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Caps on Payday Loans

People on low incomes and in considerable debt can find it difficult to meet their mortgage, weekly bills and recurring expenses and, if an unexpected emergency arises, may resort to a ‘fringe’ lender offering a short term loan to see them through. The loans are often for small amounts at high cost and for relatively short periods – often until the next payday; hence the term ‘payday loan’. It is not unusual for the interest on a short term loan to be anything from 250% to over 1300%, if calculated on an annualised basis. More often than not, there is difficulty in repaying the loan so it is ‘rolled over’ for a further period with a further charge attached and the borrower falls into greater financial distress.

Currently in Queensland, as in other states and territories, the Uniform Consumer Credit Code regulates the provision of consumer credit, including payday loans, and provides some protection for borrowers. However, some payday lenders have continued to engage in practices that cause their customers added financial hardship. Thus, the Queensland Government is considering, firstly – as part of a national approach by the Ministerial Council on Consumer Affairs – changes to the Code to provide better protection for consumers. Secondly, and providing the focus for this Research Brief, the Government is proposing to introduce a ceiling (or cap) on the amount of interest, fees and charges that can be imposed on a short term or payday loan. An exposure draft of the Consumer Credit (Queensland) Amendment Bill 2008 (Qld) and Consumer Credit (Queensland) Special Provisions Regulation 2008 (Qld), released for public comment in November 2007, seeks to implement a ceiling of 48%, inclusive of all interest, fees and charges.

Nicolee Dixon

Research Brief No 2008/04

Queensland Parliamentary Library General Distribution Research Team

Research and Information Service Ms Karen Sampford, Team Leader (07) 3406 7116 Mrs Nicolee Dixon, Senior Parliamentary Research Officer (07) 3406 7409 Ms Renee Gastaldon, Parliamentary Research Officer (07) 3406 7241 Ms Mary Westcott, Parliamentary Research Officer (07) 3406 7372 Mrs Xanthe Paltridge, Parliamentary Research Officer (07) 3406 7468

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ISSN 1443-7902 ISBN 978-1-921056-61-1 FEBRUARY 2008

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CONTENTS

EXECUTIVE SUMMARY .......................................................................................

1 INTRODUCTION.............................................................................................1

2 FINANCIAL TREND OBSERVATIONS.......................................................2

2.1 ‘POCKETS OF DIFFICULTY’ ............................................................................4

3 PAYDAY LENDING ........................................................................................5

3.1 PROFILE OF PAYDAY LOAN BORROWERS ......................................................6

3.2 REASONS FOR GROWTH IN PAYDAY LENDING ...............................................7

3.3 HOW ARE PAYDAY LOANS USED?.................................................................8

3.4 TYPICAL PAYDAY LOAN CONDITIONS AND CHARGES ...................................9

4 NON-COMMERCIAL LENDING – NILS AND LILS...............................11

5 CONCERNS ABOUT PAYDAY LOANS.....................................................12

5.1 HIGH INTEREST, FEES AND CHARGES ..........................................................14

5.2 OTHER LENDING PRACTICES CAUSING CONCERN........................................15

5.3 SOME THINGS CONSUMERS LIKE ABOUT PAYDAY LENDERS.......................17

5.4 CAUTIONS ABOUT RESPONSE ......................................................................18

6 THE UNIFORM CONSUMER CREDIT CODE.........................................18

7 INTEREST RATE CAPS ...............................................................................23

7.1 ARGUMENTS FOR AND AGAINST CAPS ........................................................24

7.2 INTEREST RATE CAPS IN OTHER JURISDICTIONS..........................................26

7.2.1 New South Wales.................................................................................27

7.2.2 Australian Capital Territory.................................................................28

7.2.3 Victoria ................................................................................................29

7.2.4 South Australia ....................................................................................32

7.2.5 Western Australia ................................................................................33

7.2.6 Tasmania.............................................................................................. 34

7.2.7 Northern Territory ............................................................................... 34

7.2.8 Overseas............................................................................................... 34

8 CURRENT QUEENSLAND SITUATION................................................... 36

8.1 INDEPENDENT WORKING PARTY ON PAYDAY LENDING .............................. 36

8.2 ‘MANAGING THE COST OF CONSUMER CREDIT IN QUEENSLAND’ DISCUSSION PAPER.....................................................................................37

8.3 THE DRAFT CONSUMER CREDIT (QUEENSLAND) AMENDMENT BILL 2008 .40

8.4 OVERVIEW OF THE DRAFT BILL AND PROPOSED REGULATION.................... 41

9 MINISTERIAL COUNCIL ON CONSUMER AFFAIRS PROPOSED LAWS ...............................................................................................................42

10 NON-REGULATORY OPTIONS TO ASSIST LOW INCOME CONSUMERS..................................................................................................44

10.1 NO INTEREST LOAN SCHEMES (NILS) AND LOW INTEREST LOAN SCHEMES (LILS) ....................................................................................44

10.2 RECENT MICROFINANCE INITIATIVES ...................................................... 46

10.3 OPTIONS................................................................................................... 48

RECENT QPL RESEARCH PUBLICATIONS 2008........................................ 51

Caps on Payday Loans

EXECUTIVE SUMMARY

People on low incomes and in considerable debt can find it difficult to meet their mortgage, weekly bills and recurring expenses and, if an unexpected emergency arises, may resort to a ‘fringe’ lender offering a short term loan to see them through. The loans are often for small amounts, at high cost, and for relatively short periods – often until the next payday. Hence the term ‘payday loan’. The payday loan customer is generally one who has been excluded from the mainstream banks and has few options but to take out a high interest loan with prohibitive fees and charges. It is not unusual for the interest on a short term loan to be anything from 250% to over 1300%, if calculated on an annualised basis. The Queensland Government is considering, firstly – as part of a national approach by the Ministerial Council on Consumer Affairs – changes to the Code to provide better protection for consumers. Secondly, and providing the focus for this Research Brief, the Government is proposing to introduce a ceiling (or cap) on the amount of interest, fees and charges that can be imposed on a short term or payday loan. This Research Brief begins with a short consideration of financial trends in the Australian economy, the increase in household debt, and the difficulties being faced by some households: pages 1-5. The discussion on pages 5-9 examines the profile of the ‘typical’ payday loan borrower and the various socio-economic factors that have contributed to the growth of the payday lending market in Australia. The way in which payday loans are often used and the sorts of charges and conditions attached to such loans are then examined: pages 9-11. The various concerns about payday loans are discussed in some detail on pages 12-17, particularly the high cost of such loans and certain dubious practices engaged in by some lenders. The lenders’ perspective regarding the costs attached to payday loans is also considered as well as aspects of this form of lending that consumers appreciate: pages 17-18. Next, the Research Brief provides an overview of how the Uniform Consumer Credit Code currently regulates short term loans, and the various shortcomings that have been identified in the burgeoning payday lending market: pages 18-23. One perceived limitation is that it does little to control the cost of credit although the legislation in each state and territory allows ceilings or ‘caps’ on the annual percentage interest rate to be prescribed by Regulation. The arguments for and against interest rate caps are set out on pages 23-26. As will be discussed, New South Wales, the Australian Capital Territory and Victoria have imposed a ceiling or cap on the cost of payday loans at 48% per annum. In NSW and the ACT, the cap applies to all fees and charges not just the interest rate charge. In Victoria, it applies only to the interest component of the loan. In South Australia, there is a proposal to shortly introduce legislation following the NSW and ACT approach. Western Australia, Tasmania and the Northern Territory are like Queensland in not having imposed a cap: pages 26-36.

Page 2 Queensland Parliamentary Library

Following the release of the ‘Managing the Cost of Consumer Credit in Queensland’ Discussion Paper in 2006, the Queensland Government has decided to introduce a 48% cap on the amount of interest, fees and charges that can be included in a payday loan: pages 37-40. The exposure draft of the Consumer Credit (Queensland) Amendment Bill 2008 (Qld) and Consumer Credit (Queensland) Special Provisions Regulation 2008 (Qld), released for public comment in November 2007, adopts the NSW and ACT approach: pages 40-42. The Research Brief then briefly discusses the nationwide reforms proposed by the Minister Council on Consumer Affairs to be made to the Uniform Credit Code to improve consumer protection generally in the fringe lending market: pages 42-43. Finally, the possibilities arising out of microfinancing initiatives, such as no interest loan schemes and low interest loan schemes, to assist low income and disadvantaged consumers are outlined: pages 44-49.

Caps on Payday Loans Page 1

1 INTRODUCTION

While the Australian economy has been growing in recent years, there are households throughout the country that have fallen upon hard times due to ill health, job loss or for any of a number of other reasons. Those on low incomes and in considerable debt can find it difficult to meet their mortgage, weekly bills and recurring expenses and, if an unexpected emergency arises, may resort to a ‘fringe’ lender offering short term loan to see them through. The loans are often for small amounts, at high cost, and for relatively short periods – often until the next payday; hence the term ‘payday loan’. The payday loan customer is generally one who has been excluded from the mainstream banks and has few options but to take out a high interest loan with prohibitive fees and charges. It is not unusual for the interest on a short term loan to be anything from 250% to over 1300%, if calculated on an annualised basis.1 More often than not, there is difficulty in repaying the loan so it is ‘rolled over’ for a further period with a further charge attached and the borrower falls into greater financial distress.

Currently in Queensland, as in other states and territories, the Uniform Consumer Credit Code regulates the provision of consumer credit, including payday loans, offering some protection for borrowers through imposing various disclosure and other obligations on lenders and enabling consumer redress in certain circumstances. However, some payday lenders have continued to engage in practices that cause their customers added financial hardship. Thus, the Queensland Government is considering, firstly – as part of a national approach by the Ministerial Council on Consumer Affairs – changes to the Code to provide better protection for consumers. Secondly, and providing the focus for this Research Brief, the Government is proposing to introduce a ceiling (or cap) on the amount of interest, fees and charges that can be imposed on a short term or payday loan. An exposure draft of the Consumer Credit (Queensland) Amendment Bill 2008 (Qld) and Consumer Credit (Queensland) Special Provisions Regulation 2008 (Qld), released for public comment in November 2007, seeks to implement a ceiling of 48%, inclusive of all interest, fees and charges.

This Research Brief explores the growth in payday lending operations in Australia, the reasons for their rapid expansion, and the profile of consumers attracted to payday loans. The Brief then turns to the various problems and concerns that have emerged regarding this loan product and possible solutions. In particular, some jurisdictions, such as New South Wales, Victoria and the Australian Capital Territory, have introduced ceilings on the cost of payday loans. The implications

1 Queensland Government, Department of Justice and Attorney-General, Office of Fair Trading

(Queensland OFT), ‘Payday lenders’, http://www.fairtrading.qld.gov.au.

http://www.fairtrading.qld.gov.au/


of this measure are discussed before considering the proposals by the Queensland Government to introduce an interest rate cap.

2 FINANCIAL TREND OBSERVATIONS

Until very recently, Australia’s economic outlook has been optimistic with expectations of continued growth in gross domestic product (GDP), despite the effects of the drought.2 GDP grew by 1% from June to September 2007 (seasonally adjusted) and real net national disposable income grew by 1% (seasonally adjusted) in the same period.3

However, there are some global issues, particularly the uncertain state of the international credit market sparked by the sub-prime mortgage crisis in the United States, which may have an impact on the Australian economy, particularly on lending interest rates and inflation. Signs of this have been shown in recent moves by the major banks to raise mortgage interest rates independently of the official Reserve Bank of Australia (RBA) increases.4

In early January 2008, a report by the United Nations warned that there was a danger of the world economy coming to a ‘standstill’ because of the US housing and credit problems, a weaker US dollar, large global imbalances, and high oil prices. The Report considered that the US economic problems could trigger a worldwide recession. A recession in the US could cut back export growth from China, Japan and Europe, reducing demand for exports from developing countries.5

In Australia, there has been a strong growth in retail spending (with a 0.8% increase on a seasonally adjusted basis from October to November 2007)6 and job

2 Pre-Election Economic and Fiscal Outlook 2007, A Report by the Secretary to the Treasury

and the Secretary to the Department of Finance and Administration, October 2007, http://www.treasury.gov.au/documents/1321/PDF/PEFO_2007_Final.pdf.

3 Australian Bureau of Statistics (ABS), Australian National Accounts: National Income, Expenditure and Product, September 2007, Cat 5206.0, December 2007.

4 Sandra O’Malley, ‘Christmas shoppers tug at rates cracker’, Courier Mail, 10 January 2008, p 7.

5 United Nations, Department of Economic and Social Affairs, World Economic Situation and Prospects 2008, Executive Summary, pp 1-3, http://www.un.org/esa/policy/wess/wesp2008files/es_eng.pdf.

6 ABS, Retail Trade, Australia, November 2007, Cat 8501.0, 9 January 2008.

http://www.treasury.gov.au/documents/1321/PDF/PEFO_2007_Final.pdf

http://www.un.org/esa/policy/wess/wesp2008files/es_eng.pdf


vacancies (growing by 4.2% from August to November 2007 to 181,000),7 which are likely to put further pressure on wages and on the RBA to raise interest rates.

As in many other countries, Australian household credit has been rising faster than GDP over the past three decades.8 Deregulation and financial innovation have improved households’ access to credit, particularly since the 1990s when non-bank lenders entered the financial market and new loan products began to be offered. At the same time, the economy has continued to grow strongly and inflation has fallen, possibly meaning that households have been less reluctant to assume debt.9 Australian Bureau of Statistics (ABS) data indicates that between 1991-1992 and 2005-2006, net national disposal income per capita has increased each year in real terms at the average annual rate of 3%.10 In real terms, household final consumption expenditure per capita rose by 152% between 1960-1961 and 2005-2006, suggesting a higher standard of living today than in the early 1960s.11 RBA figures indicate that, as of September 2007, the household debt to disposable income ratio was around 160%.12

Some economic commentators claim that the rise in household debt – especially to buy homes – has been driven by households in higher income groups with the greatest capacity to service the debt.13 In September 2007, the RBA reported that while the share of households having difficulty in meeting their debts has

7 ABS, Job Vacancies, Australia, November 2007, Cat 6354.0, 9 January 2008.

8 R Battellino, Deputy-Governor to Finsia-Melbourne Centre for Financial Studies, ‘Some Observations on Financial Trends’, Address to 12th Banking and Finance Conference, Reserve Bank of Australia Bulletin, October 2007, pp 14-21, p 14.

