Government cracks down on payday lenders
The Government has moved to place limits on the fees payday lenders can charge to 'small amount' borrowers, inviting comment on draft legislation.
The Assistant Treasurer, Bill Shorten, announced that the Government proposed to amend the National Consumer Credit Protection Act to place caps on contracts for $2,000 or less.
Under the draft legislation, payday lenders will be limited to an upfront fee of 10 per cent of the total amount borrowed, and 2 per cent each month for the life of the loan.
"I've seen cases where someone who borrows $300 is charged over $100 for a seven day loan, and can then only meet the repayment by not paying other bills, such as rent or electricity. This can lead to a cycle of debt that makes things worse for the borrower," said Shorten.
The lender Cash Stop charges residents of NSW and the ACT $33 for every $100 dollars borrowed. For residents of other states and territories, laws prevent Cash Stop from acting as a finance broker and a lender to the same client, so it outsources the lending and adds a brokerage fee of $3 - making its upfront fee $36 for every $100 borrowed.
The Government's draft legislation also contains a ban on the refinancing of 'small amount' contracts, and will also require that payday lenders inform consumers of the other options available to them. Internet-based lenders will be required to provide consumers with a link to the Australian Securities and Investment Commission's financial literacy website.
"This draft legislation continues the Government's delivery of the National Credit Reforms, and our commitment to protect and improve the position of vulnerable consumers," Shorten said.
Update: The National Financial Services Federation (NFSF) was sceptical about whether the Government's proposed legislation would have the desired effect of protecting vulnerable Australians.
NSFS chairman Mark Redmond said the alternative sources of funding named by Shorten (Centrelink advances, along with community no-interest and low-interest loan schemes) made up only 1 per cent of current payday loans.
"The Minister's legislation verges on prohibition and there is a real danger that consumers will have no option but to deal with unscrupulous operators who work outside the law,"
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