A consumer advocate s views on Fringe Lending

1. A consumer advocate’s views on Fringe Lending 2007 Min-it SoftwareMicrolenders Conference Nicole Rich Director – Policy and Campaigns Consumer Action Law Centre

2. What will this presentation cover? Regulation – now and future Question for fringe lenders Current practices – how do they measure up? Can fringe lending be fair and responsible?

3. Regulation – now and futureCurrent consumer credit regulation Credit currently a State constitutional responsibility Uniform Consumer Credit Code (CCC) covers (most) consumer lending Administration slow and fragmented

4. Regulation – now and futureThe future for credit regulation? Credit regulation has to go national Won’t happen overnight, but it will happen! No current proposals, but the efficiency benefits are obvious Most financial products/services already nationally regulated - Corporations Act Ch 7 - FSR regime Content-wise, various changes are on the cards, including around reckless lending concerns Notes: Reckless lending includes a variety of concerns, not just small-amount, short-term lending such as your businesses. Eg, includes unsolicited credit card limit increase offers; asset-based lending. Notes: Reckless lending includes a variety of concerns, not just small-amount, short-term lending such as your businesses. Eg, includes unsolicited credit card limit increase offers; asset-based lending.

5. Regulation – now and futureProvision of credit is a financial service Credit/loan is a financial product Provision of consumer credit/lending is a financial service BUT not regulated as such under the FSR regime - credit is explicitly excluded Many elements of the general FSR regime could work for credit – some tweaking required, but it is an obvious future possibility

6. Regulation – now and futureOverarching requirement – act honestly and fairly Under FSR regime, all financial service providers must be licensed Licensees must do all things necessary to ensure that their services are provided efficiently, honestly and fairly Licensees must also have a proper internal dispute resolution procedure and be a member of an ASIC-approved external dispute resolution scheme

7. Regulation – now and futureOverarching requirement – lend responsibly CCC s70 allows courts to reopen loan contracts if they are ‘unjust’ “Unjust factor” s70(2)(l) is whether the lender knew/should have known that the debtor could not repay or not without substantial hardship Intention was to make lenders lend responsibly but ongoing reckless lending concerns S70(2)(l) duty could be made upfront and more general – eg duty to lend responsibly and offer loan products appropriate to the borrower

8. The big question for fringe lenders I have been asked to speak to you about compliance with current consumer laws. To do this, today I want to ask you some questions in good faith: Would your business comply with a general duty to trade fairly / honestly? Would your business comply with a general duty to lend responsibly (including assessing capacity of the consumer to repay the loan upfront)? Notes: For us, compliance is about a culture of compliance; whereas for too many industry participants, it is about complying with the letter but not the spirit of the laws; or how to structure their business to get out of coverage (esp CCC coverage) Notes: For us, compliance is about a culture of compliance; whereas for too many industry participants, it is about complying with the letter but not the spirit of the laws; or how to structure their business to get out of coverage (esp CCC coverage)

9. Current practices – how do they measure up? Range of current lending practices in fringe lending market sector Does your business use them? See if they sound familiar. If so, would your business be complying with an obligation to act honestly and fairly or an obligation to lend responsibly?

10. Current practices – how do they measure up?Avoiding the CCC - business purpose declarations An oldie but a goodie! Some lenders require borrowers to sign a business purpose declaration - loan is not covered by the CCC Don’t worry that borrower’s sole income is social security; or that they’ve never run a business or invested and probably never will Borrower could challenge the BPD, but the onus is on them Current proposal to remove conclusive nature of BPDs, thanks to these practices

11. Current practices – how do they measure up?Avoiding the CCC – promissory notes Bill facilities are not covered by the CCC Usually a business arrangement - credit provider provides credit by accepting, drawing, discounting or endorsing a bill of exchange or promissory note WA consumer lenders started using them for small-amount consumer loans – practice is spreading Current proposal to remove exemption of bill facilities

12. Current practices – how do they measure up?Avoiding (part of) the CCC – lease, don’t loan Some lending is to enable borrower to buy a product Consumer leases are covered by the Code, but obligations are much less extensive than loans “Lease” is still a loan if there is option to purchase the item at end So some business only rent items instead – no option to purchase But do grant option to purchase “similar” item; or permission to sell item as “agent’ and retain most of price as “commission”!

13. Current practices – how do they measure up?Avoiding the CCC – no interest charged Credit only covered by the CCC if interest is charged Some lenders don’t charge any interest on their loans – what a good deal for the consumer! But how is the business making any profit… Price of the product being bought with the loan is inflated – often hugely so. Current consideration of amending CCC to cover inflated purchase prices. Business profit could also come from fees…

14. Current practices – how do they measure up?Avoiding CCC protections – fees instead of interest Some States have an interest rate cap Vic – 48% unsecured, 30% secured; NSW + ACT – 48% Qld, SA and WA – can prescribe a max APR but haven’t Almost universal practice in the small amount, short-term credit market – reduce the interest rate and charge large fees instead. Fees are clearly excessive in comparison to the “costs” they purport to cover, eg application, establishment, maintenance NSW – 48% cap now includes fees and charges because of these practices Notes: Consumers can individually argue that some fees are unconscionably high, but only some fees are covered by this protection – establishment; early termination and prepayment fees. Consumers in this market are unlikely to complain in any case, and even if they do (and win) it’s only an individual decision on their case and doesn’t apply systemically Notes: Consumers can individually argue that some fees are unconscionably high, but only some fees are covered by this protection – establishment; early termination and prepayment fees. Consumers in this market are unlikely to complain in any case, and even if they do (and win) it’s only an individual decision on their case and doesn’t apply systemically

15. Current practices – how do they measure up?Excessive fees – Consumer Action case Mr L is 65 years old. For at least 6 years, and possibly for many years before that, he has suffered from cognitive impairment. It is readily apparent to the ordinary observer. Mr L’s sole income is a disability support pension. He does not own any substantial assets. In 2006, Mr L entered into a contract for a loan of $750. The contract provided for an admin fee of $750, as well as other fees of $105.16, in addition to interest of 45.5% per annum. Notes: We have had several other similar cases. Notes: We have had several other similar cases.

