Mortgages, consumer leases and other finance products

Payday loans are high-cost, short-term loans. These loans are often targeted at disadvantaged consumers. The NCCP Act distinguishes between four types of loans:

• short-term credit contracts;
• small amount credit contracts;
• medium amount credit contracts;
• all other loans. This section examines the first three type of loans.

Since 1 March 2013, ‘short-term credit contracts’ have been prohibited under section 133CA of the NCCP Act. A short-term credit contract is defined as having a credit limit of $2000 or less and a term of 15 days or less (s 5(1) NCCP Act). This definition does not extend to loans offered by authorised deposit-taking institutions (e.g. banks and credit unions) or to ‘continuing credit contracts’ (e.g. a credit card contract; see also s 204 NCC).

In September 2019, the financial services regulator, the Australian Securities and Investments Commission (ASIC), exercised its product intervention power to ban a model of short-term lending used by Cigno Pty Ltd, Gold-Silver Standard Finance Pty Ltd, MYFI Australia Pty Ltd, and BHF Solutions Pty Ltd (Cigno). The law states that short- term credit providers only remain exempt from responsible lending obligations if the fees charged for loans of up to 62 days do not exceed five per cent of the loan amount and do not have an interest rate that is greater than 24 per cent per annum. Cigno filed a judicial review application in September 2019 in the Federal Court seeking to challenge ASIC’s exercise of its product intervention power. Cigno’s application was dismissed by the Court in April 2020, and the Full Federal Court dismissed Cigno’s subsequent appeal from that decision in June 2021.

ASIC also commenced proceedings against Cigno and BHF Solutions Pty Ltd in the Federal Court in September 2020, alleging they had engaged in unlicensed credit activities under the NCCP Act. This application was dismissed in June 2021; however, ASIC was successful on appeal before the Full Federal Court in June 2022.

The NCCP Act contains provisions relating to small amount credit contracts. The NCCP Act (s 5) defines a ‘small amount credit contract’ (SACC) as a contract where:

• the credit limit is $2000 or less;
• the term is at least 16 days but not longer than one year;
• the credit provider is not an ‘authorised deposit- taking institution’ and the contract is not a ‘continuing credit contract’; and
• the consumer’s obligations under the contract are not secured. Since 1 March 2013:
• a credit provider must obtain and consider a con- sumer’s bank account statement covering at the least the immediately preceding 90 days as part of its responsible lending assessment (s 117(1A) NCCP Act); and
• there is a rebuttable presumption that if a consumer is in default under an existing small amount credit contract, or has had two or more small amount credit contracts in the immediately preceding 90 days, the consumer will only be able to comply with a new small amount credit contract with financial hardship (s 123(3A) NCCP Act). Since 1 July 2013, section 31A of the NCC has limited the amount of interest, fees and charges that may be imposed by small amount credit contracts to: a an establishment fee not exceeding 20 per cent of the amount of credit a borrower receives; b a maximum monthly fee not exceeding four per cent of the borrower’s amount of credit; c default fees or charges; and d any government fee, charge or duty payable. In addition, section 31A(1A) of the NCC bans establishment fees under small amount contracts entered into for the purpose of refinancing another small amount credit contract. Section 39B of the NCC limits the amount payable if there is a default to twice the amount of credit received by the borrower, plus reasonable enforcement expenses. For conduct relating to SACCs on or after 12 June 2023, the rebuttable presumption formerly contained in s 123(3A) of the NCCP Act no longer applies. In addition, since 12 June 2023, the following measures apply:
• As part of its responsible lending assessment, the lender must document the preliminary assessment and inquiries and verifications made, ascertain whether the borrower is receiving a social secu- rity payment and if they are, they must obtain and consider an income statement and deduc- tion statement from the past 21 days (Reg 28HB NCCP Regulations);
• The required repayment under the SACC must not exceed 10% of the borrower’s available income. The definition of ‘repayment’ also includes any other amounts payable under any other SACC (s 133CC(1) NCCP Act, Reg 28LCA NCCP Regulations);
• Lenders are prohibited from accepting payment of monthly fees relating to a period after the SACC has been paid out (s 31C NCC). Lenders are prohibited from making unsolicited communications to consumers that contain offers to enter or invitations to apply for SACCs (s 133CF(1) NCCP Act). SACC lenders also must not make proscribed referrals, which are defined to be referrals of a person to another person where it is reasonable to believe that as a result of the referral, the person would or might enter into a contract or arrangement for the provision of credit (being credit that the credit laws do not apply to) (s 160G NCCP Act). This provision commenced on 19 December 2022.

The Financial Sector Reform Act 2022 (Cth) introduced anti-avoidance provisions which commenced on 13 December 2022. The provisions prohibit schemes designed to avoid the operation of the SACC, consumer lease and product intervention order laws. Section 323B of the NCCP Act sets out an inexhaustive list of matters that may indicate an avoidance purpose is present, including where a consumer is provided with credit that is more complex or costly to the consumer than a SACC, or where a consumer is enabled to have the use of goods in a more complex or costly manner than a consumer lease. A presumption of avoidance will operate in relation to a scheme where the scheme is of a kind prescribed by the regulations or as determined by ASIC (s 323C NCCP Act). Contravention of the anti-avoidance provisions may attract civil or criminal penalties, or both.

According to section 204(1) of the NCC, a ‘medium amount credit contract’ is similar to a small amount credit contract, save that the credit limit is at least $2001 and not more than $5000, the term of the contract is at least 16 days but not longer than two years, and the consumer’s obligations under the contract can be secured.

Since 1 July 2013, a medium amount credit contract cannot have an annual cost rate higher than 48 per cent (s 32A NCC). The method for calculating the annual cost rate is set out in section 32B of the NCC. However, in addition to this amount, an establishment fee of up to $400 may be charged (s 32B NCC).

Before taking out a payday loan, consumers should speak to a free, community based financial counsellor about managing their debts or alternative funding options. These may include hardship variations for bills, energy relief grants, emergency assistance, Centrelink advances, and low-interest loan schemes (see Chapter 5.4: Financial counselling services).

If a consumer has entered into a payday loan, they should consider whether the lender has complied with its obligations (see ‘Unjust contracts’, above) and decide whether a complaint to a dispute resolution scheme is warranted.