New Consumer Credit Protections Pass the House of Representatives
Better protections for vulnerable people who use payday loans are a step closer with amendments to the Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011, passing the House of Representatives today.
Minister for Financial Services Bill Shorten said these reforms will stop loan sharks from operating.
"This bill will put the first national cap on small amount loans, limiting the extremities of what lenders are able to charge and complementing the Gillard Government's ongoing commitment to social inclusion by addressing the financial harm caused by some lenders who use the vulnerable financial position of their customers to their advantage."
"This cap on costs appropriately balances consumer protection and a viable return for a responsible industry. Lenders have confirmed to the Government that will be able to continue to operate under the 20/4 cap," explained Mr Shorten.
"This Government believes there is a place in the economy for legitimate short term small amount lending. These loans are appropriate to fill in the gaps for people who need a temporary cash injection. However, the Government is determined to reduce the harm caused to consumers from these relatively high cost forms of credit."
The bill, as amended will;
- Define small amount redit contracts as 1 year or less, keeping the amount as $2000 or less;
- Cap costs for loans under $2000 so that the maximum any lender can charge for a small amount credit contract is 20 per cent of the amount of credit upfront and 4 per cent for each month of the loan;
- Prohibit credit providers entering into a small amount credit contract with a term of 15 days or less; and
- introduce an interest rate of 48%, plus an additional $400 to cover establishment costs for mid-tier loans of amounts between $2000 and $5000 with a maximum term of 2 years;
The bill also introduces the following responsible lending obligations to address high risk conduct in this market:
- a rebuttable presumption that a refinance is unsuitable where the borrower is already in default;
- a rebuttable presumption that a small amount credit contract is unsuitable where it would be the borrower's third such loan in the last 3 months;
- a requirement for credit providers to obtain and consider a copy of the borrower's bank statements for the last 3 months before entering into the contract which will assist the Australian Securities and Investment Commission in enforcing the legislation.
The bill also introduced a legislative requirement to review these policy settings after 2 years to monitor their effectiveness.
Through complimentary regulations, the Government will introduce a further consumer safeguard via a ‘Protected Earnings Amount' for borrowers who are dependent on Centrelink benefits. Under this reform, the maximum repayments this class of borrowers would have to repay, on a short term small amount loan, cannot exceed 20% of their income.
The Bill also implements the Government's election commitments in relation to reverse mortgages. The new laws will introduce a statutory protection against negative equity, as well as targeted disclosure requirements. These amendments will maintain public confidence in reverse mortgage providers.
"These reforms go on top of other credit reforms the Gillard Government has already implemented to protect consumers and improve their financial outcomes when they borrow money. Responsible lending obligations, credit card reforms, the ban on exit fees – all these reforms demonstrate this Government's ability to deliver significant outcomes for consumers," said Mr Shorten.
26 June 2012