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November 23, 2011

ASIC review of micro lenders responsible lending conduct and disclosure obligations

ASIC’s Report 264 Review of micro lenders responsible lending conduct and disclosure obligations (REP 264) has found that while the majority of micro lenders are aware of and taking steps to comply with their responsible lending obligations, ASIC identified some instances where micro lenders were at risk of not being able to demonstrate they had met their responsible lending and disclosure obligations.

Whilst "micro lenders" is not statutorily defined, in the report the term ‘micro lender’ is used for lenders who provide loans not involving real property, such as short-term loans of small amounts and payday loans.

The review involved 19 micro lenders and looked at 168 loans between 1 July and 31 December 2010. These 168 files included 19 loans offered by micro lenders over the internet and 8 loans offered for car finance. The majority of micro lenders reviewed (16 of the 19) offered loans of terms not more than 12 months, while 6 micro lenders offered credit for amounts of $1500 or less. While a small number of the lenders did offer credit card contracts or home loans, none of the files reviewed were for those credit products.

ASIC’s review found that, while micro lenders were generally able to demonstrate they were meeting their responsible lending and disclosure obligations, there were occasions where the micro lenders reviewed were not consistent in their approach to and/or record keeping for their obligations. Problems included instances of lenders not recording the actual purpose of the loan, undertaking very limited verification of a consumer’s financial circumstances, and not taking steps to clarify conflicting information in loan applications.

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Posted 23rd November 2011 by David Jacobson in responsible lending

November 21, 2011

Consumer credit enhancements: small amount loans and interest rate caps

The Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 amongst other things contains provisions for:

  • Small amount credit contracts (in Schedule 3) (“payday lender” or micro-loans) which commence on 1 July 2012
  • Caps on interest rates and costs for all other credit contracts (in Schedule 4) which commence on 1 July 2013

The Bill is the subject of 2 inquiries: Senate Economics Committee is due to report on the Bill on 23 November and the Joint Committee on Corporations and Financial Services is due to deliver its report on 24 November.

UPDATE 21 November 2011: I have been informed that the Joint Committee may delay delivery of its report and that the Bill may be carried over to February 2012.


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Posted 21st November 2011 by David Jacobson in legislation

Case note: a contract for diamonds was a regulated loan

In Carter and Anor v Fast Access Finance (Beaudesert) Pty Ltd and Anor [2011] QCAT 525 the Queensland Civil and Administrative Tribunal decided that contracts for the sale of purchase of diamonds were in fact a loan contract regulated by the Consumer Credit Code (as it then was) and as the charge for credit was well in excess of the permitted rate of 48% pa the loan should be reopened.

The lender was ordered to repay to the borrower the whole of interest [or credit charge or profit] received by it.

Rachael Carter and Michael Sinclair had fallen behind substantially with their rental. On 5 November 2009, they attended the offices of Fast Access Finance (Beaudesert) Pty Ltd in order to obtain a loan of $1,000 to pay the rent. They had 2 children and were unemployed.

They signed documentation to buy diamonds for $2000 by instalments by weekly repayments of $98.00 over a period of 5 months on the security of their 1993 Holden Commodore worth $2000 and at the same time to sell the same diamonds immediately for $1000.They were not shown any diamonds and there was no discussion about diamonds. They left with $1000.

The lender argued the arrangement was not a regulated loan even though the applicants signed a loan application form and the privacy consent referred to borrowing.

The [applicants submitted the] rate of interest was calculated at about 318% pa.

The Adjudicator concluded:

The respondents‘ submissions ... would have one believe that the genuine nature of the transaction between the parties was one of the sale and purchase of diamonds.... that Mr Sinclair and Ms Carter attended their office for the purpose of purchasing diamonds and immediately reselling those diamonds as an essential part of that transaction so that as the net result they could lose $1,000. They would never see the diamonds which they contracted to purchase and nor would they get any benefit for example by Ms Carter being able to wear the diamonds...

I find that the characterisation of the transaction in that manner is so highly unlikely, improbable and implausible as to be a complete fiction. It is ridiculous that a person would wish to enter a business premises in order to buy a product no matter what it be, to sell it immediately and make a loss...

This transaction breaches the Code in many respects, pursuant to section 70 it is reopened and I find the respondents are not entitled to any interest, credit charge or profit. As they have not produced any evidence or statement of account then I accept the evidence of the applicant that they have paid $2,500 to repay the loan of $1,000 and I order that the respondents pay to the applicants the sum of $1,500 within 14 days.

AUTHOR'S NOTE 21 November 2011: The words in square brackets have been added as the solicitor for the respondent has pointed out that there was no specific finding as to interest.

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Posted 21st November 2011 by David Jacobson in legislation

November 18, 2011

ASIC report on brokers’ responsible lending and low doc loans

ASIC has published Report 262, Review of credit assistance providers’ responsible lending conduct, focusing on ‘low doc’ home loans.

The report examined the procedures of 16 mortgage brokers providing credit assistance for home loans between July and December 2010 (the first six months of the new responsible lending regime).

It found that while they are generally aware of the new responsible lending obligations and taking steps to comply, it identified some risks of non-compliance with the responsible lending requirements, particularly where credit assistance was provided for loans promoted as low documentation (low doc).

