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Tuesday, 26 June 2012
Page: 7941

Ms SMYTH (La Trobe) (11:16): I am pleased to be able to speak in this debate today. It is an important issue for all of us in the House to respond to concerns about payday lending amongst other things that are addressed in the Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011. There are a comprehensive range of reforms which are addressed in this bill. I should begin, however, by responding to one of the propositions put earlier by the member for Bradfield. Not all who use payday loans are vulnerable and I think all of us can say that the legislation certainly has not been premised on the proposition that everyone using payday loans is in a vulnerable position. But I think the weight of evidence, including evidence before the Parliamentary Joint Committee on Corporations and Financial Services towards the end of last year, would bear out that a substantial proportion of those seeking payday loans, small loans, are indeed vulnerable people. It is important to note that at least half of those people are on incomes of less than $24,000 a year and around two-thirds are on annual incomes of $36,000. But, apart from that information, it is worth bearing in mind the comments of the shadow Treasurer on this point in relation to the special vulnerability of a great many of the people who are relying on short-term payday loans. He said in 2001:

Payday lending is an insidious practice that targets the less prosperous men and women of our society, the less financially savvy and the people who can least handle spiralling debt.

Unfortunately, as is the case with a great many things in this place in this term, it is left to a Labor government to respond to the issue of payday lending as to the special vulnerability of many but perhaps not all of the people who rely on payday lending and to respond to a range of other things that the bill before us contemplates, including the vulnerability of senior Australians to risky reverse mortgages that they may be exposed to in certain circumstances. But, returning to the issue of the particular vulnerability of a great many people who rely on short-term payday loans, I would like to specifically refer to some of the provisions and some of the findings of the Parliamentary Joint Committee on Corporations and Financial Services. It particularly refers, at 5.51, to a then interim report for a joint RMIT-University of Queensland study in relation to an analysis of some of the consumers accessing the short-term loan industry. At 5.54 the committee notes:

… The researchers concluded that 'poverty pervades the lives of most borrowers interviewed.' The study indicates that users of short-term loans are commonly unemployed, receive Government assistance, have low rates of home ownership and are likely to be in their 30s or 40s. Of the 112 borrowers interviewed, 78 per cent received Centrelink benefits, less than 25 per cent were in paid employment, and 75 per cent lived in rental accommodation. Only nine persons interviewed owned their own homes, and eight were homeless. … Of the 112 borrowers interviewed, only seven had credit cards and 68 had poor credit history.

I think it is important to note those points in particular. The committee went on to find, at 5.56, as a result of the evidence presented to it:

… The research indicates that the short-term loan industry has a disproportionately high client base of Disability Support Pensioners.

It further found, at 5.58:

… The study shows that the primary reason for seeking a short-term loan is to cover regular expenses such as food, bills and petrol. … Of the regular expenses cited as reasons to obtain a short-term loan, the third most common reason was 'to pay back another loan.'

These are fairly telling findings of a parliamentary committee about the characteristics of the bulk of those people who are entering into short-term loans as a means to simply pay for basic necessities and carry on with their lives. So I think it is appropriate that this government, through this bill, respond to those particular vulnerabilities and ensure that we provide appropriate protections for consumers before they are exposed to short-term loans which might result in significant costs to and significant interest payments by them.

The bill is indeed the next in a series of measures which have been taken by this government to provide appropriate consumer protections for Australians who borrow. It includes important measures which are designed to protect some of our most vulnerable consumers. It follows on from measures introduced by this government earlier in this term to better protect consumers who take up home loans or credit cards. It is a result of extensive consultations on the matters which are in the bill, and I have mentioned one parliamentary committee's inquiry, and it has also been the subject of a Senate Economics Legislation Committee inquiry. Between the committees some 86 submissions were received in relation to the draft bill. Those committee inquiries followed on from a green paper in July 2010 in relation to national credit reform. So, contrary to some of the assertions that have been made in the contributions from those opposite today, this bill has been the subject of extensive consultation with consumer advocates and with industry. It has been the subject of two parliamentary inquiries. It has been the subject of a green paper. It was something that this government took to the last election. Draft amendments to the bill were also released for public comment between April and May of this year. The government has also consulted directly with payday lenders and consumer groups and has amended certain provisions in the bill in response to issues raised by them.

