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Over the last 10 years, I have seen the consumer lending industry change significantly.
ASIC’s report, Payday lenders and the new small amount lending provisions, continued to define these changes in the small loans segment – the concept of a payday loan is no longer one that is paid back in full the next payday, but one that includes loans up to $2,000, with repayment terms up to one year – a small-amount credit contract (SACC).
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The purpose of ASIC’s report was to review the small loans industry and reinforce adherence to the small-amount lending provisions included in the 2013 Enhancements Act. These lending provisions were introduced to increase consumer protection, implement a more national approach and help further regulate this rapidly growing industry. The provisions included capping fees and charges (overcharging), debt spiral prevention, protection for low-income consumers and “presumptions of unsuitability” to determine when a small-amount loan should be deemed unsuitable.
To complete the report, ASIC chose a sample of 288 small-amount loans under $2,000 that were taken over a term of less than one year. ASIC selected 13 lenders from 1,208 licence holders, who provided the 288 loan files funded during August 2013. ASIC estimated that the 13 chosen lenders were responsible for funding more than three quarters of all SACC loans provided at that time.
The findings, released in March 2015, have been well documented, and were damming for some lenders and certain practices that were reported. In particular, ASIC was focused on Australia’s most vulnerable consumers, who understandably, warrant the highest protection. So what specific findings from this report do I think will resonate with lenders and brokers? Here are my top four:
1. Ensuring lending practices are in line with ASIC’s expectations
This report has clearly highlighted not only the need to have diligent lending practices in place, but they must be strictly adhered to and must be in accordance with ASIC’s expectations.
2. Servicing vulnerable consumers
Both lenders and brokers are charged with responsible lending obligations. These, in addition to abiding by consumer protection laws and specific lending guidelines, are non-negotiable foundations. Red flags such as arrears, many SACC loans in the past three months, and defaults demand further discussion and clear documentation, as do any comments that set off alarm bells, such as anticipated income instability or disclosure of circumstances that could cause future undue hardship.
3. Loan documentation and record-keeping
The implications of not accurately maintaining records and loan documents are two-fold. Firstly, the credit licence that authorises your business operations could be breached. If not undertaken, ASIC can enforce licence suspension, cancellation or banning. Secondly, the consumer has potential grounds to take action to recover money.
4. Compliance
A key message from this report was that compliance, in respect to the new laws recently introduced, needed immediate improvement. As Peter Kell, ASIC’s deputy chairman stated, the report is now a “guide for the industry”, in essence “where to lift standards to comply”. For the payday lending industry, federal laws are up for review again in mid-2015, so those lenders not prepared to adapt and duly comply will have no choice but to leave the industry voluntarily or be stripped of their licence.
Overall, this report – similar to previous ones – continues to provide clarity around ASIC’s expectations and reinforces necessary improvements that will enable ongoing industry growth and consumer protection. I look forward to seeing this industry continue to strive professionally.