9 R Battellino, p 17.

10 Australian Bureau of Statistics (ABS), ‘Purchasing power’, Australian Social Trends 2007, Cat 4102.0, p 1. Real net disposable income is the capacity of the community to buy goods and services and save and invest. The ABS considers that our expanded capacity to spend is a result of Australia’s improved terms of trade with other countries (strong prices for exports, especially mineral exports) and the rising value of the Australian dollar; strong productivity growth; and increasing levels of employment (pp 2-3).

11 ABS, ‘Trends in household consumption’, Australian Social Trends 2007, Cat 4102.0, p 1.

12 RBA, Household Finances B21 – Selected Ratios, http://www.rba.gov.au/Statistics/Bulletin/B21hist.xls.

13 R Battellino, p 20. See also, Dr Shane Oliver, Head of Investment Strategy and Chief Economist, AMP Capital Investors, ‘Interest rates – the Australian economy and the latest share wobble’, Oliver’s Insights, Edition #37, 7 November 2007.

http://www.rba.gov.au/Statistics/Bulletin/B21hist.xls


increased, that proportion is still relatively low.14 Borrowing for housing has accounted for the bulk of such household debt, increasing by 13% over the year to July 2007.15 The RBA noted a modest rise in arrears rates in banks’ personal loans and on credit card loans but said that the non-performing rate for personal loans was relatively low by international standards at just under 1% in June 2007.16

2.1 ‘POCKETS OF DIFFICULTY’

Not all households have experienced improved levels of wealth and income as a result of the Australia’s good economic performance in recent years. The RBA observed that, despite the reasonably benign picture at the aggregate level, there are pockets of difficulty, especially in New South Wales. Provisional data indicates that total personal insolvency in Australia has risen by 3% (to 7,787) in the December 2007 quarter, compared with the same period in 2006-2007.17

ABS figures indicate that in 2003-2004, over 1 million households (14%) were in the lowest three deciles of income and wealth (known as low economic resources households).18 The proportion was considerably higher among lone parent households with dependent children (44%). It was also found that 78% of low economic resources households had government benefits as their main source of income.19

The ABS has found that differences between income and expenditure tend to indicate a household’s financial sustainability and the likelihood of its facing financial stress. In 2003-2004, low economic resources households spent almost $50 per week more on average for goods and services than they earned through regular income.20 Some indicators of financial stress used by the ABS include

14 Reserve Bank of Australia (RBA), ‘Household and Business Balance Sheets, Financial

Stability Review, September 2007, p 37. In Queensland, there were 1,765 insolvencies in the December 2007 quarter, a decrease of 2.38% on the same period the previous year.

15 RBA, Financial Stability Review, p 39.

16 RBA, Financial Stability Review, p 44.

17 Commonwealth Government, Insolvency and Trustee Service Australia, Office of the Chief Executive and Inspector-General, Provisional Bankruptcy Statistics, 10 January 2008.

18 ABS, ‘Low income low wealth households’, Australian Social Trends 2007, Cat 4102.0, p 1.

19 ABS, ‘Low income low wealth households’, p 3.

20 ABS, ‘Low income low wealth households’, pp 5-6.


inability to save; spending more than one receives in income; and inability to pay bills on time. Other reported indicators include having to pawn or sell items or seeking assistance from welfare or community organisations. In 2003-2004, half of all households in the low economic resources group reported that they were unable to raise $2,000 in one week for an important emergency, compared with 9% of other households.21

Individuals falling into the socio-economic group just described are the very people to whom short term credit may appeal when times get tough. A possible scenario is that of a family with a sole breadwinner in a low paid job or in casual employment but between jobs. The car needs urgent and costly repairs, a child needs vital medical care, the electricity bill is larger than anticipated, or expensive schoolbooks have to be bought. The person may be shut out from the mainstream credit market for many reasons, as will be explained later, and a short term loan from a ‘fringe’ lender may seem the only option.

3 PAYDAY LENDING

In the consumer credit industry, there is generally a distinction made between ‘mainstream’ and ‘fringe’ lenders with the former including bodies such as banks and building societies which are subject to considerable regulation, including prudential oversight by the Australian Prudential Regulation Authority. The ‘fringe’ lending market comprises other businesses that may be smaller and not as conscious of profile or reputation.22 Short term lenders of small amounts of money at high cost – often known as ‘payday lenders’ – tend to belong to the fringe lending market.23

‘Payday lending’ is a type of commercial lending involving the advancement of a small amount of money for a short period – often until the debtor’s next payday – for a fee. While described as a ‘fee’, the ‘fee’ generally takes the form of high rates of interest that vary according to the period of the loan. While the costs of payday loans can be higher and the terms more onerous than products offered by

21 ABS, ‘Low income low wealth households’, p 5.

22 N Howell, Centre for Credit and Consumer Law, Griffith University Law School, ‘High Cost Loans: A Case for Setting Maximum Rates?’, Background Paper, August 2005, p 2.

23 Queensland Office of Fair Trading (Queensland OFT), ‘Managing the cost of consumer credit in Queensland’, Discussion Paper, November 2006 (2006 Discussion Paper), p 11, http://www.fairtrading.qld.gov.au/OFT/oftweb.nsf/AllDocs/E3B0BF78553C677C4A25721B000C96CB/$File/0467-Consumer%20Credit%20QLD%20Discussion%20Paper.pdf. At this time the Queensland OFT was part of the Department of Tourism, Fair Trading and Wine Industry Development but it is now part of the Department of Justice and Attorney-General.

http://www.fairtrading.qld.gov.au/OFT/oftweb.nsf/AllDocs/E3B0BF78553C677C4A25721B000C96CB/$File/0467-Consumer%20Credit%20QLD%20Discussion%20Paper.pdf



the mainstream lenders, these loans can also be more flexible and more quickly obtained.24 Common features of payday loans are that they are available for many purposes such as to meet emergency household expenses, medical costs, or bills; they are short term, ranging from one week to six months; they may be targeted towards low income, higher risk consumers; the loan is for a fixed fee; and a common method of repayment is via a direct debit facility.25

Examples of businesses involved in payday lending include Cash Converters, AMX Money, Money3, and Aussie Payday Loans and there has also been a growth in online payday lending websites. Payday lending operations have expanded in most Australian states and territories during this decade. In the United States, the number of outlets has grown from around none in the mid-1990s to over 20,000 in 2007 so that, in that country, payday lenders are said to outnumber McDonald’s restaurants.26

3.1 PROFILE OF PAYDAY LOAN BORROWERS

A July 2002 study of payday lending in Victoria commissioned by the Consumer Law Centre Victoria (the CLCV Report) looked at who uses payday lenders in Victoria and the reasons for doing so. It was found that: • both men and women use payday lenders and tend to be aged in their late 20s

or early 30s;27 • the average wage of a payday loan borrower was (at the time of the study in

2002) around $24,500 with many earning under $401 a week. 38% of borrowers were receiving Centrelink benefits;28

• many borrowers were in rented premises, particularly in public housing;29

24 Queensland OFT, 2006 Discussion Paper, p 11; N Howell, p 2.

25 Victoria, Department of Consumer Affairs, Report of the Consumer Credit Review, March 2006, (Victorian Review Report), p 91, http://www.consumer.vic.gov.au/CA256902000FE154/Lookup/CAV_Credit_Review_Documents/$file/credit_review_complete.pdf.

26 DP Morgan & MR Strain, ‘Payday Holiday: How Households Fare after Payday Credit Bans’, Federal Reserve Bank of New York Staff Report No 309, November 2007, p 8.

27 D Wilson, Consumer Law Centre Victoria Ltd, Payday Lending in Victoria – A Research Report (CLCV Report), July 2002, p 9.

28 CLCV Report, p 54-57.

29 CLCV Report, p 9.

http://www.consumer.vic.gov.au/CA256902000FE154/Lookup/CAV_Credit_Review_Documents/$file/credit_review_complete.pdf



• single, separated and divorced women with dependent children were a significant subgroup of payday loan borrowers and female sole parents represented 25% of all borrowers in Victoria;30 and

• payday loan borrowers tended to have lower levels of education, with 25% having left school in Grade 10.31

3.2 REASONS FOR GROWTH IN PAYDAY LENDING

The CLCV Report examined the various socio-economic reasons contributing to the burgeoning payday lending market in Australia – reflecting similar factors found to exist in the United Kingdom and North America. Those suggested by the CLCV Report and by other research are: • deregulation of the banking sector since the 1980s which has resulted in

mainstream lenders tending to cater to wealthy customers and discouraging low income consumers by imposing high account keeping fees and withdrawing products, such as personal loans under $1,000, suited to such customers.32 Low income borrowers often want access to small amounts of money over a short timeframe (e.g. under $1,000). The CLCV Report found that the average amount borrowed under a payday loan was $258 for periods of between 2 and 4 weeks;33

• borrowers seeking smaller loans tend to be directed towards credit cards but it is possible that some lower income borrowers may be wary of credit cards, preferring the financial security of borrowing a fixed amount for a set term with preset repayment arrangements.34 However, there have apparently been other reports that credit cards are still popular among people on lower incomes;35

• a widening gap between the rich and poor;36



32 N Howell, pp 3-4.


34 N Howell, p 4, citing studies such as Chant Link & Associates, Report on Financial Exclusion in Australia, November 2004, pp 70-71, CLCV Report, pp 35, 80-81.

35 N Howell, p 4, referring to communication with Legal Aid Queensland, 28 June 2005.

36 CLCV Report, p 35, citing a number of other studies dating from the 1990s.


• a rise in casual and part-time employment with consequent job insecurity causing low income earners to resort to credit to maintain living standards. Such people – sometimes called the ‘working poor’ – have difficulty in accumulating savings to cope with financial shocks;37

• an increase in the level of household debt and personal debt accompanied by a decline in household savings, particularly among persons on low incomes who then have little capacity to meet financial emergencies and to save;38

• a rise in personal bankruptcies since the 1970s resulting in there being more people with poor credit histories who tend to find themselves excluded from mainstream lenders and thereby driven to the fringe high cost lenders;39 and

• potential borrowers on low or insecure incomes, or who have poor credit histories may be regarded as too ‘high risk’ by mainstream lenders and, conversely, those types of borrowers may assume that mainstream lenders will reject them and seek out a fringe lender in the first instance.40

For the low income and disadvantaged consumer, payday lenders may offer more flexibility and some even openly advertise that poor credit reports or previous bankruptcies will not bar loan approval.41 There is a tendency for businesses to be located in more socially disadvantaged areas. Some studies have suggested that fringe lender customers felt that the lenders offered a friendlier service, treating the customer with respect regardless of level of income, and provided more accessibility (longer branch opening hours) as opposed to call centres favoured by larger mainstream lenders. Moreover, payday lenders have been seen as being faster in processing a loan application.42

3.3 HOW ARE PAYDAY LOANS USED?

A study of Victorian payday loan borrowers conducted for the CLCV Report reported that the most cited reasons for obtaining such a loan was to pay bills

37 CLCV Report, p 36, citing other research.



40 N Howell, p 4.

41 N Howell, pp 4-5.

42 N Howell, p 5, citing Prof Iain Ramsay, Access to Credit in the Alternative Consumer Credit Market, Office of Consumer Affairs, Industry Canada, Ministry of Attorney-General, British Columbia, February 2000, pp 17-18.


(32%) and cover living expenses (26%).43 Several respondents were specific about the bills to be covered with one borrower stating that the loan was to cover medication for a child, one saying it was to pay veterinary bills and another reporting that the loan was to pay for schoolbooks. A further 10% said the loan would be used to pay for car repairs or registration.44

There is some suggestion, however, that not all users of fringe credit or payday loans are from lower socio-economic backgrounds (although this group forms the majority of such users). Evidence was produced to a recent South Australian Parliamentary Committee inquiry into consumer credit indicating that fringe lending was becoming a preferred option for middle class consumers seeking to fund costly discretionary consumer purchases.45 Loans are used for different purposes according to wealth status. Those consumers who are better-off tend to use credit to finance a consumer lifestyle while those on lower incomes use credit to temporarily compensate for inadequate income, ease financial difficulties and smooth over fluctuations in finances.46

3.4 TYPICAL PAYDAY LOAN CONDITIONS AND CHARGES

Although the following is taken from a consideration of the Victorian market in 2001, the findings about the conditions and charges on payday loans would still hold considerable relevance in Queensland in 2008. The CLCV Report looked at a number of lenders operating at outlets throughout Victoria in respect of charges and conditions attached to a $200 loan taken out over 14 days and found that:47

• the annual percentage interest rate charges tended to be around 500%-700% and usually, the interest rate was described as a ‘fee’ (which the CLCV Report suggested was to avoid regulation under the Uniform Consumer Credit Code, discussed later, and the 48% interest rate cap in Victoria). Some lenders had other fees such as service and administration fees;

43 CLCV Report, pp 66-67 regarding payday lending borrowers in Victoria.

44 CLCV Report, pp 66-67.

45 South Australia House of Assembly, Economic and Finance Committee, ‘Consumer Credit and Investment Schemes’, Final Report (‘SA EFC Final Report’), Report No 64, 25 October 2007, p 21, http://www.parliament.sa.gov.au/NR/rdonlyres/CCA9B123-03BC-4441-9860-59FA8B3CE7A7/9493/ConsumerCreditFinalReport.pdf.

46 CLCV Report, p 36, citing R Berthoud & E Kempson, Credit and Debt: The PSI Report, Policy Studies Institute London, 1992, p 64.

