Insights / May 17th, 2016

Small amount credit contracts to get even smaller

In particular, a recommendation to extend the existing protected earnings cap, currently only applicable to consumers that are Centrelink recipients, to all consumers.

The government has recently released the final report on the independent review of the application of the National Consumer Credit Protection Act 2009 to small credit contracts and consumer leases.

Small credit contracts are loans of up to $2,000 made to consumers for a term of 16 days to 12 months, where the credit provider is not an authorised deposit taking institution.

Of the recommendations made in the report, the recommendation that would potentially have the greatest impact on small credit providers if implemented, is the recommendation to extend the existing protected earnings cap to all consumers. The cap currently only applies to consumers that are Centrelink recipients. In addition to extending the cap, the report recommends changing the cap to 10% of the consumer’s net income. Credit providers will not be permitted to offer a small credit contract to a consumer where the total amount of all small credit contract repayments made by that consumer will exceed 10% of the consumer’s net income over the relevant period. This recommendation is likely to have an impact on the viability of small credit loans provided by many providers.

Some of the other key recommendations arising from the report include:

  • (Suitability presumption): Subject to the extension of the protected earnings amount, removing the rebuttable presumption that a loan is presumed to be unsuitable if the consumer is in default under another SACC or in the previous 90 day period the consumer has had 2 or more other small credit contracts.
  • (Direct debit fees): Fees for processing of direct debits to be included in the existing cap on fees and charges.
  • (Equal repayments): The definition of a small credit contract be amended to apply only to loans that have equal repayments over the life of the loan. If a loan doesn’t fit within the definition the loan will be subject to the 48% cap on the annual cost of the contract applying to other loans.
  • (Unsolicited offers): providers to be restricted from making unsolicited offers to current or previous consumers, including by email, SMS or phone.
  • (Default fees): Default fees recoverable by a provider to be limited to a maximum of $10 per week while the consumer remains in default regardless of the actual cost incurred by the provider as a result of the default.
  • (Suitability assessment): providers to document the suitability assessment conducted.

The recommendations, in particular the extension of the protected earnings cap to all consumers, are likely to have an adverse impact on existing small credit contract providers, with potential for certain small credit contracts to be unviable. However, other providers may benefit from an opening up of competition in this sector.

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