26 Jun 2012

Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 – Pay Day Lenders

Mike's Speeches in Parliament Comments Off on Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 – Pay Day Lenders

Mr SYMON (Deakin) (26th June 2012 12:12): I speak in support of the Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011. Payday lending is an issue that I have spoken on several times in this place because of the great impact it has had on a fairly large number of constituents within my electorate of Deakin. It is certainly not—as we have heard from other speeches in relation to this bill—related to just one part of Melbourne or indeed one part of Australia. Payday lending extends right across the country and has become very popular with some groups of people. This bill will amend the National Consumer Credit Protection Act 2009 to implement a range of national reforms of consumer credit. The initiatives included in the bill making it easier to seek relief from credit under the grounds of hardship and provide greater protections for consumers using reverse mortgages, including a statutory protection against negative equity, and new regulation of payday lenders.

As I said just a little while ago, I would like to focus on the impact of payday lenders, because the current practices of this industry are of great concern to me. Payday lending typically involves small loans of less than $2,000 and for terms of less than two years. The payday lending industry is best known for short-term cash advances to manage people’s financial shortfalls. This legislation will introduce caps on fees and interest charged on such short-term finance. The majority of consumers accessing short-term credit are on low incomes. Some very good research has been done on this over recent years—for instance, the Caught short report, which was released in August 2011. This research was conducted by the National Australia Bank, RMIT and the University of Queensland. The report noted that 78 per cent of those using payday lenders were receiving Centrelink payments and over half had taken out at least 10 loans since first borrowing from a payday lender. The report found that borrowers largely have no access to other forms of credit, with some surveys finding that this is the situation for over 70 per cent of payday lenders. People who borrow from the payday lenders are often excluded from mainstream borrowing from the market due to a number of factors, and other speakers have spoken about this. These factors may include previous defaults, a difficulty in proving ongoing income or the fact that borrowers may be intimidated by banks and their processes. The most common uses for the funds advanced under the short-term loans are to meet day-to-day living expenses such as electricity bills, food, rent, car repairs and registration. The research found that there was minimal or negligible use of short-term loans for discretionary spending purposes.

Payday lending is a strong and growing market that has attracted many customers, but many of them are vulnerable. It is unfortunate that payday lenders are taking advantage of these vulnerable consumers and customers by charging rates that are well in excess of other mainstream lenders. As an example, Cash Converters, which is the largest payday lender in Australia, in the 2010-11 financial year provided 626,555 short-term loans amounting to almost $257 million in value. That year Cash Converters reported a record profit result of $26.7 million, a profit that had surged 27 per cent on the previous year. Its revenue for the period was up 47 per cent, with the main drivers for growth including an increase in personal loan interest of $4.2 million and establishment fees of $5 million. Cash Converters reported that the number of loan customer numbers grew 19 per cent in that year to 345,295 people. Cash Converters’ own data shows that 46 per cent of borrowers of a cash advance loan received government benefits and 75 per cent of those customers had an income of under $36,000.

An examination of the costs charged by Cash Converters in Victoria for short-term loans shows why Cash Converters’ profit has risen so rapidly. For example, charges for a short-term cash advance at Cash Converters include 35 per cent of the principal of the loan for an establishment fee. That is an incredible $35 fee for every $100 borrowed. But that is not all. Borrowers may also be charged a $16.50 default fee and other charges, such as fees for direct debit failures. The bulk of loans from Cash Converters are short-term loans, which are repayable in two or four weeks. Converting the 35 per cent charge into an annualised interest rate, the interest works out at around 400 per cent for a four-week loan. For unsecured loans of between $1,000 and $2,000, Cash Converters charge a $385 establishment fee, a $7.50-per-week account-keeping fee and a $33 default fee. For example, for borrowing $600 and paying that amount back in six months the total paid back would be $1,036. That is an incredible $436 in interest and other charges on the borrowed amount of $600 in the relatively short period of six months.

The Consumer Action Law Centre in Victoria explains that these short-term loans exploit the most vulnerable by sidestepping current regulation. They say: ‘Lenders such as Cash Converters are circumventing credit laws by charging a fee rather than interest. This avoids legislation that caps interest at 48 per cent in Victoria’—and I know that applies in some other states as well. They continue: ‘By charging fees the total interest rate paid on these short-term loans can be as high as 500 per cent, once all costs are included.’ The industry has a number of other fees that are levied on payday borrowers. They can be things like late payment fees, which can be charged per day, per week or per month if the payment is late and can be up to $75 per day, and default interest charges, where interest may continue to be charged at the same rate, or at a higher rate, once a borrower has missed a payment. In some cases these default interest rates can be as high as 47 per cent. Payday lenders can also charge a direct debit dishonour fee, which can be up to $150 per dishonour. Payday lenders can also levy loan-rescheduling fees, which may be charged when a customer is unable to meet payments as they fall due under the repayment schedule. The loan reschedule fee may occur independently of, or in addition to, default fees.