47 CLCV Report, pp 45ff.

http://www.parliament.sa.gov.au/NR/rdonlyres/CCA9B123-03BC-4441-9860-59FA8B3CE7A7/9493/ConsumerCreditFinalReport.pdf



• while the lending criteria is less stringent than that applied by mainstream lenders, it appeared that some minimal level of income was required – but some lenders provide loans to those on Centrelink benefits (38% of respondents in the Victorian study reporting that Centrelink benefits were their source of income);48

• most lenders required the usual 100 points of identification from potential borrowers and other forms of proof such as evidence of income;

• payday loans were predominantly unsecured although there was evidence of security being required for larger loans;

• a common method of repayment was through direct debit – which has caused some concern because banks can dishonour the direct debit if there are insufficient funds available. This may result in high penalties being incurred by the borrower. Also, direct debit appears to give the payday lender first priority on the borrower’s income over essentials such as rent and food;49

• default rates on such loans were reported to be relatively low – maybe due to borrowers prioritising loan repayments ahead of other essentials;

• a number of lenders had ‘back to back’ loans where borrowers request another loan straight after having repaid the initial loan – a process that is fairly quick when the borrower is already an established customer. Of more concern is where lenders allow loans to be ‘rolled over’ for a further period when the initial loan could not be repaid in time (but at the time of the study, this was practised by only one lender in Victoria);

• advertising was targeted at lower income earners under financial stress with emphasis on speed of approval and some was aimed at those with poor credit histories.50

The CLCV Report found that the payday lending industry has considerable volatility and a great deal variation in lending criteria. Some payday lenders insist upon evidence of earnings while others will lend to welfare recipients.51 The South Australian branch of the National Financial Services Federation has pointed out that it is not in the lender’s interests to ignore the borrower’s probable inability to


49 CLCV Report, p 48, citing an interview with an officer from the Peninsula Community Legal Centre, 29 October 2001.




repay the loan and few lenders will give credit to borrowers who they assess as being unable to afford the loan.52

Cash Converters’ submission to the 2006 Victorian Consumer Credit Review (undertaken by Consumer Affairs Victoria and authorised by the Victorian Government) indicates that a typical Cash Converters loan is for 30 days, is unsecured and is for an average amount of $220. It charges $35 in fees for every $100 lent. Its costs are around $28 per $100 lent for new borrowers and $24 per $100 for existing customers53 and it seems that defaults occur on 24% of first attempts at direct debits. Around 80% of borrowers are wage/salary earners and 20% are on pensions (Cash Converters imposes a lending limitation of 15% of net monthly income).54

It has been reported that Cash Converters made a net profit of $11.5 million in 2006-2007 from a mix of franchise commission payments and a $124.6 million loan book.55

4 NON-COMMERCIAL LENDING – NILS AND LILS

Another type of small amount lending that also seeks to cater to the needs of the same market of disadvantaged consumers – usually on Centrelink benefits – are non-commercial loan schemes such as no interest and low interest loans schemes (NILS and LILS). This type of lending falls within the scope of what some commentators refer to as ‘microfinance’.

Microfinance is the provision of products and financial services (such as financial literacy training) to address the needs of disadvantaged, low income individuals who are financially excluded from the mainstream market and thereby subject to often exploitative conditions of ‘fringe’ lenders.56 It is premised on the belief that people on low incomes can and do save and do not necessarily pose a higher credit risk; that small loans can contribute significantly to economic well-being; and that

52 SA EFC Final Report, p 38, citing National Financial Services Federation (SA) Inc.,

Submission, February 2007, p 38.

53 Victorian Review Report, p 38, drawing from the submission by Cash Converters. The Report notes that it is unclear from the submission whether the amounts include default costs.

54 Victorian Review Report, p 38, drawing from figures supplied by Cash Converters.

55 Tim Boreham, ‘The poor prove profitable prey’, Australian Online, 24 November 2007.

56 Ingrid Burkett, University of Queensland, ‘Microfinance in Australia: Current Realities and Future Possibilities’, Report, May 2003, p 5.


the debt cycle is often linked to the continuation of poverty.57 Microfinance is not a traditional ‘commercial’ response to poverty and social exclusion like that of a credit provider offering small high interest loans, even though some payday lenders sometimes regard themselves as providing ‘microfinance.58

The structures in which microfinance initiatives have tended to emerge are community organisations, the banking sector as part of its ‘social banking’ or corporate social responsibility agenda, and bodies such as credit unions.59 Examples include schemes such as NILS, LILS, savings incentive programs, savings and loan circles, and various initiatives for funding microenterprises.60

More will be said about microfinance alternatives, particularly NILS and LILS, in the final section of this Research Brief.

5 CONCERNS ABOUT PAYDAY LOANS

According to the Victorian Government’s recent Consumer Credit Review Report, (Victorian Review Report) it may be difficult to ascertain the extent and severity of problems associated with consumer credit. The Review focused on credit products that consumers identified as presenting the most problems. Those included ‘small amount loans’, such as payday loans. The Victorian Review Report indicated that, statistically, only a small percentage of borrowers experience consumer credit difficulties but it is likely that real detriment may be understated, particularly due to the fact that the size of the market means that the number of individuals affected is large.61

The impacts on borrowers of high interest rate loans are said to include an impeded ability to overcome financial difficulties as well as a depleted ability to save. In

57 Ingrid Burkett, p 6, referring to other studies such as that by C Connolly & K Hajaj, ‘Financial

Services and Social Exclusion’, Report (prepared for the Chifley Research Centre, University of NSW), March 2001, p 6. The spread of the concept throughout the world received impetus from a Microcredit Summit in 1997.

58 Ingrid Burkett, p 6.


60 Ingrid Burkett, p 25. Other initiatives discussed by Burkett include those which assist low income or unemployed people to develop microenterprises especially in Indigenous communities. Savings and loan circles are groups – sometimes receiving initial support from a community organisation – that meet regularly and contribute small amounts of money into a group account which can be lent to members of the group for defined purposes (see p 38).

61 Victorian Review Report, p 6.


severe cases, borrowers fall into bankruptcy and this leads to further exclusion from the mainstream lending market down the track.62

Research indicates that there is greater potential for exploitation by unscrupulous lenders where small amount loans are involved because the demand for credit by low income earners is often price inelastic.63 The borrower may need the loan to cover unexpected costs and household emergencies. He or she may have little, if any, time to source the credit and is not very likely to compare terms and prices between lenders.64 Furthermore, given that a significant number of borrowers of fringe credit have lower education standards, this may equate with poor financial literacy and inability to grasp the full implications of the loan.65

The short timeframe of the loan means that it is highly unlikely that the borrower will have recovered from the difficulty that caused him or her to seek out the loan in the first place. In some cases, the terms of the loan are such that there is difficulty in meeting repayments. As a result, the borrower is likely to pay a default fee or charge for rolling over the loan for a further period. In the end, the borrower has not received any financial benefit and there is likely to be a reduction in the borrower’s purchasing power.66

The high cost credit and other problematic features of payday loans have been the subject of government and parliamentary reviews in a number of jurisdictions. This focus may be due to the fact that access to consumer credit can be essential for low income consumers to be able to effectively participate in social and economic life.67

Indeed, some studies suggest that short term lending does have a role to play and can sometimes be beneficial. A 2006 study of Californian households found that households coped with floods, fires and other natural disasters with less suffering if they happened to live near places where payday lenders operated and that such

62 Queensland OFT, 2006 Discussion Paper, p 13.

63 N Howell, p 10.

64 N Howell, p 23.

65 SA EFC Final Report, p 20, citing submission by the Northern Community Legal Service Inc., February 2007, p 4.

66 N Howell, pp 23-24, citing other studies. See also Victorian Review Report, p 6.

67 N Howell, p 10, citing the United Kingdom Office of Fair Trading’s Vulnerable Consumers and Financial Services: Report of the Director-General’s Inquiry, OFT255, 1999, p 19. Other essential financial services were said to include banking, insurance and long term savings.


lending can be ‘profoundly beneficial’ in extraordinary events.68 Interestingly, it appears that a recent credit experiment set in South Africa found that marginal credit applicants who are granted expensive loans are less likely to become unemployed, poor or hungry.69

5.1 HIGH INTEREST, FEES AND CHARGES

The annual percentage interest rate (APR) charged for payday loans is often as high as the law in the relevant jurisdiction permits (as discussed below, some jurisdictions have a prescribed maximum APR) and often exceeds market rates for fixed term credit or that for credit cards. Usually, the amount is expressed in terms of a ‘fee’. Payday loan terms are quite short, meaning that the actual amount of interest payable is not a big part of the cost of the loan.70 What often comes at significant cost to the borrower are the additional fees and charges, such as establishment fees. For example, a lender might lend $400 to a borrower upon which there is an APR of 25% and an establishment fee of $160.71 Costs may also escalate if the loan falls into default so if the direct debit to make a repayment ‘bounces’, a default fee of $35 might be incurred by the borrower to the lender and a smaller fee to the financial institution with the debit facility.72

While some of the APRs on payday loans seem quite astonishing at first glance, the small timeframe of the loan tends to place the rates into some perspective. For instance, a borrower might take out a $100 loan to be repaid at the end of the week for a fee of $20. The total amount owed is $120. On an annualised basis, this works out to an APR of 1,040%.73

Payday lenders have argued that annualising interest rates charge on loans for a small term distorts the nature of the contract and makes affordability comparisons

68 DP Morgan and MR Strain, p 5, citing A Morse, ‘Payday Lenders: Heroes or Villains’,

University of Michigan Working paper, 2006.

69 DP Morgan and MR Strain, p 5, citing D Karlan & J Zinman, ‘Expanding Credit Access: Using Randomized Supply Decisions to Estimate the Impact’, Dartmouth College Working Paper, December 2006.


71 As reported by a small amount lender at a forum during the review culminating in the Victorian Review Report. See p 106.


73 Financers Association of Australia Limited, ‘Managing the Cost of consumer Credit in Queensland’, The Financier, March 2007.


with mainstream lenders impractical and misrepresentative.74 It has been claimed that lending a small amount over a short period, which then needs to be extended when the borrower cannot repay at the end of the original period, has cost implications for the lender. There are expenses involved in setting up and managing the loan and there is also a high risk involved where the loan is unsecured.75

A number of consumer advocates have concerns that dishonest lenders might get around any ceiling imposed on interest rate charges by merely adding on non-interest fees and charges that are not caught by the ceiling. The Victorian Review Report found that this had occurred in Victoria where the maximum APR applied only to the interest component of the loan.76 Consumer advocates have been calling for a cap or ceiling on the total cost of credit – that is the total of interest, fees and charges.77 However, as will be seen later in this Brief, lenders and their advocates have argued that such a total cost cap would make the small loan industry unviable because of the higher risk profiles of the borrowers.78

5.2 OTHER LENDING PRACTICES CAUSING CONCERN

Some lenders enable one or more ‘rollovers’ if the borrower cannot repay the loan at the end of the original term. This means that the loan is renewed for a further term together with an additional charge for the renewal.79 If this occurs a number of times, the original loan amount is taken over by fees, effectively ‘blowing out’ the repayments. The borrower may suffer financial and emotional pressure and a greater risk of over-indebtedness because the size of the loan keeps growing without the borrower choosing to borrow more.80 Unethical lenders may profit

74 SA EFC Final Report, p 26, citing Cash Converters, Submission, February 2007, p 11.

75 Evidence to the SA Economic and Finance Committee, Consumer Credit and Investment Schemes Inquiry, Committee Hansard, 7 March 2007, pp 43-44 (cited in the SA EFC Final Report, pp 27-28).


77 Victorian Review Report, p 93, citing submissions from bodies such as the Law Institute of Victoria, Anglicare Vic., the CLCV and the Consumer Credit Legal Service (CCLS).

78 Victorian Review Report, p 93, citing submissions from credit providers such as MON-E, Cash Converters.




from borrowers who regularly incur penalties for late payments or rollover loans they cannot afford.81 Both consumer representatives and credit providers have noted that it is important for lenders to assess a consumer’s capacity to repay the loan so the consumer is not taking out a loan that is unaffordable to them.82

While some lenders will simply write off bad debts on small loans, others indulge in dubious, and sometimes illegal, practices to recover these debts. For instance, Consumer Affairs Victoria has pursued cases where the lender has presented the defaulting borrower with a false summons to attend court when no court proceedings have actually been taken; where the lender has told the borrower’s employer about the loan; and where the lender tries to have the employer pay the borrower’s total wages to the lender; or where the lender has threatened to take money directly from the borrower’s Centrelink benefits.83

Another inappropriate lending practice, identified by both consumer advocates and credit providers as being carried out by a small number of lenders, is the lender taking security over household items to ensure that the borrower does not default on his or her loan.84 Borrowers make sure that they keep up repayments to that lender even if they become bankrupt out of fear of having their essential items taken away (when, under bankruptcy legislation, certain household items are immune from creditors).85 In one example, a lady, who was a sole parent receiving Centrelink benefits, borrowed $600 from a company. The loan included an establishment fee of $350, a loan application fee of $20 and a 30% annual interest rate so the total cost to be repaid was $1,065.24. The loan was secured by a mortgage over most of the lady’s essential household goods, some owned by her parents. Due to over-commitment, the lady became bankrupt and this released her from her debts. However, she continued to make weekly payments on the loan fearing she would lose her household items.86


82 Victorian Review Report, p 93, citing various submissions.

83 Victorian Review Report, p 122. A number of such practices are in breach of Fair Trading legislation.

84 Victorian Review Report, pp 93-94, citing various submissions.

85 Victorian Review Report, pp 123-124.

86 Victorian Review Report, p 98, citing CLCV and CCLS Submission, p 22.


5.3 SOME THINGS CONSUMERS LIKE ABOUT PAYDAY LENDERS

Some features of the payday lending industry have considerable appeal to consumers. Some, such as the speed of the application and loan approval process, and its accessibility, were noted earlier. In many cases, the first contact with a payday lender is a result of seeing or hearing an advertisement offering loans that seem directed at the low income consumer’s needs. Many lenders focus quite heavily on good customer service, a quality that is important to people who cannot access credit from mainstream providers. One borrower said that the lender was ‘excellent in the way they treated you as a person. They didn’t treat you in the way that you get treated because you’re on a pension. They treated you as if you were a client that was worth being treated well…’.87

Thus, simply being accepted for a loan and treated as a ‘valued customer’ seems to help restore self-esteem to those who feel financially excluded due to low income and disadvantage.88 Many payday loan customers are reported not to like banks – often for the same reasons many other people in the community do not like them, such as hidden charges, high fees and lack of service. One borrower who went to a payday lender reported that it was like walking into a bank but friendlier and you get service. Experience with a bank tended to result in the low income consumer feeling disappointed and demoralised. In any event, given that few banks lend below $2,000 for a personal loan and have continued to withdraw products aimed at lower income consumers, banks have tended to become ‘irrelevant’ to the average payday loan consumer.89

In terms of other forms of credit, it appears that many payday loan customers are wary of credit cards, perceiving them as hard to manage and encouraging them to give in to temptation and into bigger and bigger debt. Pawnbrokers were not viewed with much favour by many such customers who seemed to regard resorting to a pawnbroker as having a stigma of poverty and desperation. Most saw taking out a payday loan as more dignified than pawning their goods.90

87 D Wilson, ‘Payday Lending: Policy Making for the Financial Fringe’, Just Policy, No 33,

October 2004, pp 17-25, p 21 quoting a comment from an interview participant in a street survey by the Consumer Law Centre of Victoria in 2001-2002.

