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31 August 2011 |
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MacGillivrays |
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On Thursday 25 August 2011, the Assistant Treasurer announced reforms to so-called ‘pay day lending’. An exposure draft of legislation has been released to regulate ‘small amount credit contracts’ and to introduce comprehensive cap on the “cost of credit”. The expression “Comprehensive” is perhaps an understatement.
Importantly, some of the changes proposed apply across the board to all lenders and all credit contracts, not only micro-lenders. To our mind, if the proposals announced proceed un-amended it will effectively mean the end of the micro-lending industry in Australia. We say this because the maximum permitted fees and charges, when combined with the limits of the cost of credit (including a prohibition on charging interest at all on small amount credit contracts) could well make it uneconomic for lenders to engage in micro-lending in the future – that’s the feedback we are getting from clients. The reports and analysis issued after the National Australia Bank’s micro-lending project, indicated quite clearly the difficulty in breaking even in this type of lending given the presence of a cap on interest rates chargeable. The exposure draft of the legislation, which is part of the National Consumer Credit Protection Amendment (Enhancements) Bill 2011, is a beautifully drafted piece of legislation, effectively closing any and all loop holes which appear to have existed previously in consumer credit legislation around the issue of micro-lending. Having said that, it probably would have been easier merely just to ban micro-lending outright. Lets look at the main features of what is proposed in the exposure draft. The proposals include: < Characterise a new type of credit contract called a ‘small amount credit contract’ –$2000 or less with a term not exceeding 2 years; < Introduce new responsible lending conduct obligations in relation to small amount credit contracts; < Prohibit interest being charged on small amount credit contracts; < All that is permitted to be charged on small amount credit contracts is an establishment fee (no more than 10% of the amount of credit); and a monthly administration fee (not to exceed 2% on the adjusted credit amount); < Require micro-lenders on small amount credit contracts to disclose the availability of other options other than borrowing money; < Require micro-lenders with websites to have links to the ASIC web site “moneysmart.com.au”; < Prohibit refinancing small amount credit contracts; < Prohibit having more than one small amount credit contract on the go at any one time. The proposals also affect all other credit contracts, in the following main respects: < Continues the cap on maximum interest rate permitted of 48%pa on all credit contracts. See next point which explains how the cap of 48% is calculated. < In calculating the cap of 48%pa factors into the calculation, not only interest charges, but also credit fees and charges paid to lender and fees and charges paid to third parties for introduction of the borrower, even if the third party is unrelated to the lender To our mind, the fact that the Government is considering an exemption for bridging finance contracts being inadvertently caught by the new legislation is one indication of the wide scope of the proposed “cost of credit” provisions. Whether the micro-lending industry will be successful in its lobbying endeavours remains to be seen. It strikes us that one of the credibility problems the industry does have is that on a small dollar value loan, when you factor in fees and charges, it leads to a very high notional annual percentage rate. However, as any lender knows it costs money to establish a loan and then to administer the loan for it’s term and in assessing profitability under a loan portfolio, the percentage of bad debts is a factor that has to be taken into account. Where a loan of say $20,000 is being made over a number of years, those costs can be averaged out more easily. However, where a loan of $1,000 – $2,000 is being made over a 1 or 2 year period, those costs have to be amortized over a much shorter period and applied against a much smaller principal hence deriving what a first blush appears to be an exorbitant interest rate. No doubt there will be much debate concerning these new proposals. Whether or not the micro-lending industry will be successful in any representations it makes to Government remains to be seen. Closing date for submissions is Monday 5 September 2011. More details on the National Consumer Credit Protection Amendment (Enhancements) Bill 2011 can be located on the Treasury web site. Article by Richard Williams, Partner - Banking Services
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PLEASE NOTE: This article is not legal advice and our comments are of a general nature only. This document is not to be relied on as substitution for proper detailed legal advice. Liability limited by a scheme approved under professional standards legislation.
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