The other key concern I have about payday lending is the practice of using new loans to pay off previous loans. An individual may borrow an amount and within a short period be unable to make the next payment, due to other bills. The payday lender can then reschedule and extend a new loan, with further charges and fees. This practice can lead to the individual being tied up in debt and unable to pay off their short-term loans. An article in the Herald Sun on 19 October 2011 revealed that Cash Converters was facing proceedings in the Magistrates Court of Victoria over the case of a disability support pensioner who had received 64 short-term loans over a three-year period. Another example of consumers being caught in a debt trap through such short-term finance includes a case reported in the Australian Financial Review last year about a lender who started with a loan of $170 at Cash Converters. Three years later, and after 64 loans, the debt had ballooned out to a grand total of $15,450, including $5,407 in fees. Allowing for the fact that the money was always due in a month, the annualised interest rate on each loan was about 425 per cent.

This legislation is about bringing to a halt some of these practices and bringing fairness to payday lending. It is obvious there is a growing demand for short-term borrowing, but this industry most certainly needs better regulation. The current situation is untenable, as the customers relying on the industry are quite often vulnerable and in no position to fight these fees or do not know where to or how to shop around for a better deal. This legislation will bring urgently needed regulation to fees and charges in this industry. There will be caps on fees, including a cap on establishment fees of 20 per cent of the loan amount and a four per cent cap on monthly fees for unsecured loans of less than $2,000 and less than one year; a midtier cap of 48 per cent plus $400 for loans between $2,000 and $5,000 and a term of two years or less; and a cap on the total amount recoverable, so that even with default fees or other penalties the most a person will ever repay is double the loan amount, 200 per cent. The legislation will restrict the refinancing of payday loans or providing a new payday loan. The risk of a debt spiral is to be addressed by introducing further responsible-lending obligations. A presumption would be introduced that a refinance is unsuitable where the borrower is already in default or where it is the lender’s third loan in the last three months. The restrictions on refinancing will address the risk of debtors entering into that debt spiral, and that is something that I have explained several times in this place in previous speeches. So many people do not understand the contracts that they are signing when they walk in the door, and, although some of us may have more financial knowledge than others, in many cases it is quite simply a case of needing the money now and signing whatever piece of paper has been put in front of the person who needs the money. Certainly cases like that have come to my electorate office.

Under this legislation, payday lenders will also have to provide information about alternatives to their potential borrowers or consumers. This is a very important point. Improving disclosure about the availability of alternatives will help consumers to make better and more informed financial decisions, and with that information to have the ability to seek out lower cost alternatives to relatively higher cost short-term credit contracts. There are currently a range of alternatives to high-cost short-term loans, and this legislation will ensure that borrowers are informed of these choices. Already, alternatives to payday lenders include Centrelink loans and advances on payments, utility hardship programs and some microfinance products. A recent survey by the Consumer Action Law Centre found that 21 per cent of consumers had used a payday loan to pay utility bills, but in fact most utility providers will have hardship arrangements to help people pay off their bills over time. Surely that would be a preferable option for most people, rather than getting into debt at high rates of interest?

The federal government provides alternatives to payday lenders such as the No Interest Loans Scheme—NILS—which is designed for people on welfare benefits. The scheme offers loans of up to $1,200 to people on low incomes with healthcare or pension cards. There are no interest charges or fees on these loans. This scheme is run by Good Shepherd Microfinance in partnership with the National Australia Bank and the federal government. People who receive social security payments such as the age or disability support pension, Newstart, parenting payment or youth allowance can request Centrelink advances, where recipients can draw forward payments at no cost. Also, families that receive family tax benefit part A can request an advance on their payments from Centrelink of up to 7.5 per cent of their annual payments, capped at $1,000.

Many non-profit community groups have expressed support for greater regulation of payday lending—groups who see the impact of payday lending every day, groups such as the Uniting Church, whose spokesman, Mark Zirnsak, called on the government to close the loophole and protect consumers from high-interest schemes. He said:

These pay-day loans are the wild west of lending.

Catriona Lowe, co-Chief Executive Officer of the Consumer Action Law Centre, said:

These type of loans do not help a person who can’t meet the day-to-day cost of living.

Eleven organisations have signed a joint letter supporting this legislation, including the Consumer Action Law Centre, the St Vincent de Paul Society, Anglicare Victoria, CHOICE, the Financial and Consumer Rights Council Inc., the Good Shepherd Youth & Family Service, the Brotherhood of St Laurence, Financial Counselling Australia and EACH’s—Eastern Access Community Health—social and community section, an organisation based in my own electorate of Deakin. To quote Anglicare Victoria:

Payday lending practices are in urgent need of reform to protect low income earners and vulnerable families from becoming trapped in debt. Anglicare Victoria provides financial counselling to more than 10,000 Victorians every year and we have seen firsthand the impact excessive fees and other charges can have on people who see no other option but to use short term loans.

There is a clear case to reform the industry of payday lending. Community organisations know the impact that these excessive fees and charges are having on our community. This bill will place reasonable regulation on an industry that is making incredible profits on the back of low-income earners, low-income earners who in many cases feel that they have no other options when they need to borrow.

As I have said, I certainly hope that this gets some of the message out to people who are in that situation that there are alternatives. I think that is one of the good measures in this bill, that it provides information to be put out to people who may need that sort of finance in a hurry. I commend the bill to the House. (Time expired)

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