88 D Wilson, ‘Payday Lending: Policy Making for the Financial Fringe’, p 22.




5.4 CAUTIONS ABOUT RESPONSE

It has been recognised that any regulatory intervention must be undertaken so as not to result in further problems for low income, vulnerable and disadvantaged consumers in obtaining credit.91 Thus, measures are required that will facilitate access by such consumers to affordable, safe credit without limiting the available options. Non-legislative solutions – such as encouragement of no interest and low interest loan schemes and other forms of microfinance and social lending – need to be found to work in conjunction with laws regulating excessive fees, unfair contract terms and dubious practices, like taking household items as security.92

A recent US study of consumer problems in Georgia and North Carolina, where payday lending has been banned (in 2004 and 2005 respectively), found that consumers in those states did not seem better off compared with household in all other states. Those consumers have bounced more cheques (possibly because they found ‘bounce protection’ too expensive),93 complained more about lenders and have filed for bankruptcy at a higher rates. Moreover, the problems did not appear to be temporary ones of adjusting to a ‘healthier financial life’ without payday credit. Further, it was found that Hawaiian consumers had fewer problems after various restrictions on payday lending were lifted.94

6 THE UNIFORM CONSUMER CREDIT CODE

The regulation of financial services in Australia is quite complex, those services being subject to a number of different laws and administrative arrangements at the state and federal levels. For instance, the Australian Securities and Investment Commissioner (ASIC) oversees licensing and disclosure requirements of the Corporations Act 2001 which does not cover credit, although credit is included in the Australian Securities and Investments Commission Act 2001 (Cth) as a financial product for the purposes of consumer protection and regulating market


92 Victorian Review Report, pp 6, 8, 93-94, citing various submissions.

93 A number of credit unions and banks in the USA offer ‘bounced cheque protection’ which spares the cheque writer the embarrassment and expense of having a cheque dishonoured but the protection is quite expensive – with APRs of around 2,400%: see DP Morgan and MR Strain, p 4.

94 DP Morgan and MR Strain, p 25.


conduct.95 On the other hand, lending products such as mortgages, credit cards, hire purchase agreements and loans are subject to the Uniform Consumer Credit Code (see below) administered by the states and territories. Some jurisdictions have additional laws for licensing credit providers and imposing interest rate ceilings as well as Fair Trading Acts concerning consumer protection in general.96

It has been reported that around 90% of personal lending is provided by bodies that are subject to both the Commonwealth Government’s financial services regime and the Uniform Consumer Credit Code, meaning overlapping administrative and financial compliance costs.97

The Uniform Consumer Credit Code (the Code) forms an appendix to the Consumer Credit (Queensland) Act 1994 (Qld) (the Act) and is part of the law of Queensland. The Queensland legislation provides the ‘template’ for consistent legislation throughout the country. All states and territories have passed legislation which adopts the template laws and applies it in the state or territory as ‘in force from time to time’.98

The Explanatory Notes to the Consumer Credit (Queensland) Bill 1994 (Qld) state that the legislation is based on the principle of truth-in-lending which allows borrowers to make informed choices when buying credit. The policy of the legislation is to rely generally on competitive forces to provide price restraint but to afford borrowers significant mechanisms for redress against credit providers for non-compliance.99

95 Such as prohibition of misleading conduct and unconscionable conduct. There is overlap with

state fair trading laws in this consumer protection area.

96 Productivity Commission, ‘Review of Australia’s Policy Framework’, Draft Report, December 2007, pp 20-21.

97 Productivity Commission, p 90.

98 Meaning that changes to the Code or the Regulations need only be made to the template legislation and they will automatically apply in other jurisdictions (although there are some differences in approach in Tasmania and Western Australia): see the Australian Government’s Consumer Credit Code website, http://www.creditcode.gov.au/display.asp?file=/content/code_principles.htm.

99 Consumer Credit (Queensland) Bill 1994 (Qld), Explanatory Notes, p 1.

http://www.legislation.qld.gov.au/LEGISLTN/CURRENT/C/ConsumCredCode.pdf



http://www.legislation.qld.gov.au/LEGISLTN/CURRENT/C/ConsumCredA94.pdf

http://www.creditcode.gov.au/display.asp?file=/content/code_principles.htm


The Code covers credit provided wholly or predominantly for personal, domestic or household purposes and applies to credit providers such as banks, building societies, credit unions, finance companies and payday lenders.100

The types of credit to which the Code (or parts thereof) will not apply are set out in s 7.101 In terms of short term loans the Code will apply if all three of the following conditions are satisfied:

(a) credit is provided for less than 62 days; and

(b) the total fees and charges payable exceed 5% of the amount of credit; and

(c) the interest rate charged or provided for exceeds 24% per annum: s 7(1).

Most payday lenders have fees and charges of more than 5% and have interest rates of more than 24% per annum. Until s 7 was extended in 2001, the Code exempted loans provided for less than 62 days without any other conditions.102 Following the amendment, the 62 day exemption remains but if the loan is for less than 62 days and the lender charges more than 5% in fees and more than 24% in interest, the Code will apply. The remainder of the discussion in this section will focus on the effect of the Code on short term or payday lending.

The protection offered for credit contracts covered by the Code are set out mainly in Part 2. Non-compliance with the various requirements of Part 2 is an offence and lenders face penalties for breach. The main feature of Part 2 is the pre-contractual, contractual and ongoing disclosure obligations. These include that credit contracts must be in writing and contain details about the credit provider, the amount of credit to be provided, the annual percentage interest rate, calculation of interest charges, frequency of interest charges, amount of repayments, applicable fees and charges, the default rate of interest, enforcement expenses, a statement

100 Queensland OFT, ‘Payday Lenders’,

http://www.fairtrading.qld.gov.au/OFT/oftweb.nsf/Web+Pages/5AC30F969DE98B154A25708A00160A4D?OpenDocument.

101 These include (but are not limited to) credit provided by trustees of a deceased estate by way of an advance to a beneficiary; credit provided by pawnbrokers; insurance premiums by instalments; bill facilities; and short term credit.

102 The amendments were effected by s 4 of the Consumer Credit (Qld) Amendment Act 2001 (Qld) and discussed in an earlier Queensland Parliamentary Library Research Brief by Karen Sampford ,‘Regulating Payday Lending: the Consumer Credit (Queensland) Amendment Bill 2001’, RBR 14/01, June 2001, http://www.parliament.qld.gov.au/view/publications/documents/research/ResearchBriefs/2001/rbr1401ks.pdf.

http://www.fairtrading.qld.gov.au/OFT/oftweb.nsf/Web+Pages/5AC30F969DE98B154A25708A00160A4D?OpenDocument

http://www.fairtrading.qld.gov.au/OFT/oftweb.nsf/Web+Pages/5AC30F969DE98B154A25708A00160A4D?OpenDocument

http://www.parliament.qld.gov.au/view/publications/documents/research/ResearchBriefs/2001/rbr1401ks.pdf

http://www.parliament.qld.gov.au/view/publications/documents/research/ResearchBriefs/2001/rbr1401ks.pdf


about any mortgage or guarantee provided, commissions payable, and other specified matters.

Before the contract is entered into, the credit provider must give borrowers a pre-contractual statement letting borrowers know their rights and obligations under the contract and other prescribed matters, such as whether changes can be made to the contract terms and whether the loan be repaid early.103 The credit provider is obliged to give borrowers regular statements of account during the term of the credit contract.

Credit providers must include a ‘comparison rate’ – including fees and charges – in any advertisements offering fixed term loans stating an annual percentage interest rate (APR) which allows borrowers to compare the costs of comparable products (Part 9A).104

The contract cannot impose monetary liabilities on the debtor that are inconsistent with the Code and an offence is committed by the credit provider if this occurs.105

Part 4 imposes certain procedural obligations on credit providers seeking to make unilateral changes to payday loans such as alterations to interest rates and repayments. Part 4, div 3 allows a borrower who cannot, because of certain hardship grounds (e.g. illness, unemployment), meet his or her obligations but does reasonably expect to discharge those obligations if the terms of the contract were changed, to apply to the credit provider for such a variation. However, the changes that can be made to the terms of the contract are limited: ss 66-67. If the credit provider does not agree to the change, the borrower may apply to the Court and the Court may order the change, after giving parties the opportunity to be heard: ss 68-69.

Pursuant to s 70 of the Code, the Court has the power, if satisfied on the application of the borrower, that in the circumstances relating to the contract at the time when it was entered into, the contract was unjust, to reopen the transaction giving rise to the contract. Matters the Court must consider in determining if the contract is unjust are the public interest and all the circumstances of the case. It may also

103 See Consumer Credit Code Regulation 1995 (Qld), s 11 and Form 2.

104 For more information, see the Queensland Parliamentary Library Research Brief by Wayne Jarred, ‘Consumer Credit (Queensland) Amendment Bill 2002: Assisting Consumers in Matters of Credit Choice’, RBR 2002/11, April 2002, http://www.parliament.qld.gov.au/view/publications/documents/research/ResearchBriefs/2002/2002010.pdf.

105 Divisions 3 to 6 of Part 2 relate to matters such as interest charges, fees and charges, credit provider’s obligation to account to the borrower, and deferrals, waivers and charges under contracts.

http://www.legislation.qld.gov.au/LEGISLTN/CURRENT/C/ConsumCredR95.pdf

http://www.parliament.qld.gov.au/view/publications/documents/research/ResearchBriefs/2002/2002010.pdf

http://www.parliament.qld.gov.au/view/publications/documents/research/ResearchBriefs/2002/2002010.pdf


have regard to matters such as the bargaining position of the parties vis-à-vis each other; the consequences of not being able to comply with the contract’s provisions; the annual percentage rate(s) of interest in comparable cases; whether any provisions are unreasonably difficult to comply with; whether the borrower was able to protect his or her interests; whether the effect of the contract was properly explained and understood; and whether, at the relevant time, the credit provider knew, or could have ascertained by reasonable inquiry, that the borrower could not repay the loan or do so without substantial hardship.

Some commentators argue that s 70 has had limited effect on the high cost of credit because the courts tend to focus on issues of procedural injustice rather than finding that a loan is unjust because of excessive rates of interest, fees or charges.106 However, a recent case indicates the importance of the credit provider (or person acting on their behalf) ascertaining the capacity of the potential borrower to repay the loan. In Permanent Mortgages Pty Ltd v Michael Robert Cook and Karen Cook relief was granted where, although the borrowers had had experience in obtaining loans and were from English-speaking backgrounds, they had limited education and were in great financial hardship when the contract was being entered into. The lender did little to ascertain whether the borrowers were capable of repaying the loan. It would not have been difficult to have seen that the Cooks were desperate and had little capacity to meet their debt.107

Section 71 allows the Court, if it reopens the transaction, to do a number of things such as relieving a borrower from paying amounts in excess of an amount the Court considers reasonable; or setting aside or altering the agreement in whole or part; or giving judgement for an amount the Court considers justly due to a party under the contract.

It has been suggested that s 72 is the only real constraint on the cost of consumer credit imposed by the Code. On application of the borrower, the Court may annul or reduce the following if satisfied such is unconscionable: a change in the annual percentage rate(s); an establishment fee or charge; a fee or charge for early termination; or a fee or charge for a prepayment of an amount under a contract. Section 72(2) sets out the requirements applying to whether the change, fee or charge is unconscionable and these are fairly difficult to establish. It has been argued that s 72 may not be terribly effective in practice because it only applies to an unconscionable change in the interest rate, not to an originally unconscionable interest rate.108

106 N Howell, p 8. See also, Queensland OFT, 2006 Discussion Paper, p 19.

107 [2006] NSWSC 1104.

108 N Howell, p 7. See also, Queensland OFT, 2006 Discussion Paper, p 18.


Another problem with the effectiveness of the above provisions in providing redress to borrowers is that many people who take out high interest or payday loans tend to have limited resources and/or skills to make application to the courts for assistance.109

The penalties that a payday lender who contravenes the Code can incur include severe monetary fines; a loss of the right to make the debtor repay the loan; having to repay some or all of the interest charged as well as negative publicity.

