Transcript Corporate Crime 2012

Payday Lending
Andrew Serpell
Payday Lending – what is it?
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‘Payday lending’ is not a legally defined concept – it refers generally to smallamount, short-term, high-cost credit provided by non-mainstream issuers.
In Australia, new laws dealing with payday lending were enacted in 2012. These
laws apply to ‘small amount credit contracts’ - contracts which have the following
features:
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the amount of the loan is $2,000 or less;
term of the loan is between 16 days and 12 months;
the loan is unsecured;
the credit provider is not an ADI (eg bank)
Payday loans are typically used to help pay for essential items, such as food, rent,
utility bills, car repairs or registration or broken-down appliances. Loans are
sometimes used to refinance another loan (rollovers).
Payday lenders typically promote their products on the basis of convenience (ie
they are perceived to provide ‘fast and easy cash’).
Shopfront and online providers
Example: Dollars Direct website
“Get what you need; when you need it!
• Borrow up to $2,025
• Perfect Credit Not Required
• Choose from Multiple Repayment Plans
• Quick and Easy Application”
Payday Loans – an example of the
high cost
• Consider a loan of $500 for a period of
one month.
• Assume the total cost of the loan is $100
(the costs may be characterised as
‘interest’, ‘fees’, ‘charges’ etc.)
• This represents an effective annualised
cost of 240%.
Typical characteristics of Consumers
of Payday Loans
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Consumers who cannot (or think they cannot) obtain finance from a ‘mainstream’
credit provider or otherwise solve their money problem in an acceptable and
timely manner. A payday loan may be perceived to be an easy solution as it
provides ‘fast cash’.
Consumers tend not to ‘shop around’ for the best deal.
Consumers are usually on low incomes (approx. 25% have incomes below the
Henderson Poverty Line; 75% have below average wages) and have little or no
savings.
50% of consumers receive social security benefits. They sometimes have other
major problems (eg disabilities).
Consumers do not always utilise alternative options which may be available (eg
Centrelink advance payments; electricity company payment plans).
Some consumers have low levels of financial literacy.
Lack of knowledge (and confidence) to pursue legal remedies.
Repeat borrowing is common (rollovers, multiple loans) – this can lead to a ‘debt
spiral’
Impact of Payday Lending on
consumers
• The payday lending industry argues that payday loans provide a valuable
service to people with an urgent need for money. But payday lending can
lead to adverse financial and social consequences.
• Payday lending can reduce the consumer’s disposable income, especially
for consumers on very low incomes or with multiple loans. This reduction
in disposable income can contribute to health problems, inadequate
housing, relationship breakdown, homelessness.
• Survey of financial counsellors - “Thinking about the majority of your
clients who had payday loans, did the payday lending help improve their
financial situation?”
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Never:
Sometimes:
Often:
Always:
269 (79%)
41 (21%)
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A very brief outline of the regulation of
Consumer Credit before the 2012 reforms
National Consumer Protection Credit Act 2009 (Cth) – from 1 July 2010.
• Licensing – credit providers and brokers
• Dispute resolution
• Responsible Lending obligations:
– credit providers and brokers must make reasonable inquiries into the consumer’s
financial position (and verify the information received) as well as the consumer’s
requirements and objectives.
– credit must not be provided if the consumer could not repay the loan without
substantial hardship or if it would not meet the consumer’s requirements or objectives.
• National Credit Code (largely the same as the former Uniform Consumer
Credit Code) – eg disclosure requirements (ss16-17); hardship variation
provisions (ss 72-75); unjust transactions (s76).
Australian Securities and Investments Commission Act 2001 (Cth) – eg
unconscionable conduct, unfair contract terms.
The 2012 reforms - Overview
• The Consumer Credit and Corporations
Legislation Amendment (Enhancements) Act 2012
(Cth) and related regulations introduced
important reforms for payday lending:
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Price Caps
Presumptions of Unsuitability
Additional Protection for Social Security Recipients
Warnings (shopfront, website and telephone)
Failed Direct Debit Requests
Banning short term, small amount loans (ie credit
contracts of $2000 or less for 15 days or less)
Price Caps
• Regulatory objectives:
– A single set of rules for all jurisdictions (to
replace the pre-existing caps which existed in
some jurisdictions)
– Limit costs for consumers
– Encourage industry to provide longer-term
credit contracts
– Allow the payday lending industry to remain
viable and meet its legal obligations
Price Caps – the Law
• For small amount credit contracts, the maximum which can be charged is
an establishment fee of 20% plus 4% per month. However, no
establishment fee can be charged on rollovers/ refinancing.
• Additional fees can be charged by the credit provider in the event of
default.
• The maximum total amount which the consumer can become liable to pay
in the event of default is twice the original loan amount. For example, if
the consumer borrows $500, the maximum default fee is $360 ($500
times two, less the permitted establishment fee ($100) less the monthly
fees ($40), less the repayment of the principal amount ($500)).
• Note that for credit contracts other than small amount credit contracts,
the maximum which can be charged is 48% per annum. (However, for
‘medium amount contracts’, an extra $400 can be charged.)
Price Caps (ctd)
• Note: the original Bill contained a cap of 2%
establishment fee plus 10% per month for small
amount credit contracts.
• The payday lending industry submitted that this
was too low for the industry to remain viable.
• Government Amendments to the original Bill
basically doubled the amount that lenders were
permitted to charge their customers!
