Fintech lender changes ‘unfair’ loan terms

Prospa was scheduled to start trading on the Australian Securities Exchange (ASX) at midday on Wednesday (6 June), with a market capitalisation of $576 million after raising $146.5 million through its initial public offering.

However, minutes before listing, the lender revealed in a disclosure to the ASX that there would be a 48-hour delay so that it could “clarify queries raised by ASIC [on Tuesday] in relation to Prospa’s small business loan terms”.

The listing was then delayed further as the lender sought to answer ASIC’s questions that formed part of an industry-wide review into lenders’ small business loan contracts to reduce the risk of unfair contract terms.

ASIC has now announced that, following its review, Prospa Advance Pty Limited (Prospa) has changed the loan terms in its standard form small business loan contract to “address terms being unfair under the unfair contract terms provisions of the ASIC Act”.

The changes, which include addressing “problematic terms” outlined in ASIC Report 565: Unfair contract terms and small business loans, and changes to other terms which “could have operated unfairly for borrowers and guarantors”, are expected to result “in improved terms for borrowers and guarantors”.

It is believed that Prospa is the first online small business lender to have undertaken a full review of its loan terms after consultation with ASIC.

Prospa loan changes

The details of the changes to Prospa’s standard form small business loan contract include:

• Amending the early repayment clause so that borrowers can prepay their loan early without requiring Prospa’s consent.
• Removing Prospa’s absolute discretion whether to provide a discount for prepayment to instead apply a published Early Prepayment Policy so borrowers can determine the discounts they can expect to receive if they do pay back their loan early.
• Amending the “unilateral variation” clause to “significantly limit” Prospa’s ability to unilaterally vary contracts to specific instances. Prospa has also extended the notice period to 60 days where Prospa intends to vary fees.
• Amending clauses defining events of default to add remediation periods and materiality thresholds and to permit changes to control of the borrower with the lender’s consent (not to be unreasonably withheld).
• Removing a broad “cross-default” clause which “allowed Prospa to call a default under the loan contract due to any default under another finance document related to the loan” (for example, guarantee or security document).
• Removing an “entire agreement” clause which absolved Prospa from contractual responsibility for conduct, statements or representations made to borrowers about the loan contract.

Other changes include:

• Limiting the class of people who can provide guarantees under the loan contract to people who are actively involved in the management of a borrower’s business — for example, if the borrower is a company, people who are directors or shareholders of the borrower; and if a shareholder of the borrower company is a company, directors or shareholders of that company.
• Inserting a “five business days’ notice” provision to guarantors about borrowers who are 30 calendar days behind their agreed repayment schedule and the commencement of legal proceedings against a borrower or the appointment of a receiver.
• Limiting the guarantor’s liability so that the guarantor is not liable for any increase in the amount of the loan principal and interest agreed at the start of the loan (but the guarantor is liable for fees and reasonable enforcement costs).
• Inserting a provision to obtain consent of the guarantor where there is a discharge or release of any security held by Prospa given by the borrower or a guarantor, and where there are multiple guarantors, before releasing a guarantor.
• Limiting the actions of lender-appointed attorneys where there is an event of default under the loan contract so that an appointed attorney “cannot act in a way that prefers the interests of the attorney over the interests of the borrower or guarantor”.
• Restricting the borrower’s indemnity to ensure that the borrower is required to indemnify only Prospa, its employees and agents (and not third parties that are not parties to the contract such as receivers or contractors) and that the borrower is not required to indemnify Prospa for losses or costs incurred due to the fraud, negligence or wilful misconduct of Prospa, its employees, officers, agents, contractors or receivers appointed by Prospa.

“We believe these changes are industry-leading”

ASIC continued: “Prospa charges a factor rate for interest on its fixed term loans. The amount of interest, which can be considerably higher than bank loans, is fixed and disclosed at the outset and does not vary even if the loan term is extended. The amount of interest is therefore part of the ‘upfront price’ of the loan and is excluded from review under the unfair contract term provisions.

“Late payment fees for missed payments are, however, subject to review under the unfair contract term provisions.

“ASIC will be undertaking further monitoring of Prospa’s charging of late payment fees to assess whether the manner in which the fees are being charged is unfair in practice.”

Its statement continued: “Prospa has agreed that all customers who entered into or renewed contracts from 12 November 2016 will have the benefit of the changes agreed with ASIC.”

Following the ASIC release, the SME lender said that the amendments agreed with ASIC do not have any material impact on the company financially or operationally, with Prospa COO Ben Lamb stating: “We’re always looking for ways to improve finance outcomes for small business owners. As the first non-bank lender to complete its review, we believe these changes are industry-leading.

“We specialise in lending to small businesses and we know any changes we can make to ensure access to finance is simple and easy to understand are going to help our customers save precious time so they can focus on growing their businesses.”

Prospa’s general counsel, Nicole Johnschwager, added: “These changes have been made as part of Prospa’s commitment to helping lift transparency across the industry.

“Prospa looks forward to continuing to improve financial inclusion for small business owners. This is an evolving area of regulation and we will work with industry peers and stakeholders to support this important and growing industry.”

The fintech highlighted that it was a founding signatory of the Online Small Business Lenders Code of Practice that aims help make SME loans more transparent and easy to understand, and called on other small business lenders to “engage with ASIC and complete their own reviews and to subscribe to the Code of Lending Practice if they haven’t already”.

Prospa will reportedly be communicating its changes to its small business customers, with the amended contract coming into effect in early October.

ASIC’s surveillance of small business loan contracts is ongoing, and the regulator has said that it will consider regulatory action where appropriate.

[Related: ACCC doubts effectiveness of unfair contract rules]