While there are a range of concerns associated with small amount lending and payday lending, the foremost one – frequently raised during government and parliamentary reviews of consumer credit – appears to be high interest rates, fees and charges.110 The Code tends to focus on disclosure obligations regarding these costs and allows the court to review various ‘unconscionable’ fees such as establishment fees and early termination fees but it does little to actually regulate or limit those costs.111

7 INTEREST RATE CAPS

Pursuant to the Uniform Credit Laws Agreement 1993 (UCL Agreement), under which each state and territory government committed to a uniform scheme for regulating the provision of consumer credit, it was decided that some matters did not require uniformity between jurisdictions. Such matters were not, therefore, set out in the Code. In particular, for the purposes of this discussion, it was provided (in cl 12) that a state or territory could individually enact legislation fixing the maximum interest rates (or interest rate caps) payable under consumer credit contracts. Interest rate caps have been imposed in New South Wales, Victoria and the Australian Capital Territory and will soon be introduced in South Australia. Queensland, along with the Northern Territory, Western Australia, and Tasmania, does not have such a cap.

It appears that the interest rate ceiling or cap is derived from laws that operated in the United Kingdom in the early 20th century to protect poorer and disadvantaged people from unscrupulous lenders.112 In fact, caps of various types have been used


110 See, for example, the Queensland OFT, 2006 Discussion Paper, the Victorian Review Report and the SA EFC Final Report.



http://www.creditcode.gov.au/display.asp?file=/content/original_credit_code.htm


throughout history as a form of consumer protection.113 Today, it is possible that a cap could be seen as providing a ‘buffer’ for vulnerable consumers in a market that is insufficiently competitive to allow those consumers ready access to affordable loans. There is also an argument that loan cost restrictions assist the vulnerable and disadvantaged in being able to obtain a loan without having to pay several times the amount that wealthier people have to pay for mainstream loans.114

7.1 ARGUMENTS FOR AND AGAINST CAPS

Advocates of capping payday loans argue that: • controls on costs protect vulnerable consumers from exploitation and further

exacerbation of their precarious financial position – although this is a view underpinned by the assumption that fringe lenders price their loans to make excessive profits;115

• interest rate controls may compensate for the lack of practical choice for low income borrowers or those with poor credit histories and the resultant imbalance in their bargaining position vis-à-vis fringe lenders;116

• that, as research suggests, lack of ‘shopping around’ and comparing products between lenders creates little incentive for competition between fringe lenders so they continue to charge high interest rates while doing little to reduce market inefficiencies. Interest rate controls may compensate for lack of competition between such lenders;117

• borrowers of high cost payday loans often need to ‘roll over’ the loan – possibly several times and at a cost – reducing their ability to ever improve their financial position. If costs were controlled, it may increase the chance of being able to meet their repayments;118 and

113 N Howell, p 2.

114 Victorian Review Report, p 109. See also, submission from the South African Department of Trade and Industry, p 9, quoted on p 108 of the Review Report.

115 N Howell, p 22.

116 N Howell, p 25.

117 N Howell, pp 24-25. See also R Murphy, The case for an interest rate cap in the UK: A study based on Provident Financial plc, prepared for Church Action on Poverty, New Economics Foundation and Debt on our Doorstep, 2003, cited in N Howell, p 24.

118 N Howell, pp 23-24, citing a number of studies.


• that claims by the lending industry about the 48% cap being unviable have not been borne out in states such as Victoria and NSW where it already exists.119

On the other hand, the arguments against cost controls on credit include: • that, as argued by fringe lenders, the higher cost of fringe loans actually reflect

the cost of providing those types of products and fringe lenders face higher costs than the mainstream lenders. The lenders claim that: • there are higher administrative costs involved in short term and small

loans; • fixed costs are similar between small and large loans; and, • fringe lenders face higher risks because borrowers tend to have low

incomes and/or poor credit histories;120 • lenders must pay wages to the employees who organise and set up the loans

and interview prospective customers;121 • that, as argued by lenders, cost controls would mean that they would have

trouble covering their costs and many fringe lenders would simply leave the market. Cash Converters have been reported to claim that a 48% cap on all costs would mean that a one month $250 loan would earn $10 interest and provide an average per loan profit to the lender of just $3.85.122 However, it is argued that this fear of higher costs has not been empirically proven and some commentators have suggested that the higher costs of payday loans actually create a greater risk that they will go into default;123

• that caps or ceilings would result in credit shortages and exclusions because fringe lenders who can only profitably lend to high risk borrowers at prices higher than the cap will no longer offer credit to those borrowers;124

119 Derek Tipper, ‘Payday lenders won’t wear interest cap’, ABC News Far North Qld, 19 October

2007, http://www.abc.net.au.

120 N Howell, p 30, citing research such as that by CLCV Report, p 33.

121 SA EFC Final Report, pp 30-31, citing evidence from National Financial Services Federation (SA) Inc (NSF) Submission, February 2007, pp 55-56.

122 Tim Boreham.

123 N Howell, pp 30-31, citing L Drysdale & KE Keest, ‘The two-tiered consumer financial services marketplace: the fringe banking system and its challenge to current thinking about the role of usury laws in today’s society’ South Carolina Law Review, vol 51, 2000, pp 589-669, pp 617, 662-663.

124 This appears to be a significant concern of economists: N Howell, p 26, citing economists such as TA Durkin, ‘An economic perspective on interest rate limitation’, Georgia State University Law Review, vol 9, 1993, pp 824-825, and, also, UK Department of Trade and Industry, p 17.

http://www.abc.net.au/


• that if riskier borrowers were denied credit, this may mean that caps are actually not fair as they impact upon the very people that the controls were to protect;125

• that cost controls can be avoided by sufficiently motivated lenders – for instance, by increasing the non-interest fees and charges while remaining within the mandatory interest rate cap. This has been addressed in NSW by legislative changes which incorporate non-interest fees and charges within the cap but there are always other loopholes to be exploited by some unscrupulous lenders;126

• that cost controls should be left to the market rather than being imposed by government which may not be in any real position to assess what the appropriate ceiling should be;127

• that ceilings designed to protect the disadvantaged consumer may have a detrimental effect on mainstream and low risk borrowers because, once the ceiling is imposed, prices for all borrowers will tend to move towards the ceiling. However, others argue that there is no evidence to support this concern;128 and

• that lenders who operate across a number of jurisdictions may face compliance issues because some states and territories impose caps and some do not (particularly if the caps are set at different rates and/or caps in some jurisdictions include all fees and charges but caps in other places do not).129

It has also been suggested that in jurisdictions which place a cap on the total cost of credit – inclusive of fees and charges – there may be a break with the Code because the Code does not provide power to prohibit fees and charges.130

7.2 INTEREST RATE CAPS IN OTHER JURISDICTIONS

As noted earlier, the cost of consumer credit contracts is regulated through individual state and territory Consumer Credit Acts. In New South Wales and the Australian Capital Territory, the laws set a maximum prescribed annual percentage

125 N Howell, p 22, citing TA Durkin, pp 835-836.

126 N Howell, pp 28-29.

127 N Howell, pp 28-29, citing TA Durkin, pp 830-831.

128 N Howell, pp 29-30, citing UK Department of Trade and Industry, p 22 and other sources.




rate (APR) at 48%, inclusive of not just interest but of all fees and charges. In Victoria, the maximum APR is also set at 48% but applies to interest charges only. The South Australian Government has recently proposed imposing a maximum APR inclusive of all interest, fees and charges as occurs in NSW and the ACT. Queensland, like Western Australia, Tasmania and the Northern Territory, currently has no prescribed maximum APR but the Queensland Government is intending to introduce laws to impose a maximum APR of 48% inclusive of all interest, fees and charges.

7.2.1 New South Wales

Section 11(1) of the Consumer Credit (NSW) Act 1995 (NSW) (NSW Act) provides for prescription by Regulation of a maximum APR. The maximum APR is set by the s 7 of the Consumer Credit (NSW) Special Provisions Regulation 2007 at 48%.131 All interest charges and all credit fees and charges under a credit contract are to be included for the purpose of calculating the APR.

Until recently – March 2006 – only short term (up to 62 days) credit contracts were required to include both interest and non-interest fees and charges in calculating the maximum APR. Amendments to the NSW Act ensure that non-interest charges must be included in calculating the maximum APR in all consumer credit contracts covered by the Code (apart from prescribed temporary credit facilities), regardless of length.132 When the new laws commenced, the Commissioner for Fair Trading said that they sought to address concerns that some fringe lenders were extending the terms of their credit contracts beyond the 62 day threshold so as to be able to charge interest, fees and charges that together exceeded the 48% cap.133

It is also provided that any provision of a credit contract seeking to impose an APR exceeding 48% is void to that extent, any prohibited amount paid can be recovered, and the lender commits an offence.

Moreover, s 10B of the NSW Act requires that the pre-contractual statement and the credit contract must state the APR calculated on the basis of charges under the contract that are in the nature of interest charges (whether or not they are expressed to be interest charges). This seeks to prevent the actions of some lenders who were

131 Originally prescribed by the Consumer Credit (New South Wales) Special Provisions

Regulation 2002 (NSW), s 8.

132 By the Consumer Credit (New South Wales) Amendment (Maximum Annual Percentage Rate) Act 2005 (NSW).

133 NSW Department of Commerce, Office of Fair Trading, Ms Lyn Baker, Commissioner for Fair Trading, Statement of Regulatory Intent, 19 April 2006.

http://www.legislation.nsw.gov.au/summarize/inforce/s/1/?xref=RecordType%3DACTTOC%20AND%20Year%3D1995%20AND%20Actno%3D7&nohits=y

http://www.legislation.nsw.gov.au/fullhtml/inforce/subordleg+394+2007+FIRST+0+N?#fn

http://www.legislation.nsw.gov.au/fullhtml/inforce/act+86+2005+FIRST+0+N?

http://www.legislation.nsw.gov.au/fullhtml/inforce/act+86+2005+FIRST+0+N?


disguising the cost of loans by not disclosing an interest charge on an annualised basis but, instead, disclosing an inflated ‘fee’ or charge.134

While the terms ‘interest’ and ‘fees and charges’ are not defined in the Act or the Code, it would seem that interest is an amount of profit for the money lent while fees and charges are imposed to cover the costs associated with advancing the loan to the particular consumer.135 There are some decisions of the Victorian Civil and Administrative Tribunal indicating that the term ‘interest’ should cover a payment which can be characterised as made for the use of money lent and the amount of interest depends on its true purpose not an artificial characterisation.136 The separation of fees and charges from interest charges is intended to ensure that the cost of use by the actual borrower is carried by that borrower and that cross subsidisation between borrowers is minimised.137

As of early 2008, there has not been any departmental review of the impact of the cap on the total cost of payday loans.138 The application of the cap to all consumer credit contracts, regardless of length, has only been in place for less than two years.

7.2.2 Australian Capital Territory

An interest rate cap has operated in the ACT since 1 November 1996 – where, pursuant to s 8B of the Consumer Credit Act 1995 (ACT) (ACT Act) and s 5 of the Consumer Credit Regulation 1996 (ACT) the ceiling was set at 48% and includes interest, fees and charges, similarly to the NSW regime. In 2005, amendments were passed to ensure that the ceiling applies to all consumer credit contracts, irrespective of their term.139 A contractual term that seeks to impose an APR in excess of 48%, inclusive of the interest rate and all fees and charges, is void to the extent it does so and, if paid already by the borrower, is recoverable and the lender is guilty of an offence.

134 NSW Commissioner for Fair Trading, Statement of Regulatory Intent.

135 NSW Commissioner of Fair Trading, Statement of Regulatory Intent.

136 See NSW Commissioner of Fair Trading, Statement of Regulatory Intent, referring to Director of Consumer Affairs Victoria v Australian Finance Direct Limited [2004] VCAT; Director of Consumer Affairs Victoria v City Finance Loans (Credit) [2005] VCAT.

137 NSW Commissioner of Fair Trading, Statement of Regulatory Intent.

138 Email communication with an officer from NSW Office of Fair Trading.

139 Justice and Community Safety Legislation Amendment Act 2005 (ACT), inserting a new s 8B(2).

http://www.legislation.act.gov.au/a/1995-18/current/pdf/1995-18.pdf

http://www.legislation.act.gov.au/sl/1996-24/current/pdf/1996-24.pdf


Section 8C of the Act requires that the contract document must state an APR calculated on the basis of charges in the nature of interest charges whether or not expressed as such. This is similar to the NSW requirement.

Credit providers in the ACT have to be registered.

7.2.3 Victoria

Most payday lenders need to be registered as credit providers with the Business Licensing Authority and it is an offence under the Victorian Act to carry on a business as a credit provider without being registered.140

The Consumer Credit (Victoria) Act 1995 (Vic) (Victorian Act) differentiates between mortgages and other consumer credit contracts regarding maximum APRs. Section 39 of the Act provides that a credit contract (and any mortgage given in relation thereto) is unenforceable if the APR exceeds 48%.141 A mortgage relating to a credit contract is void if the APR exceeds 30% insofar as it relates to that contract (s 40). However, unlike NSW, the maximum APR does not incorporate non-interest fees and charges.

The Report of the Consumer Credit Review (Victorian Review Report), released in March 2006, reviewed the operation of the current interest rate ceiling as part of a broader review of consumer credit.142

The Victorian Review Report found that the existing cap did not discourage high cost loans in Victoria. This is because (unlike the case in NSW) lenders can lawfully exceed the 48% cap as non-interest fees and charges are not part of the APR calculation. It was also found that lenders were avoiding the restriction by exploiting forms of lending that the Code did not cover such as lending for ‘business purposes’ (the Code only protecting loans for personal or domestic purposes).143

140 Consumer Affairs Victoria, ‘Payday lenders and the Consumer Credit Code’, Financial

Services Factsheet, October 2003.

141 Originally set in the 1940s by the Money Lenders Act 1906 (Vic).

142 Victoria, Department of Consumer Affairs, Report of the Consumer Credit Review, March 2006, http://www.consumer.vic.gov.au/CA256902000FE154/Lookup/CAV_Credit_Review_Documents/$file/credit_review_complete.pdf.