Government Amendments also allowed providers
to charge more for medium amount credit
contracts.
Price Caps – compare other
jurisdictions
In the UK, Financial Conduct Authority (FCA) recently
announced that a price cap will be introduced – but no
details have been released yet.
In the US, price caps are set in some states - for example:
• Florida has a cap of 10% of the loan amount (eg for a $500 loan for
one month, a maximum of $50 can be charged, which represents
an effective annualise interest rate of about 120%.)
• New Mexico has a cap of $16 for every $100 (eg for a $500 loan for
one month, a maximum of $80 can be charged, which represents
an effective annualise interest rate of about 190%.)
• Oregon has a cap of 36% per annum but in addition a fee of $10
per $100 can be charged up to $30 for a new loan (eg for a $500
new loan for one month, a maximum of $45 can be charged,
representing an effective annual rate of 108%.)
Presumptions of Unsuitability
Recall that for all credit contracts, the credit provider must undertake an
assessment of the affordability and suitability of the credit product for the
consumer.
Under the 2012 reforms, a small amount credit contracts is presumed to be
unsuitable for a consumer in two situations:
– Where the consumer is in default under another small amount credit
contract (whether that contract is with the same lender or not);
– Where the consumer has been a debtor under 2 or more small
amount credit contracts in the previous 3 months (whether these
contracts are with the same lender or not).
In these circumstances, the onus of proof lies with the credit provider to
prove that the contract was suitable for the consumer.
Alternative approaches to the problem of
default, rollovers and multiple loans
• Examples of approaches in the United States:
• Florida - consumers are not permitted to have more than one loan at
any given time.
• Minnesota - rollovers are banned.
• Oregon, a maximum of 2 rollovers is permitted. In Idaho, a maximum
of 3 rollovers is permitted.
• Washington - a maximum of 8 loans in any 12 month period is
permitted.
• United Kingdom - there is a proposal to allow a maximum of 2 rollovers.
• Alternative approaches to consider:
• Should rollovers be permitted only if, say, 75% of the original loan has
been repaid?
• Should mandatory referral to financial counselling be required in
circumstances indicating extreme financial stress?
Additional Protection for Social
Security Recipients
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The following additional protection applies to persons who receive at least 50% of
their gross income as social security payments.
Under the 2012 reforms, a small amount credit contract must not be provided to
such a person unless the total repayments required under the contract (and under
any other small amount credit contract already held by the consumer) does not
exceed 20% of the consumer’s gross income.
EG: consider a consumer who receives a Newstart Allowance of $497 per fortnight
and who has no other income . They apply for a $500 loan to be repaid in eight
weeks. The total amount of fees and charges which the credit provider will charge
for the loan is $120.
If the loan was provided, the consumer would be required to repay $620 in eight
weeks, or $155 per fortnight. The required repayments for each fortnight would be
approximately 31% of the consumer’s gross income for that period. Thus, it would
be unlawful to provide that loan.
Warnings
The following is the prescribed shopfront warning – it must be displayed on the front door
or front window of any premises from which the credit provider operates:
WARNING
Do you really need a loan today?*
It can be expensive to borrow small amounts of money and borrowing may not solve
your money problems
Check your options before you borrow:
• For information about other options for managing bills and debts, ring 1800 007 007
from anywhere in Australia to talk to a free and independent financial counsellor
• Talk to your electricity, gas, phone or water provider to work out a payment plan
• If you are on government benefits, ask for an advance payment from Centrelink: 13 17
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Go to www.moneysmart.gov.au - MoneySmart shows you how small amount loans work
and suggests other options that may help you.
* This statement is an Australian Government requirement under the National Consumer
Credit Protection Act 2009.
Warnings (ctd)
• A similar warning must be contained on the
website of any small amount credit contract
provider.
• Issues to consider:
– Are typical payday loan consumers likely to take notice
of these warnings?
– Should the warning be required to include a
representative example demonstrating the cost of a
typical payday loan?
– Are the warnings sufficiently prominent? In the case
of website warnings, do they tend to be obscured by
advertising? How can this be overcome?
Failed Direct Debit Requests
• Problems with allowing direct debit to be used for payday loan
repayments:
– It may encourage irresponsible lending practices;
– If a direct debit requests fails, consumers can incur additional costs
(the lender may charge default fees and the bank may also charge
fees).
• Under the 2012 reforms, where a provider of a small amount credit
contract has twice sought unsuccessfully to obtain a repayment using a
direct debit request, the credit provider must refrain from continuing to
seek the repayment by relying on the request unless:
– the credit provider has contacted the consumer to let him or her know
that the direct debit requests have been unsuccessful; or
– the credit provider has received the repayment.
• Does this reform go far enough to protect consumers?
Enforcement and avoidance
• The rules we have discussed are of limited use if they are not
complied with or can be easily avoided.
• Some issues to consider:
- Should a database of small amount credit contracts be established?
This may assist industry to comply with the law and assist the
regulator in monitoring compliance.
- Many consumers are not aware of their rights, or confident enough to
pursue them.
- Techniques to avoid regulation. For example, the Fast Access Finance
Diamond scheme (consumer ‘buys’ $1000 worth of diamonds and
‘sells’ them back at the same time for $500. They walk away with $500
in hand, but also with an obligation to pay $1000 in a number of future
instalments. Is this consumer credit?)
- Techniques to circumvent price caps, eg insurance ‘add-ons’