Consumer groups, industry and consumers have long raised concerns about this sector, arguing they prey on the community’s most vulnerable and encourage a damaging cycle of debt.
“Payday lending can be high risk for vulnerable or low-income consumers. People often borrow money from payday lenders in order to meet short-term commitments like rent and groceries. The interest charged on the loan is often so exorbitant it only worsens the financial position of the consumer in the long-term, who may need to take out further loans in order to pay off the original loan and the interest,” Mr Shorten said.
“This Government acknowledges that there is no quick fix to problems related to payday lending. As such, we fund a range of programs which help consumers address their financial issues before they resort to payday loans.”
The discussion paper outlines Government programs and policies which:
- reduce the need for high cost, short term, small amount credit by improving access to low-cost and/or fairer alternative assistance;
- encourage more alternatives to high cost, short term, small amount lending; and
- improve assistance to those in a debt cycle so they are provided with constructive long-term solutions.
The paper outlines some areas the Government is already pursuing, such as The Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 (the Enhancements Bill) which Minister Shorten has also released for comment today.
The Bill introduces a number of reforms in relation to small amount credit contracts, including a cap on costs and a requirement on lenders and brokers to disclose the existence of alternatives on their websites.
The key reforms introduced by this Bill are:
- caps on costs that can be charged by lenders in relation to small amount loans (including payday loans);
- introducing greater protections for seniors seeking to use the equity in their homes via a reverse mortgage; and
- enhancements to specific provisions of the National Credit Code, including changes to make it more straightforward for borrowers to seek a hardship variation when they are in financial difficulties.
“The reforms I introduced last year in the Credit Enhancements Bill have benefited from significant review through Parliamentary committee inquiries and consultations with industry stakeholders,” Mr Shorten said. “The draft amendments I am releasing today refine the operation of the Bill, and improve its effectiveness.”
The main changes resulting from the draft amendments to the Credit Enhancements Bill are:
- changing the cap in relation to small amount credit contracts, so that the maximum fees which can be charged are an establishment fee of 20% of the amount of credit and a monthly fee of 4% of that amount;
- simplifying the operation of the hardship variation procedures made in relation to both credit contracts and consumer leases; and
- changing the commencement dates for certain obligations to provide industry with an appropriate time to transition to the new requirements.
The deadline for submissions on The Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 is 7 May.
http://www.treasury.gov.au/ConsultationsandReviews/Submissions/2012/Consumer-Credit-and-Corporations-Legislation-Amendments
The deadline for responses to the Discussion Paper is 4 June.
http://www.treasury.gov.au/ConsultationsandReviews/Submissions/2012/Strategies-for-reducing-reliance-on-high-cost-short-term-small-amount-lending