143 Victorian Review Report, pp 110, 127. Although the use of business purposes declarations was not exploited with respect to short term loans as much as they were in relation to solicitor loans and consumer leases.

http://www.legislation.vic.gov.au/Domino/Web_Notes/LDMS/PubLawToday.nsf/a12f6f60fbd56800ca256de500201e54/153EC4DCA39B6B53CA2572E900127899/$FILE/95-41a025.pdf





The Victorian Review Report said that there was not enough evidence to show that putting a ceiling on the total cost of credit was the best way to address the causes of very high cost credit but further research had been commissioned to help determine the most effective approach.144 The Report pointed out that a cap would not address unfair contractual terms often found in short term loans nor address the avoidance tactics to get around the Code used by some operators. It was also noted that ceilings would only be effective if there was a commitment by government to compliance and enforcement.145

The Victorian Review Report indicated that applying a single standard of ‘unreasonableness’ rather than the stricter ‘unconscionability’ test to court/tribunal reviews of fees and charges under s 72 of the Code might overcome problems in this area and could even lead to the removal of the interest rate cap.146 This is an approach adopted in New Zealand. The connection between the amount of the fee or charge and the costs incurred by the lender in providing the credit would be the main determinant in deciding whether the fee or charge is ‘unreasonable’ but consideration could also be given to other things. It would also be prima facie unreasonable for default fees to exceed the cost of recovering the debt.147

The Review expressed a provisional conclusion that there needed to be an analysis and an evaluation of the way in which the existing 48% cap overcomes problems in the short term lending market before extending the cap to cover the total cost of credit, as occurred in NSW. It was noted, however, that there was some logical attraction in following the NSW approach given that NSW was a major part of the national credit market. However, the impact of the new (as was the case when the Review Report was released) extended cap in NSW would be monitored to see if it worked well.148 The Review considered that the aim should be to limit lenders to a reasonable profit and, in so doing, prevent consumer exploitation. This recognises that competition has not always been able to dampen the imposition of high fees and charges.149

In September 2006, the Victorian Government responded to the Victorian Review Report. It said that ‘competition between credit providers, the interest rate cap, and



146 Victorian Review Report p 117.





mandatory disclosure have proven inadequate to control all excessive fees and charges because they do not address the underlying problems of consumers ignoring or underestimating the likely impact of fees and charges when they choose between credit products, and credit providers taking advantage of consumers’ lack of vigilance’.150

The Government agreed with the Review that putting a ceiling on the total cost of credit would not be likely to give vulnerable and disadvantaged consumers access to affordable small amount credit on fair terms and it could also exclude some legitimate products from the lending market. There was also a risk that some consumers might seek credit from unregulated sources.151 The Government response said that further work was needed to ‘determine the best way to redress [the] problem, balancing acceptable levels of consumer protection with minimising the cost to business.’ The Government believed that the issues should be progressed nationally because credit is a national market.152

In December 2007, the Consumer Credit (Victoria) and Other Acts Amendment Bill 2007 (Vic) was introduced into the Victorian Parliament. The Bill forms part of the ongoing implementation of the Government’s response to the Victorian Review Report. It also reinforces the Government’s commitment to the Government social action plan, A Fairer Victoria, released in 2005, which includes improving access by low income consumers to affordable credit. The Bill seeks to implement those recommendations of the Review that are specific to Victoria (others that involve national change are being progressed through the Minister Council on Consumer Affairs, such as dealing with unscrupulous lending practices).153 Among the various measures to be introduced are an enhancement to the registration scheme for credit providers under the Consumer Credit (Vic) Act 1995; a requirement for such providers to belong to an external dispute resolution scheme; and to enable the Director of Consumer Affairs to bring proceedings on behalf of consumers under the Code.

150 Victoria, Department of Consumer Affairs, Government Response to the Report of the

Consumer Credit Review, September 2006, pp 22-23.

151 Government Response to the Report of the Consumer Credit Review, pp 22-23.

152 Government Response to the Report of the Consumer Credit Review, p 22.

153 Hon R Hulls MP, Attorney-General, Second Reading Speech, Consumer Credit (Victoria) and Other Acts Amendment Bill 2007 (Vic), VicHansard, 6 December 2007, pp 4387-4389, p 4388.

http://www.dms.dpc.vic.gov.au/domino/Web_Notes/LDMS/PubPDocs.nsf/ee665e366dcb6cb0ca256da400837f6b/078FBC093B11D277CA2573A700809216/$FILE/561108bi1.pdf

http://www.dms.dpc.vic.gov.au/domino/Web_Notes/LDMS/PubPDocs.nsf/ee665e366dcb6cb0ca256da400837f6b/078FBC093B11D277CA2573A700809216/$FILE/561108bi1.pdf


7.2.4 South Australia

As noted above, South Australia does not currently impose any cap on the APR for small amount loans.

On 25 October 2007, the House of Assembly’s Economic and Finance Committee tabled its ‘Consumer Credit and Investment Schemes’ Final Report (EFC Final Report).154 The Report was the outcome of the Committee’s resolution, in November 2006, to inquire into the provision of consumer credit and investment schemes in South Australia.155

The Committee recommended to the Minister for Consumer Affairs that consideration be given to capping interest rates, fees and charges. The Committee said that it did not necessarily endorse a 48% cap but believed that further research was needed regarding cap type mechanisms in other jurisdictions.156 The SA Office of Consumer and Business Affairs’ (OCBA’s) submission referred to a possible ‘structured cap’ which would be ‘reflective of payday lenders’ costs and [allow] a fair rate of profit’ and would probably be set well above 48%.157 Industry expressed opposition to any form of ceiling or cap during the Inquiry arguing that the costs associated with providing a payday loan meant that an all-inclusive 48% cap would lead to insolvency for lenders.158

The point was made during the Inquiry that the lender Cash Converters did not operate in NSW where there was a cap. However, the then Commissioner for Consumer Affairs (SA) told the Committee that, in NSW, the cap had not extinguished demand for payday loans as there were people that like the fact it is short term and value the attention they get from the lender. He also noted that there was evidence that some NSW lenders were flouting the cap.159

154 South Australia House of Assembly, Economic and Finance Committee, ‘Consumer Credit and

Investment Schemes’, Final Report, (‘SA EFC Final Report’) Report No 64, 25 October 2007, http://www.parliament.sa.gov.au/NR/rdonlyres/CCA9B123-03BC-4441-9860-59FA8B3CE7A7/9493/ConsumerCreditFinalReport.pdf.

155 SA EFC Final Report, p 16.

156 SA EFC Final Report, recommendation 4, p 103.

157 SA EFC Final Report, p 29, referring to OCBA Submission, February 2007, p 25.

158 SA EFC Final Report, pp 30-31, citing evidence from National Financial Services Federation (SA) Inc (NSF) Submission, February 2007, pp 55-56.

159 SA EFC Final Report, p 35, citing evidence from Mr Bodycoat, former Commissioner for Consumer Affairs, Committee Hansard, 6 June 2007, p 101.





The Committee said that: [T]he cap mechanism is posited as a way to walk a path between the perceived dangers of unfettered lending (particularly with respect to rate levels) and closing the current regulated industry down, yet on both models put forward [flat 48% cap and a structured cap], the results are unsatisfactory if the object is to maintain a functioning industry with credible repayment protections for consumers.’160

The OCBA were concerned that the consequence of payday lenders leaving the market or tightening up borrower eligibility requirements could be to leave low socio-economic borrowers with poor credit histories with few options for obtaining loans. This might cause some borrowers to turn to illegal ‘loan sharks’ who employ unlawful debt collection practices.161

The Committee did, however, recommend that consideration be given to a cap on the cost of credit and made a number of other recommendations aimed at better consumer protection, including that payday lenders and other short term lenders be subject to licensing requirements (which includes a need for accreditation, membership of dispute resolution schemes, and ongoing professional development).162

In October 2007, the Minister for Consumer Affairs announced that the Government had decided to develop legislation aimed at cracking down on unscrupulous payday lenders and which would include a maximum interest rate cap that encompassed fees and charges.163 The Minister said that the reforms would also require credit providers to be licensed and subject to a ‘fit and proper’ character test.

7.2.5 Western Australia

In Western Australia, payday lenders have to be licensed as credit providers. In 2001, the then Minister for Racing and Gaming told the WA Parliament that the Government was currently considering setting a ceiling of 48% on the maximum

160 SA EFC Final Report, p 33.

161 SA EFC Final Report, p 33 citing OCBA Payday Lending Discussion Paper, October 2006, p 17. Although the context in which this outcome was noted was if payday lending were effectively prohibited.

162 SA EFC Final Report, pp 103-105.

163 Hon Jennifer Rankine, Minister for Consumer Affairs, ‘Days are Numbered for Payday Lending “Rogues”’, News Release, 21 October 2007.


APR for short term credit under the Consumer Credit (WA) Act 1996.164 The Minister went on to say that the Government was, at that time, receiving representations from the payday lending industry and would consult further with stakeholders prior to finalising Regulations to set a maximum rate.

There does not appear to be any legislation imposing a cap on the cost of payday loans in the WA at the present time.

7.2.6 Tasmania

In April 2001, the Payday Lenders Moratorium Act 2001 came into force to prevent the establishment of payday lending in Tasmania (where no such lenders operated at that time) until a comprehensive national approach to the industry had been developed. However, since the Code was extended to short term lenders, payday loans are now regulated in Tasmania and the Payday Lenders Moratorium Act 2001 was repealed in December 2002.165 There do not appear to be any current proposals to impose a cap on the cost of payday loans in Tasmania.

7.2.7 Northern Territory

While the Consumer Credit (Northern Territory) Act (NT) provides for an APR to be prescribed, there do not appear to have been any Regulations doing so. Nor does it appear that there are any legislative proposals to impose a cap on the cost of payday loans.

7.2.8 Overseas

Ceilings on interest rates are used in many countries including:166

• Germany where it appears that the courts have, in deciding whether to intervene in credit contracts that are ‘significantly disproportionate’, come to interpret this as occurring when the interest rate exceeds 100% of the base rate for a given loan type;167

164 Hon N D Griffiths MLC, Consumer Credit (Western Australia) Amendment Bill 2001 (WA),

Second Reading Speech, Legislative Council Hansard, 20 September 2001, p 4056.

165 See also, the Consumer Credit (Tasmania) Act 1996 (Tas).

166 The following information is sourced mainly from N Howell, pp 2-3.

167 N Howell, p 2, citing other studies and articles.

http://www.slp.wa.gov.au/statutes/swans.nsf/5d62daee56e9e4b348256ebd0012c422/1e9ea71891bbcf73482565db001bb598/$FILE/Consumer%20Credit%20(Western%20Australia)%20Act%201996.PDF

http://notes.nt.gov.au/dcm/legislat/legislat.nsf/d989974724db65b1482561cf0017cbd2/30f43151144fde0d692563f800041167?OpenDocument

http://www.thelaw.tas.gov.au/tocview/index.w3p;cond=ALL;doc_id=25%2B%2B1996%2BAT%40EN%2B20080116180000;histon=;prompt=;rec=;term=consumer%20credit


• France where the cap on rates varies according to the type of loan with small consumer loans having the highest rate cap;168

• Canada where it is an offence under the Criminal Code to impose an interest rate in excess of 60% (but it has been noted by commentators that the law has rarely been applied to payday lenders even though they have rates above 60%);169

• USA where some states such as Georgia, Oregon, Pennsylvania, and North Carolina have effectively banned payday lending and a number of states have caps, albeit gradually rising over time. The caps usually vary between different loan types. In some states, there are exemptions from the cap for small loans. Some studies indicate that the effectiveness of the caps has, in practice, been undermined by court decisions that have allowed lenders to avoid them by setting up in a non-cap state and offering loans to consumers living in states that have caps (because the loan is regulated by the laws of the state in which it is taken out).170 In September 2007, it was reported that the District of Columbia had removed an exemption that had enabled payday lenders to exceed the 24% ceiling on interest rates.171 Consumer advocates argued that more borrowers were being trapped into long-term debt and the non-profit research institute, Centre for Responsible Learning, has found that typical payday customers borrow 8 to 13 times per year.172 It was also reported that several states were currently considering capping interest rates or removing payday lender exemptions from existing caps;173

• United Kingdom where the 48% cap was abolished in 1974. The scheme of regulating credit has been reviewed a number of times but the Government has not been persuaded that imposing interest rate caps was the right approach. In 2006 a new Consumer Credit Act was passed to provide greater protection for borrowers but it does not include any interest rate ceilings. The Government has said that it decided against doing so on the basis of independent research of

168 N Howell, pp 2-3, citing UK Department of Trade and Industry p 7.

169 N Howell, p 3, citing S Lott & M Grant, Fringe Lending and ‘Alternative Banking: the Consumer Experience, Public Interest Advocacy Centre, November 2002.

170 N Howell, p 3, citing various studies including M Saunders & A Cohen, ‘Federal Regulation of Consumer Credit: The Cause or the Cure for Predatory Lending?’ Working Paper Series, Joint Centre for Housing Studies, Harvard University, BABC 04-21, pp 7-8.

171 United States of America, Centre for Responsible Lending, ‘Nation's Capital Kicks Out Payday Lenders’, Press Release, 18 September 2007, http://www.responsiblelending.org.

172 DP Morgan & MR Strain, p 9.

173 US, Centre for Responsible Lending, ‘Nation's Capital Kicks Out Payday Lenders’.

http://www.responsiblelending.org/


interest rate ceilings in France, Germany and the USA. The research found that the market did not provide small amount credit over short terms which excluded some low income people from the market or caused them to take out longer loans than they needed. It was also found that some low income borrowers took out credit that had additional charges which were not included in the interest rate cap, such as late payment charges. Further, there were twice as many consumers who said that they had borrowed from illegal or unlicensed lenders in Germany and France than in the UK.174

8 CURRENT QUEENSLAND SITUATION

It seems that there has been little research on the prevalence of high interest loans in Queensland but it appears that the Queensland OFT has anecdotal evidence from consumer support organisations, such as Legal Aid Queensland, that the predictions of growth in the payday lending market have been correct.175

There is currently no ceiling on interest rate charges under the Queensland Credit Act. Section 14(1) of the Act currently provides for a prescribed maximum APR but, to date, no prescribed maximum APR has been set by Regulation.

