ASIC has released Report 426: Payday lenders and the new small amount lending provisions (REP 426) which sets out the findings of a review of the level of compliance by payday lenders with the small amount lending provisions of the Consumer Credit Legislation Amendment (Enhancements) Act 2012.
The Enhancements Act defines a ‘small amount credit contract’ as a contract that:
(a) is not a continuing credit contract and is unsecured;
(b) is not provided by an authorised deposit-taking institution (ADI);
(c) has a credit limit of $2000 or less; and
(d) has a term between 16 days and one year.
It introduced additional consumer protection provisions for small amount loans, including:
(a) the presumption that a small amount loan will be unsuitable if either:
(i) the consumer is in default under another small amount loan; or
(ii) the consumer has had two or more other small amount loans in the last 90 days;
(b) a cap on the fees and charges of the loan (an establishment fee of 20% of the amount of credit and a monthly fee of 4%);
(c) a requirement that consumers who default under a small amount loan must not be charged an amount that exceeds twice the adjusted credit amount;
(d) a prohibition on entering into a small amount loan where the consumer receives at least 50% of their gross income under the Social Security Act and the repayments under the proposed small amount loan would exceed 20% of the consumer’s gross income (protected earnings amount);
(e) a prohibition on charging an establishment fee if any of the credit is used to refinance another small amount loan;
(f) a requirement to obtain the consumer’s account statements for the 90-day period prior to the assessment, and consider this financial information when determining whether or not the proposed loan is suitable; and
(g) disclosure of a small amount loans warning statement advising consumers of alternatives to a small amount loan.
ASIC refers to the licensees who provide small amount loans as ‘payday lenders’.
The report sets out ASIC’s expectations, weaknesses in compliance and examples of good practice.
The review has already resulted in the issue of infringement notices and industry exits.
The report findings will be provided to an independent review of the small amount lending provisions which must be undertaken as soon as practicable after 1 July 2015: National Credit Act, section 335A.
Methodology
ASIC identified 13 payday lenders to take part in the review. The lenders included both large national operators and small, locally based firms and included lenders with online businesses and those who operate over the telephone or through shopfronts. ASIC estimates that the participants in the review are responsible for more than three quarters of the payday loans made to Australian consumers.
ASIC obtained and reviewed the policies and procedures of the lenders. It reviewed 288 individual files from those lenders to assess how lenders were complying with their Enhancements Act obligations, and more generally with their responsible lending and disclosure obligations.
Findings
Bank account statements: ASIC found that payday lenders generally were aware of this requirement and had implemented the necessary procedures to ensure the account statements were being collected. There were, however, varying levels of review of these statements. 26 Of the 288 files reviewed, 272 (94%) contained account statements for the full 90-day period.
Social Security recipients: The review found that payday lenders were aware of this provision. ASIC found that approximately a quarter of the 288 loans we reviewed were entered into with consumers who received more than 50% of their income from Centrelink. All of these loans had repayments that were less than 20% of the consumer’s income.While ASIC found no evidence that the protected earnings amount provision was not being complied with, it is concerned that some payday lenders do not comply with their own policies on this issue.
Cap on costs: Generally, ASIC’s review found that industry has a good understanding of the new fee structure and appears to be applying it in accordance with the legislation. Only one lender was identified as not charging the correct amount.However, ASIC has identified problematic practices where payday lenders set the loan term on credit contracts at 12 months or more (to take advantage of the medium amount loan provisions) in circumstances where the relevant file indicated that the consumer requested a shorter loan term of well under 12 months.
Warning statements: The Enhancements Act requires payday lenders to disclose a warning statement advising consumers of the alternatives to a small amount loan. As part of its review, ASIC asked the 13 payday lenders how they disclosed the warning statements to consumers in store, online and over the telephone. ASIC also reviewed the individual lenders’ websites. While the majority of payday lenders have made genuine efforts to introduce a warning statement for consumers, five of the 13 lenders had a statement that was not sufficiently prominent to attract consumers’ attention.Payday lenders operating through a website have been endeavouring to ensure that the numerous pages on their sites are updated to include the warning statement. The review identified instances where lenders with more than one entrance to their premises only displayed the warning statement on one entrance.
Unsuitability presumption: ASIC’s review found that nearly two thirds of the 288 files reviewed indicated that the payday lender had entered into a small amount loan with a consumer who appeared to trigger the presumptions of unsuitability, with 8% triggering the default presumption and 54% triggering the multiple loan presumption. To determine whether a presumption applies to a particular transaction, payday lenders must make reasonable inquiries into whether the consumer is currently, or has been within the preceding 90-day period, a debtor under any other small amount loans, and whether the consumer is in default in payment of an amount under those loans. Inquiry into a consumer’s requirements and objectives before they enter into a loan: ASIC’s review found that some payday lenders inappropriately use high-level statements, such as ‘personal’ or ‘temporary cash shortfall’, to describe the purpose of the loan. In addition, some online lenders restrict consumers to high-level pro forma responses with no ability for the consumer to provide the payday lender with more specific information about the purpose of the loan. General or high-level descriptions of the purpose of the loan and inflexible online pro forma responses are not by themselves sufficient to comply with the law.
Responsible lending: All 13 payday lenders reviewed had relevant and up-to-date policies and procedures that indicated they are aware of their responsible lending obligations and the specific Enhancements Act provisions relating to small amount lending. ASIC noted, however, that some policies contained high-level statements that replicated the credit laws and provided little guidance to indicate how in practice the lender would meet their obligations.The file reviews also indicated situations where payday lenders did not follow their own policies and procedures in all circumstances.
Record keeping: Overall, ASIC found that the record keeping by lenders in the review was inconsistent and incomplete. There were examples of lenders not maintaining copies of important documents (such as a consumer’s application form) on file, no evidence that Credit Guides had been supplied to consumers and no records to show how conflicting information on the file had been reconciled.
Clarifying conflicting information: the review identified files where information in the consumer’s account statements was inconsistent with information provided by the consumer on an application form.
Third party software: ASIC found some payday lenders used a third-party software provider that accessed the data from the consumer’s online banking account. Using third-party software providers may raise concerns for consumers relating to disclosure, privacy, security and difficulties accessing EDR schemes, given that for this service the consumer often has an agreement directly with the third-party software provider independent of the credit provider.
