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Are Your Low Fee Payday Loans Actually Exempt?

Short term lenders relying on the low fee exemption from the credit licensing regime need to ensure their lending practices satisfy anti-avoidance provisions under the regime

Lenders seeking to rely on the credit licensing exemption for low fee short term loans need to ensure their lending practices don’t fall foul of the anti-avoidance provisions of the credit licensing regime.

Short term credit will be exempt from the National Credit Code, and therefore the requirement for the lender to hold a credit licence, where the following criteria are satisfied:

  • credit term is 62 days or less;
  • the maximum amount of fees and charges that are payable under the credit contract does not exceed 5% of the total amount of the credit provided; an
  • the maximum amount of interest charges that are payable under the credit contract does not exceed 24% per annum.

However, lenders need to be aware that in calculating the maximum amount of fees and charges payable under the credit contract, any fees and charges payable by the borrower, even where it is a fee or charge payable to a third party, in relation to the following need to be included in this maximum:

  • an introduction to the lender;
  • any service carried out by a person introduced to the borrower by the lender; and
  • any service related to the provision of credit.

In a recent decision, ASIC has banned the director of payday lender, Australian Money Exchange, from engaging in credit activities for ten years. The ban was issued after ASIC found that Australian Money Exchange had exceeded the 5% limit on the maximum amount of fees and charges that are payable under the credit contract. Australian Money Exchange provided short term loans to borrowers in the form of a cheque. It then charged borrowers a “cheque cashing fee” of 16%. ASIC found that the “cheque cashing fee” was a fee payable under the credit contract and therefore the short term loans provided by Australian Money Exchange were not exempt from the credit licensing regime.

This decision is a timely reminder to other short term lenders relying on the low fee short term loan exemption to review their lending practices to ensure they don’t exceed the maximum limit requirements.

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