8.1 INDEPENDENT WORKING PARTY ON PAYDAY LENDING

In its August 2000 Pay-day Lending - A Report to the Minister for Fair Trading, as part of an investigation of payday lending practices in Queensland, an independent working party considered the introduction of an interest rate cap in Queensland. It was decided that the market should continue to determine rates of interest. Nevertheless, it was recommended that payday lenders be brought under the Code (which was not the case at that time) which would have the effect of requiring those lenders to disclose details of the loan, including the interest rate, to the borrower.176

174 United Kingdom, Department for Business Enterprise & Regulatory Reform, ‘Frequently asked

questions on Consumer Credit Act 2006’, http://www.dti.gov.uk/consumers/consumer-finance/credit-act-2006/FAQs/page24450.html, referring to Policis, The effect of interest rate controls in other countries, A report for the Department of Trade and Industry (UK), London August 2004.

175 Queensland OFT, 2006 Discussion Paper, p 11-12. 176 Queensland, Payday Lending – A Report to the Minister for Fair Trading, August 2000,

http://www.fairtrading.qld.gov.au/OFT/oftweb.nsf/AllDocs/3A1B0FBCF63EE9FA4A256B4400317450/$File/36.pdf, p 31. The working party was comprised of a cross section of interested stakeholders, including mainstream lenders, financial counsellors, consumer groups, lawyers, academics and Government officials.

http://www.fairtrading.qld.gov.au/OFT/oftweb.nsf/AllDocs/3A1B0FBCF63EE9FA4A256B4400317450/$File/36.pdf

http://www.dti.gov.uk/consumers/consumer-finance/credit-act-2006/FAQs/page24450.html

http://www.dti.gov.uk/consumers/consumer-finance/credit-act-2006/FAQs/page24450.html




The working party found that the payday lending market was, at that time (in 2000) quite new and relatively small. It was anticipated, however, that the payday lending market would grow rapidly over the following 5 to 10 years.177

The working party considered that a cap of 48% on effective annual interest rates that had been adopted by some jurisdictions did not take into account the time, effort and expense associated with providing payday lending services to consumers. A loan application for $200 for one month would take around 45 minutes to process and a 48% cap would mean that the lender would receive $8 in interest, making the loan unviable from the lender’s perspective.178 Some concern was also expressed by the working party that a legislated cap might result in the cap being regarded as a ‘benchmark’ and that a borrower might have difficulty challenging an interest rate as being unconscionable where the interest rate is actually below the cap. It was further considered by the working party that capping interest rates would not overcome other problems associated with payday lending.179

The Government adopted the recommendation of bringing payday lenders in all states and territories under the Code and, as noted earlier, legislation was passed in 2001 to ensure this occurred. However, concerns about some fringe lenders have continued to be expressed and the practices of some have received media attention. In August 2007, the media reported that the absence of interest rate caps in Queensland has fostered the second largest payday loan industry in the country with around 200 operators, based mainly in lower income suburbs.180 Thus, the Queensland Government has been revisiting the issue of whether interest rate caps should be introduced to regulate the provision of consumer credit.

8.2 ‘MANAGING THE COST OF CONSUMER CREDIT IN QUEENSLAND’ DISCUSSION PAPER

In November 2006, the Queensland Office of Fair Trading (Queensland OFT) released the ‘Managing the cost of consumer credit in Queensland’ Discussion Paper (2006 Discussion Paper) to consider the costs and benefits of various options for ‘achieving the policy objective of ensuring that the fees and charges relating to the provision of consumer credit are fair and reasonable and, in particular, that

177 Queensland OFT, Pay-day Lending - A Report to the Minister for Fair Trading, p i.

178 Queensland OFT, Pay-day Lending - A Report to the Minister for Fair Trading, p 29.

179 Queensland OFT, Pay-day Lending - A Report to the Minister for Fair Trading, p 29.

180 Patrick Lion, ‘Credit crunch’, Courier Mail, 25 August 2007, p 54.



vulnerable consumers are not exploited through the imposition of unfairly high rates of interest and/or excessive fees and charges.’181 The 2006 Discussion Paper noted that achieving this policy objective might involve the introduction of an interest rate cap similar to that which exists in NSW, the ACT and Victoria, or it might involve some other form of legislative intervention.182

When considering various means of meeting the above policy objective, the 2006 Discussion Paper considered a number of options and the impact of each on various stakeholders. In dismissing the option of maintaining the status quo, it was noted that lenders would be unlikely to lower their rates and/or fees voluntarily and borrowers would continue to direct money to servicing high costs of the loan rather than meeting basic living costs. Further, the Government would incur costs that are a consequence of more household debt, higher bankruptcies, reduced consumer spending and more people needing to turn to welfare services.183

Other options were also seen as having various shortcomings. Self-regulation through industry codes of practice or guidelines had problems including that industry may not develop appropriate, or even any, codes or guidelines nor comply with them.184 The possibility of encouraging the expansion of no interest or low interest loan schemes (NILS and LILS) faced the difficulty of there only being a small number of such schemes in Queensland; that the eligibility criteria might exclude some consumers; and loans are only for limited purposes but it was suggested that these schemes might be useful in conjunction with another option considered by the Paper.185

The option of education initiatives to address information imbalance between consumers and lenders, either instead of or in conjunction with regulation, was also considered.186 However, educational material may not be received by those most in need of it at the very time when it is needed and that it may not help those potential

181 Queensland OFT, 2006 Discussion Paper, p 8. The Discussion Paper was prepared to satisfy

Queensland’s obligations under the National Competition Policy given that controls on the cost of consumer credit could restrict competition among credit providers and, also, limit the ability of certain consumers (e.g. low income earners) to secure credit: see p 10.




185 Queensland OFT, 2006 Discussion Paper, pp 24-25.

186 Such as material warning of the dangers of high cost loans, informing consumers how to interpret credit contracts and calculate the applicable interest rates and charges, and advising of consumer rights.


borrowers who know they are being charged high interest but need to take the loan anyway because they need the money.187 Some people feel that they ‘must have’ the latest household luxury and will use supporting information just to reinforce their decision to buy but disregard any negative information.188 Other reviews have noted the poor decisions often made by consumers even when armed with information. For instance, some people do not consider the long term implications when they take out a loan in terms of their ability to continue to service it and many consumers are optimistic about their capacity to cope in the future despite the risk of default charges.189 In addition, some consumer groups have a low level of financial literacy and are unlikely to be able to read and understand contracts before signing them.190

Lastly, the option of government regulation was discussed. Such would involve the making of a Regulation under the Consumer Credit (Queensland) Act to prescribe a maximum APR (cap) for credit contracts under the Code. The 2006 Discussion Paper commented that this measure raised a number of issues for consideration.191 These included choosing what the maximum rate should be and whether it should be a single rate for all types of loans (unlike Victoria where different rates apply to mortgages and other credit contracts). There was also the question of whether, as in NSW and the ACT, the cap should include non-interest fees and charges or, as occurs in Victoria, just the interest component. Other issues included whether the amount paid by the borrower in excess of the maximum rate could be recoverable and what the penalties for breach of the cap by the lender should be.

The impact – positive and negative – of a new prescribed cap on lenders and borrowers was also considered by the 2006 Discussion Paper as follows:192

• lenders whose interest rates and/or fees exceed the prescribed maximum APR or cap would have to reduce them for all new loans which might limit the lenders’ capacity to recover the costs associated with short term loans. Thus, some lenders might need to withdraw from the market;





191 As set out in the Queensland OFT, 2006 Discussion Paper, pp 28-33.



• those lenders who operate within the cap may gain certain benefits that flow from lenders who previously exploited consumers having to leave the industry. Those lenders may gain from a better industry reputation and greater community confidence;

• lenders may derive benefit from better uniformity with the regulatory environment existing in NSW, the ACT and Victoria;

• unscrupulous lenders may have more incentive to develop new products not covered by the cap, meaning that borrowers lose the Code’s other protections;

• new compliance costs faced by lenders may be passed on to borrowers in the form of lower levels of service, less product choice, stricter loan terms, more stringent screening and a greater likelihood that lenders would pursue defaulting borrowers;

• lenders might be more likely to refuse loans to certain high risk consumers resulting in those consumers possibly resorting to illegal lenders and incurring more risk;

• some lenders might subsidise the loans to high risk borrowers by increasing the interest rates charged to low risk borrows;

• interest rates may begin to gravitate towards the cap which might become to be seen as a benchmark rather than a maximum rate;

• a number of significant benefits to borrowers would be likely to flow such as a decrease in the cost of a loan; more protection from exploitation and from unfair and unreasonable rates and terms; improved ability to save and build assets; more household finances for essential goods; and increased consumer confidence.

8.3 THE DRAFT CONSUMER CREDIT (QUEENSLAND) AMENDMENT BILL 2008

On 26 November 2007, the Queensland Attorney-General and Minister for Justice, the Hon Kerry Shine MP, released for industry and community comment, a draft Consumer Credit (Queensland) Amendment Bill 2008 (Qld) (the draft Bill) and draft Consumer Credit (Queensland) Special Provision Regulation 2008 (Qld) which seek to amend the Consumer Credit (Queensland) Act 1994 (Qld) (the Act) and the accompanying Consumer Credit (Queensland) Regulation 1995 (Qld). A major initiative is the proposed introduction of a 48% cap on consumer loan interest rates, fees and charges.

In a joint media statement on the same day, the Premier, the Hon Anna Bligh MP said that the Government ‘made a commitment to introduce a cap … and despite a sustained campaign by payday lenders opposed to our proposal, I can now confirm that

http://www.fairtrading.qld.gov.au/oft/oftweb.nsf/AllDocs/E5F7B34F8C908E7F4A25739F00251BA8/$File/Consumer%20Credit%20Qld%20Amendment%20Bill%202008.pdf

http://www.fairtrading.qld.gov.au/oft/oftweb.nsf/AllDocs/E5F7B34F8C908E7F4A25739F00251BA8/$File/Consumer%20Credit%20Qld%20Regulation%202008.pdf

http://www.legislation.qld.gov.au/LEGISLTN/CURRENT/C/ConsumCredA94.pdf

http://www.legislation.qld.gov.au/LEGISLTN/CURRENT/C/ConsumCredR95.pdf


cap will be set at 48% inclusive of interest, fees and charges.’193 The Attorney-General said that his Department had received over 5,000 submissions, including borrowers of payday loans, urging the Government not to introduce a cap but that the Government’s priority was to protect consumers from falling into a payday credit trap.194 The Attorney-General said that the purpose of releasing the draft legislation was not to revisit discussion about the intention to introduce a 48% cap but to provide stakeholders with the opportunity to comment on whether it adequately achieved the Government’s policy objective.195

8.4 OVERVIEW OF THE DRAFT BILL AND PROPOSED REGULATION

Section 14(1) of the Act currently provides for a prescribed maximum APR for a credit contract or class of credit contract. Section 14(2) states that Part 2, division 2 of the Code – which limits a debtor’s monetary obligations – applies in relation to the prescribed maximum APR as if the rate had been prescribed by the Code. Clause 4 of the draft Bill intends to make changes to this provision.196

The draft Bill seeks to insert a note to s 14(2) which explains the effect of that sub-section. The effect is that a provision of a contract is void to the extent it imposes a monetary liability in excess of the prescribed maximum APR and that any excess amount paid under the contract may be recovered.

In addition, the credit provider commits an offence for entering into the contract and will face civil penalties of up to $500,000 for breaching the Code as well as criminal penalties of up to $10,000 for an individual and $50,000 for a corporation.197

The draft Bill also proposes the inclusion of a new s 14(3) and s 14(4). Section 14(3) seeks to provide that a Regulation may require that, for calculating the APR of a credit contract, not only interest charges but all credit fees and charges under the credit contract are to be included. This is consistent with the approach in NSW and the ACT. The proposed s 14(4) provides that if a provision of a contract is

193 Hon Anna Bligh MP, Queensland Premier, & Hon Kerry Shine MP, Attorney-General and

Minister for Justice and Minister Assisting the Premier in Western Queensland, ‘Bligh Government to crack down on payday loans’, Media Statement, 26 November 2007.

194 ‘Bligh Government to crack down on payday loans’.


196 Transitional provisions will be in a proposed new Part 10 of the Act (inserted by cl 5).



void to a particular extent because of ss 14 and 21(2) of the Code (prohibited monetary obligations), nothing in s 14 affects the powers of the Court under Part 4, division 3 of the Code in relation to other provisions of the contract (i.e. so the Court can still reopen an unjust contract or make changes on grounds of hardship even if it is void).198

The draft Consumer Credit (Queensland) Special Provision Regulation 2008 (Qld) seeks to prescribe that the maximum APR for a credit contract is 48% and that the APR of a credit contract must be calculated in accordance with s 3 of the new Regulation. Section 3 sets out a formula for calculating the APR as a nominal rate per annum, together with the compounding frequency. The APR must include not just interest charges but all credit fees and charges under the credit contract.

Fees or charges that arise from the establishment or maintenance of a temporary credit facility (such as an overdraft facility) by authorised deposit-taking institutions (ADIs) in specified situations will not need to be included for calculating the maximum rate: s 2(4).

9 MINISTERIAL COUNCIL ON CONSUMER AFFAIRS PROPOSED LAWS

In the meantime, a broader national approach is being undertaken by the Ministerial Council on Consumer Affairs (MCCA) on wider changes to the Code to deal with dishonest practices that have been found to have emerged in the fringe credit market. Only a very brief comment will be made about these proposals in this section as they are beyond the scope of this Research Brief.

