pp12-14.

^[40] Ibid, p21.

^[41] Ibid, p22.

^[42] Ibid, pp24, 27, 31, 37.

^[43] Ibid, pp23, 33, 35, 83, 87.

^[44] Ibid, pp28-30.

^[45] Ibid, pp75, 80, 90.

^[46] Ibid, p93.

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