16. Current practices – how do they measure up?Take security over household goods Mortgages over all property or future property are void – CCC ss40-41 Some lenders take mortgage over itemised list of borrower’s household goods No intention of seizing the goods if consumer defaults – what would they do with a bed, a fridge, a couch? But threat of doing so enough to force repayment from borrower no matter what Well-known that consumer groups want this practice banned Current proposal for CCC to prohibit taking security over essential household goods We also want proposed PPS Register to be closed to these securities Notes: Borrowers will prioritise payments over food, rent, utility bills, or borrow more to cover this debt to avoid losing all their essential households goods Notes: Borrowers will prioritise payments over food, rent, utility bills, or borrow more to cover this debt to avoid losing all their essential households goods

17. Current practices – how do they measure up?Increase client base CCC prohibits door to door hawking of credit Waltons did this decades ago – sold high cost credit door to door to pensioners Good reason to prohibit – recognises the high-pressure tactics used Except not prohibited if ‘by prior arrangement by the credit provider with a person who resides there’ Recent letter-boxing of households by one provider – then makes an “arrangement” to visit in the home Notes: or visit at a drug and alcohol rehabilitation centre in one case we are aware of I have seen leaflets letterboxed in my own neighbourhood Notes: or visit at a drug and alcohol rehabilitation centre in one case we are aware of I have seen leaflets letterboxed in my own neighbourhood

18. Current practices – how do they measure up?Summary BPDs Promissory notes Leases Inflated prices and/or Excessive fees Blackmail securities Letter-boxing with follow-up home visits Are any of these consistent with acting honestly and fairly? Lending responsibly? If they were, why would each be subject to so much scrutiny and/or real proposals to amend laws to stop them?

19. Can fringe lending be fair and responsible? Before asked: Would your business comply? Another question: Could your business comply? Fringe lending deliberately positioned to lend to the low-income/disadvantaged sector of the community High risk = high cost Notes: We know many payday loan customers know they are getting exploited – but they are desperate. If they had other options, they would take them Notes: We know many payday loan customers know they are getting exploited – but they are desperate. If they had other options, they would take them

20. Can fringe lending be fair and responsible? Simply servicing a demand? Payday lending research: 79% used to compensate for income shortfalls, eg rent, bills Payday lending research: 65% are repeat customers, 37% continuous and 15% in a back to back loan cycle Loans are not to supplement lifestyle, but to cover financial difficulties Notes: Payday Lending in Victoria report 65% of customers had taken out more than 1 payday loan. Ave no of repeat loans taken out by consumers is 6 over 12 months. Many use them continuously: 37% of consumers had 5 or more loans within the previous 12 months, and within this group a sub-group of consumers in a cycle of back-to-back loans - 15% of consumers had taken out 10 or more loans in the previous 12 months. 79% of loans are used to maintain existing living standards and compensate for shortfalls in income: 32% to cover bills; further 26% to cover day-to-day living expenses, 10% to pay for car repairs or registration; 7% to pay their rent or mortgage; 4% to repay existing debts. ‘…very few consumers are using this form of short-term credit for a ‘lifestyle’ purpose. Payday loans are used to buffer shocks to income created by large bills and in many cases simply to meet regular household expenses.’ pg 67 Notes: Payday Lending in Victoria report 65% of customers had taken out more than 1 payday loan. Ave no of repeat loans taken out by consumers is 6 over 12 months. Many use them continuously: 37% of consumers had 5 or more loans within the previous 12 months, and within this group a sub-group of consumers in a cycle of back-to-back loans - 15% of consumers had taken out 10 or more loans in the previous 12 months. 79% of loans are used to maintain existing living standards and compensate for shortfalls in income: 32% to cover bills; further 26% to cover day-to-day living expenses, 10% to pay for car repairs or registration; 7% to pay their rent or mortgage; 4% to repay existing debts. ‘…very few consumers are using this form of short-term credit for a ‘lifestyle’ purpose. Payday loans are used to buffer shocks to income created by large bills and in many cases simply to meet regular household expenses.’ pg 67

21. Can fringe lending be fair and responsible? Other ways to deal with this “demand” Lenders also creating more demand through advertising, letter-boxing etc The bottom line: small-amount, short-term credit caters to the poor Question for rest of conference: can fringe lending be efficient, honest and fair and lend responsibly in this context? Notes: Other ways to deal with these problems include low cost housing; better financial hardship programs offered by utilities so that not forced to borrow at high cost to pay bills; affordable finance initiatives Notes: Other ways to deal with these problems include low cost housing; better financial hardship programs offered by utilities so that not forced to borrow at high cost to pay bills; affordable finance initiatives

22. www.consumeraction.org.au