In late 2003, the MCCA took submissions on the ‘Fringe Credit Providers’ Discussion Paper199 and, after taking into account submissions on the proposals put forward therein, released a Decision Making Regulatory Impact Statement and Final Public Benefit Test in early 2007. The recommendations for changes to the Code include:200

• amendments to disclosure provisions to make it clear that the APR must be provided for all loans where there is a charge in the nature of interest, even where the charge is not portrayed as interest (based on s 10B of the NSW Act);

198 Transitional provisions are also included regarding application of the maximum APR to

contracts entered into before it is prescribed: cl 5.

199 MCCA, ‘Long Term Regulation of Fringe Credit Providers’ Discussion Paper, August 2003.

200 Queensland Department of Tourism, Fair Trading and Wine Industry Development, Ministerial Council on Consumer Affairs, Consultation Package, August 2007, pp 1-2.

http://www.fairtrading.qld.gov.au/oft/oftweb.nsf/AllDocs/E5F7B34F8C908E7F4A25739F00251BA8/$File/Consumer%20Credit%20Qld%20Regulation%202008.pdf


• amendments to clarify that the pawnbroker exemption only applies where money is lent on the security of pledges of goods and the sole recourse for failure to repay is for the pawnbroker to sell or dispose of those goods;

• an amendment to ensure that all the amount of fees and charges imposed or provided, including any fee paid to a third party for referral to or from the credit provider, is included in determining whether or not a loan is exempt as ‘short term credit’ under s 7 (if fees and charges are more than 5% and the other conditions of s 7(1) are fulfilled, the credit is a payday loan covered by the Code);

• amendments to remove the presumption that applies to a business purpose declaration and to require lenders claiming that the credit was not provided wholly or predominantly for personal, domestic or household purposes, to be able to show that they took active steps to ascertain the actual purpose of the loan;

• insertion of a new s 72 (Court may review unconscionable interest and other interest) to permit the Court to take into account the objective reasonableness of the interest rather than apply the more difficult to establish ‘unconscionability’ test.201 The new s 72 would allow the Court to consider fees and charges reasonably imposed by other credit providers in considering ‘unreasonableness’ and the section would be expanded to enable all fees and charges to be reviewable where they represent more than a reasonable estimate of the lender’s loss;

• insertion of a new s 72A to permit government consumer agencies to make applications under ss 70 and 72 of the Code to represent borrowers;

• an amendment to require consumers to be given information about direct debit authorities; and

• an amendment to prohibit lenders from asking for, or taking security over, essential household goods.

In August 2007, the Queensland Office of Fair Trading (Queensland OFT) released exposure drafts of a Consumer Credit Code Amendment Bill 2007 and a Consumer Credit Code Regulation 2007, prepared by the MCCA, to implement the above recommendations. In response to a call for public comment, a number of submissions were received and will be considered as part of the review of the Code. The proposed changes seek to curtail unfair credit practices within the fringe credit market affecting consumers.

201 This was discussed by the Victorian Review Report, p 117 (see above).

http://www.creditcode.gov.au/content/downloads/Fringe_Credit_Discussion_Paper_Bill%20_%20and_regulation_Aug07.pdf





10 NON-REGULATORY OPTIONS TO ASSIST LOW INCOME CONSUMERS

As noted by some commentators above, regulating the payday lending industry alone will not eliminate the issue of how to provide vulnerable, low income consumers with equitable access to credit.202 A Canadian academic studying the growth of alternative credit providers in that country identified two main policy challenges arising from the expansion of the short term credit market: firstly, ensuring that the needs of vulnerable consumers are met in a less costly manner, and, secondly, regulating abusive practices effectively.203

In Australia, it appears that some community and welfare bodies have responded to those people on low incomes facing financial exclusion by developing various microfinance programs and services. As discussed earlier, various studies have seen the potential for microfinance – such as no interest loan schemes (NILS) and low interest loan schemes (LILS) – as a tool for addressing poverty rather than more typical ‘welfare’ responses where money is given rather than lent. Involvement by commercial lenders in microfinance has generally been an aspect of their fulfilment of corporate social responsibility.204 Research has emphasised, however, that microfinance, like the regulation of short term credit, is not a panacea to poverty nor does it significantly change its underlying causes.205 It has also been argued that any initiatives or programs perceived by consumers as being a form of charity might risk their being rejected as an undermining of the sense of financial inclusion and dignity that they feel they get from payday lenders.206

10.1 NO INTEREST LOAN SCHEMES (NILS) AND LOW INTEREST LOAN SCHEMES (LILS)

NILS are free of interest, fees and charges so that the borrower repays just the amount borrowed. When the money is repaid it is lent out again. NILS loans are usually for limited purposes, usually to purchase essential domestic appliances (e.g.


203 D Wilson, ‘Payday Lending: Policy Making for the Financial Fringe’, pp 23-24, citing Prof Iain Ramsay, Access to Credit in the Alternative Consumer Credit Market, p 40.

204 Which has been engaged in fairly intensively by some banks such as ANZ which published a Corporate Responsibility Report 2005.

205 Ingrid Burkett, p 15, referring to other studies.



refrigerators) or to assist with buying medical equipment (e.g. wheelchairs). Loan amounts are typically around $600-$1,000 repaid over 12 to 15 months.207 The Good Shepherd Youth and Family Services in Melbourne began the first NILS in 1981 and it spread throughout Australia after that. Credit unions also provide NILS and LILS.208 Many NILS receive grants from corporate business, government and philanthropic trusts.209

LILS, a relatively new innovation, charge small amounts of interest on loans to cover some of the costs of the loan but they do not have any additional fees. They tend to be jointly run between banks and community or charitable bodies. The best known example is the StepUp loan program, a joint Good Shepherd and National Australia Bank initiative, providing personal unsecured loans of between $800 and $3,000 at reduced rates of interest to low income earners (see below). 210

While most of the research in this area has been related to provision of credit, it has been found that savings, insurance and financial literacy training are also vital products and services. Thus, programs need to be found that cater to the multifaceted needs of those who receive them.211 NILS and LILS often include other services such as financial counselling, access to buying services for more affordable goods, and education and awareness services about debt related issues. It is possible that the low default rates associated with these schemes are due to the support services associated with the loan. These services, while beneficial to consumers, tend to raise the costs of the schemes and of managing the loans.212

However, LILS services usually require that the consumer has a clear credit history.213 Some schemes require a sort of ‘test period’ if a person does not have a credit history, for instance, asking the person to establish a savings account.214 In

207 Victorian Review Report, p 90; NSW OFT, ‘Alternatives to high cost credit’, Factsheet,

November 2007.




211 Ingrid Burkett, p 19, referring to other studies.

212 Victorian Review Report, pp 92, 95.




addition to fairly strict eligibility criteria, these schemes provide loans only for limited purposes, such as to purchase essential household items.215

It has also been noted that the high cost and low return on these loans tend to mean that, without government involvement, long term viability depends upon the goodwill and corporate social responsibility of lenders and other charitable donors.216 Research indicates that microfinance initiatives are viable mainly when the scale of them is large enough and the fees charged sufficiently high. While some organisations have achieved a level of profitability, in reality, the majority of microfinance services are considerably subsidised.217

The Victorian Review Report observed that there were a number of barriers faced by financial institutions that may contemplate establishing microfinance opportunities for customers. The ANZ has indicated that one hurdle was commercial viability, given that microfinance initiatives tend to have high start-up costs and low uptake. Staff also have to be trained in managing the operation.218

Operators of LILS must also meet the requirements of the Code (because they charge interest) but this is generally covered by the fact that many LILS are offered in partnership with credit providers that already have internal compliance systems in place and because the community agency administering the loan tends to absorb administration costs.

10.2 RECENT MICROFINANCE INITIATIVES

While it is not possible to explore all of the various microfinance programs that have been entered into in Australia, a few involving some of the larger banks are briefly described below.

National Australia Bank219

The National Australia Bank (NAB) has had a relatively long history of involvement in provision of financial services and products to assist low income

215 Victorian Review Report, p 93, citing Cash Converters’ Submission, p 6.


217 Ingrid Burkett, pp 20-21.

218 Victorian Review Report, p 102, citing Submission from the Australia and New Zealand Banking Group Ltd, p 12.

219 NAB, ‘Microfinance – backing people, not just banking them’, http://www.nab.com.au.

http://www.nab.com.au/


and disadvantaged consumers. These have predominantly taken the form of NILS and LILS and aim to build the borrower’s financial capability like their budgeting and saving skills and credit history. In April 2006, the NAB committed $30 million over three years to microfinance programs.

In association with Good Shepherd Youth and Family Services, the NAB has made $3.3m in loan capital available to expand its NILS® in Victoria (which was developed over 25 years ago) and both are working with the Victorian Government to do this. There are currently 233 NILS® programs around Australia. Further loan capital has been provided by the NAB to expand NILS® in other states, including Queensland.

As mentioned earlier, the NAB also operates the StepUp loan program – unsecured not for profit loans up to $3,000. StepUp seeks to provide a bridge between NILS® and the mainstream market.

In 2007, the NAB began piloting a new Microenterprise Loan to assist people aspiring to set up business, but who cannot obtain mainstream loans, by providing low income borrowers with loans on a low interest business loan basis. Borrowers also, with the help of government partnerships, have access to business skills training.220

The NAB also offers insurance for low income customers as well as a variety of concession bank accounts.

ANZ

The ANZ has programs seeking to respond to problems such as financial literacy and financial inclusion. These are delivered in partnership with community organisations. The programs and services offered include Saver Plus (a financial literacy and matched savings program established in 2003 to help people to improve their financial knowledge and build savings); MoneyMinded (a suite of financial education programs for low income earners); MoneyBusiness (operating in partnership with a government agency to build the money management skills and confidence of Indigenous people and being piloted in six remote communities in the NT and WA); and Progress Loans in partnership with the Brotherhood of St Laurence (to give low income borrowers access to small loans up to $3,000 for essential household items). The ANZ also supports various forms of community giving to charities.221

220 NAB, ‘NAB launches affordable loans for microenterprises’, http://www.nab.com.au.

221 ANZ, Community, http://www.anz.com.au.

http://www.nab.com.au/

http://www.anz.com.au/


Other

Westpac has provided low cost basic banking facilities for community organisations and offers a package that provides discounts on a range of banking products commonly used by not for profit community organisations. It includes access to financial literacy and general advice tools.222

The Macquarie Group has been involved in supporting community organisations since 1969 and set up the Macquarie Group Foundation in 1984. The Foundation supports a range of welfare initiatives.223

10.3 OPTIONS

It has been suggested that the capacity of NILS and LILS could be expanded via a number of policy options.224 One possibility is to reduce the cost of administering such schemes or the default rate so that the amount that could be lent would be increased. The NAB has noted that the delivery of services on a wide scale was resource intensive and that programs were currently being run through NILS volunteers or through specific measures such as StepUp.225

The Victorian Review Report commented that the existing schemes were well managed, keeping default rates low, but there was scope for government and industry to help. The means by which this assistance could occur needed further investigation.226 Some consumer groups have suggested that governments could encourage the expansion of NILS and LILS through measures such as providing more grants to charitable groups and through working out how to foster greater industry development of these schemes.227

The Queensland OFT 2006 Discussion Paper noted that consumer credit problems for low income borrowers would not be solved by encouraging the expansion of NILS and LILS in Queensland unless this was combined with another measure

222 Westpac, Financial Solutions’,

http://www.westpac.com.au/manage/pdf.nsf/E4163C2C4FEEB9F6CA257059000D61F3/$File/OPCommunity.pdf?OpenElement.

223 Macquarie Group Foundation, http://www.macquarie.com/foundation.


225 Victorian Review Report, p 101, citing NAB Submission, p 5.



http://www.westpac.com.au/manage/pdf.nsf/E4163C2C4FEEB9F6CA257059000D61F3/$File/OPCommunity.pdf?OpenElement

http://www.westpac.com.au/manage/pdf.nsf/E4163C2C4FEEB9F6CA257059000D61F3/$File/OPCommunity.pdf?OpenElement

http://www.macquarie.com/foundation


such as government regulation. This was because there were few such schemes in Queensland and they would not eliminate the need for high interest loans. NILS and LILS tend to lend for limited purposes, such as for essential household items, and tend to have strict eligibility criteria that current payday lending customers may not be able to meet.228 Further, the additional funding needed to expand the schemes was greater than the current size of the commercial market.229

Another type of measure that could help low income consumers is if the Centrelink Advance Payment were made more flexible. Recipients of certain income support payments are eligible to receive lump sum advance payments from Centrelink and must be repaid. It has been suggested that recipients of income support payments could receive smaller advances over shorter periods which might meet unforeseen emergencies.230


229 Queensland OFT, 2006 Discussion Paper, p 25, citing Victorian Review Report, p 100.



RECENT QPL RESEARCH PUBLICATIONS 2008 2008/01 Wine Industry Amendment Bill 2007 (Qld) Feb 2008 2008/02 Prohibiting certain conduct of released child sex offenders: the Child Protection (Offender

Prohibition Order) Bill 2007 (Qld) Feb 2008

2008/03 Drugs Misuse Amendment Bill 2007 (Qld) Feb 2008 2008/04 Caps on Payday Loans Feb 2008

Research Papers are available as PDF files: • to members of the general public, the full text of Research Briefs is now available on the parliamentary web site, URL,

www.parliament.qld.gov.au/publications • www.parliament.qld.gov.au/Library/Query.exe – Library Research Briefs

A Subject Index to Research Publications is available at the following site: www.parliament.qld.gov.au/view/publications/publications.asp?area=research&LIndex=4&SubArea=s_aborigines&Bindex=0&Barea=searchOrders may be sent to the Executive Assistant – Library: (07) 340 67275

http://www.parliament.qld.gov.au/publications

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This Publication:

RBR 2008/04 Caps on Payday Loans (QPL, February, 2008)

Related Publications:

Consumer Credit (Queensland) Amendment Bill 2002: Assisting Consumers in Matters of Credit Choice (QPL, April 2002)

RBR 2002/11

Regulating Payday Lending: The Consumer Credit (Queensland) Amendment Bill 2001, (QPL, June 2001)

RBR 14/01