Small Personal loans are a currently a hot topic given the recent Royal Commission report and recent suggested regulatory changes. However, how much do you really know about your legal requirements?
Classification Under Law
These Small personal loans are regulated under the National Consumer Credit Protection Act 2009 (“NCCP”) and NCCP Regulations. The NCCP Act defines a small amount credit contract (SAAC) as a contract where the credit limit is $2,000 or less, the term is between 16 days and one year, the credit provider is not an authorised deposit-taking institution (ADI), the contract is not a “continuing credit contract” (ie. credit card) and the consumer’s obligations under the contract are not secured.
Currently, payday loans predominantly make up the market for SAACs. These are small personal loans provided by payday lenders, with flexible eligibility requirements focused on your income and ability to pay back the loan rather than on your credit score.
ASIC regulates the market and there are a number of requirements that payday lenders are required to adhere to in order to meet their responsible lending obligations.
Licensing
Lenders are required be licensed with ASIC and cite their credit licence numbers on their website and key documents. ie. their credit guide.
Reasonable inquiries about requirements, objectives and financial
situation
Payday lenders are required to make reasonable inquiries about your financial situation, requirements and objectives before making a final assessment of suitability.
Financial inquiries include:
• the amount and source of your income;
• your fixed expenses i.e. rent, child support, insurances
• your variable expenses i.e. utility bills; and
• any existing debts that are to be repaid from the loan.
Requirements and objectives include:
• the loan amount needed;
• the loan term; and
• the purpose of the loan.
All of the Payday lenders must ensure that the purpose is clearly evidenced and consistent with the loan amount requested. Where inconsistent information is provided; payday lenders must make additional inquiries and not rely on information if they doubt it’s reliability.
Lenders must make certain additional inquiries to determine your capacity to pay, or whether you could only pay under substantial hardship including:
(a) whether you receive at least 50% of your gross income as Centrelink
payments;
(b) whether repayments in a payment cycle would exceed 20% of your gross
income;
(c) whether you are currently in default under an existing payday loan;
(d) whether you have had two or more payday loans in the last 90 days;
(e) whether the loan will be used to repay another payday loan; and
(f) requesting further information if bank statements showed no income being paid into the provided account (suggesting a second bank account), fluctuating income, any unusual transactions or any conflicting information.
Reasonable steps to verify the financial situation
Lenders must take reasonable steps to verify your financial situation before they give you a loan. They must obtain bank statements, covering the previous 90 days, from the account where your income (and/ or Centrelink payments) are paid in order to verify your income and review your expense history over a period of time, including whether you have had any other payday loans within the period.
The Payday lenders may use third-party software providers to gain and review your account statements, allowing information to be provided by the borrower upfront. Risks of using providers to provide statements should be prominently disclosed and alternative options provided.
The number and type of documents a lender asks you for may depend on whether they have dealt with you before, application content, your credit history and transaction history. Documents may include copies of bills, employment contracts, copies of other credit contracts, credit history, statements, payslips or centrelink statements).
Additional evidence may be requested where the lender has noted conflicting information or needs to verify transaction history (ie. if you are frequently overdrawn or you recently closed the account where your income was paid).
Unsuitability assessment
According to law, Payday lenders must not lend you money if they think the loan would be unsuitable and you could not repay under your current financial obligations, without suffering hardship or if they believe the credit contract does not meet your requirements and objectives.
Payday lenders take the following factors into account when considering whether a transaction is likely to result in substantial hardship:
(a) the surplus amount after expenses and proposed additional payday loan
repayments are deducted from income;
(b) the source of your income (including whether all or some of it is from
Centrelink payments);
(c) how consistent and reliable your income is
(d) your payment obligations relative to your income level;
(e) whether your expenses are likely to be significantly higher than average
(ie. if you live in a remote area); and
(f) your other debt repayment obligations and financial commitments (e.g.
child support).
There are some circumstances where there is an automatic presumption,under law, that you could only comply with your financial obligations with substantial hardship, unless the contrary is proved:
(a) You have had two or more other payday loans in the last 90 days
(whether repaid or not);
(b) You are spending all of your money each pay and are unable to meet
your other expenses;
(c) You have defaulted on another payday loan;
(d) You receive at least 50% of your income from Centrelink; and
(e) Your loan repayments (including the proposed repayments) exceed 20%
of your income.
Some presumptions are treated as a prohibition, some built into eligibility requirements and others used as a trigger to make further inquiries and make a decision on whether you could meet your financial obligations based on those inquiries.
Fees and charges
The fees and charges on payday loans are capped. Payday lenders must only charge you the following:
• a one-off establishment fee of a maximum 20% of the amount loaned
• a monthly account maintenance fee of a maximum 4% of the amount
loaned
• a government fee or charge (should not be any for payday loans)
• default fees or charges until you repay the outstanding amount in full or
reach the maximum of 200% of the total amount of the loan (including
any repayments you made under the contract and excluding
enforcement fees).
Lenders are no longer permitted to charge interest/ direct debit fees on any payday loan entered into from 1 February 2017.
Credit guide
Lenders are required to provide you a credit guide when they enter into a contract with you, including their licence number, contact details, fees and charges, complaint details and information on preliminary assessment requests. Most payday lender credit guides are accessible on their website.
Warning about borrowing
Payday lenders are required to disclose, in a prominent manner, a defined SAAC warning statement advising you of alternatives to a small amount loan. The warning statement is designed with mandatory text to help you make better and more informed financial decisions, then seek out lower cost
alternatives. Warnings statements must also include a reference to ASIC’s MoneySmart website. This is generally provided on payday lender websites.
Multiple payday loans
Payday lenders cannot lend to someone who already has a loan with them and do not renew loans by rolling them over or by refinancing them. You must finalise your loan with them before you can apply for a new one.
Copy of Preliminary Assessment on Request
The lender is required to provide a copy of the written preliminary assessment, on request, prior to entering the contract, within 7 business days if requested within 2 years from the contract date and within 21 business days if requested within 7 years of the contract date.
In understanding and applying the above; you should have a greater understanding of the legal requirements underpinning payday loans and checks you can undertake to make sure your payday loan is with a reputable lender who is meeting their responsible lending obligations.