Consistent with the regulatory requirements, files reviewed generally recorded inquiries into a consumer’s credit requirements and objectives, inquiries into and verification of a consumer’s financial situation, and/or assessment of whether a consumer would be able to meet their obligations under the proposed credit contract without substantial hardship.

Some of the compliance risks ASIC identified in its review included instances of brokers not recording:

  • a consumer’s requirements and objectives beyond the immediate purpose of the home loan (eg buy a home)
  • steps taken to verify a consumer’s income, or relying only on statements from a consumer to verify income, when providing credit assistance for home loans promoted as low doc
  • inquiries into a consumer’s actual living expenses or steps taken to verify a consumer’s ongoing fixed expenses; and
  • how a consumer’s ability to make repayments under the proposed credit contract had been assessed.

ASIC has announced that a further review of how credit providers in the home lending market are now meeting their responsible lending obligations will commence in coming months.

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Posted 18th November 2011 by David Jacobson in licensing, responsible lending

November 7, 2011

Credit card key facts sheet regulations

The National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Act 2011 contains additional rules that apply to credit licensees that are credit providers under credit card contracts.

The rules relating to the key facts sheet requirement for credit cards will commence on 1 July 2012.

They are set out in the National Consumer Credit Protection Amendment Regulations 2011 (No. 6) which were registered on 7 November 2011.

The changes will:

•insert new restrictions on a licensee approving the use of a credit card in excess of the credit limit for the credit card contract.
•require credit card providers to allocate repayments to higher interest debts first.
•prohibit a licensee making a credit limit increase invitation unless expressly consented to by the consumer, subject to a transitional provision.
•require lenders to inform consumers about the implications of only making minimum repayments through a personalised minimum repayment warning on monthly statements.
•require a consumer is provided with, or given access to, a Key Facts Sheet before entering into a credit card contract. If a consumer applies to a licensee for a credit card contract under which the licensee would be the credit provider, the licensee must not enter into, or offer to enter into, the contract unless the application is made using an application form that includes a Key Facts Sheet for the contract that contains up-to-date information. But entry by a licensee into a contract without an up-to-date Credit Card Key Facts Sheet having been provided to the borrower will not be a strict liability offence.

Lenders will be permitted to seek and obtain consents from consumers to receive credit limit increase invitations prior to 1 July 2012 so they can rely on those consents for the purpose of making an unsolicited credit limit offer after commencement.

The consumer may withdraw the consent at any time.

A licensee must keep a record of consents the licensee obtains and withdrawals of such consents.

The Regulations require a licensee who is the credit provider under a credit card contract to notify the consumer not later than 2 business days after the day on which the licensee becomes aware that the consumer has used the card in excess of the credit limit for the contract unless the consumer pays the excess within 2 business days and the credit provider has not already issued the notice.

If a credit card is used to obtain cash, goods or services in excess of the credit limit for the credit card contract, the licensee who is the credit provider under the contract is prohibited from imposing any liability to pay fees or charges, or a higher rate of interest, on the consumer who is the debtor under the contract because the credit limit was exceeded unless:
(a) the licensee has obtained express consent from the consumer covering the imposition of the fees or charges, or the higher rate of interest; and
(b) the consent has not been withdrawn.

The final regulations do not contain a requirement relating to the disclosure of interest free calculation models.

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Posted 7th November 2011 by David Jacobson in licensing, responsible lending

November 4, 2011

Consumer credit enhancements: consumer leases

Schedule 3 of the Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 contains amendments to the NCCP Act (including the National Credit Code) which relate specifically to contracts for consumer leases, commencing on 1 July 2012.

Currently leases that contain a right or option to purchase are functionally the same as a credit contract and are therefore deemed to be credit contracts by the Code in section 9. Part 11 regulates consumer leases where there is no right or obligation to purchase the leased goods.

The Bill contains changes designed to achieve regulatory consistency between leases and credit contracts.

Some of the main regulatory differences between the two include:
• the form of consumer leases;
• the obligation to provide an information statement or statement of account;
• the content of the disclosure requirements;
• liability for conduct such as false and misleading representations; and
• the rights of lessees and lessors in respect of enforcement proceedings.

Lessees may mistakenly believe that they have an ability to buy the goods at the end of the lease when they do not.

What do you need to do?

If you provide consumer leases (as defined) then your procedures and systems will change.

If the Bill is passed, changes include:

  • Lessors are required to provide an ongoing statement of account if requested by the lessee and an end of lease statement.
  • Consumer leases can be changed on the grounds of hardship or on the basis the transaction is unjust.
  • The lessor will be obliged to provide a statement of the amount payable on termination.
  • The lessor will be obliged to inform the lessee when a direct debit default occurs.
  • The lessee will have a right to terminate a lease in two different circumstances:
    • before the goods have been provided; and
    • after the goods have been provided.
  • The Code provisions relating to enforcement matters will be extended to consumer leases
  • Lessors will be liable for a supplier's misrepresentation.
  • A criminal penalty may be imposed on a lessor or supplier for harassment.

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Posted 4th November 2011 by David Jacobson in legislation, Phase 2