It is estimated that at least $500 million is lent annually in payday loans. These are short-term loans for small amounts up to around $2,000. Those Australians who rely on payday loans are often unable to obtain other forms of credit which might be provided on substantially more reasonable terms. As I have said, they are often low-paid workers—half of them will be on incomes of less than $24,000 a year and around two-thirds will be on incomes of less than $36,000 a year. These are people our consumer credit laws should be looking out for.

Needless to say, these are people who can least afford to be exposed to high-interest loans, as they have the least capacity to repay them. I think all of us in this place would agree that paying almost $1,500 in interest and fees on an original loan of $1,000 over six months is unreasonable. For some of these people, what might begin with a small loan can often turn into a debt spiral, eating into the already limited wages of the borrower over a lengthy period of time and prompting the borrower to take out new loans, as the corporations committee inquiry heard.

The consumer credit reforms in the bill will maintain a sensible balance between a sustainable and responsible industry and reducing the damage caused to consumers who may, out of necessity or without proper advice about their options, come to rely on credit products which they are ill-equipped to repay. It will do this by a variety of means. The bill provides that for short-term small-amount contracts of less than $2,000 and 12 months duration, a cap on costs of 20 per cent of the credit provided plus four per cent of the credit provided for each month of the credit contract will apply. The bill will reduce the term for small-amount credit contracts from 24 months to 12 months to target the most vulnerable consumers. For mid-tier loans of between $2,000 and $5,000 and two years duration or less, a cap on costs of 48 per cent per annum interest plus a $400 establishment fee will apply. The bill addresses the possibility of avoidance of that cap by applying it over the life of the contract while doing so in a way that minimises the potential compliance burden on lenders.

The bill introduces a prohibition on loans with a term of 15 days or less and introduces a maximum 200 per cent total cap on charges for all lending. The cap will limit the cost of credit for consumers, so that they will no longer be charged such high costs for these types of credit. I think most of us would agree that we must do something to respond to cases where people who borrow $300 can be charged over $100 for a seven-day loan, and can then only meet the repayment by not paying for other necessities, such as utilities or rent. The committee heard that in many cases people are using these funds for basic necessities. The bill will also introduce a specific requirement for credit providers to obtain and consider a copy of the borrower's bank statements for the last three months before entering into the contract. This will supplement responsible lending obligations to ensure the lender obtains and considers the details of payments in the statements.

Many low-income consumers take out these kinds of loans as their first port of call rather than using them as a last resort. The reforms in the bill will encourage consumers to consider other options when they are faced with a temporary financial shortage. The government is also considering ways to let consumers know that they have other options to meet their everyday expenses. It is extremely troubling that a survey undertaken recently by the Consumer Action Law Centre found that around 21 per cent of consumers used a payday loan to pay utility bills. Given that most utility providers already have hardship arrangements in place to help people pay off their bills over time, it would be far preferable that consumers be made aware of and have the opportunity to use those arrangements. They would indeed cost substantially less than taking out a payday loan to cover utility bill costs.

In addition to the measures that I have mentioned, the legislation addresses the risk of fees accruing to a debtor's account in the event that repeated unsuccessful use of a direct debit arrangement is used to make payments under a small-amount credit contract. The bill will respond to this issue by introducing a regulation making power that will enable the use of direct debit arrangements to be suspended if this occurs. Importantly, the bill also introduces a regulation making power for a protected earnings amount. This is where borrowers are dependent on Centrelink benefits. This could enable the maximum payments this class of borrowers would have to pay to not exceed 20 per cent of their income. Members will no doubt appreciate the significance of this safety net for those who are reliant on Centrelink benefits. In addition to the arrangements relating to short-term loans, the bill also contemplates arrangements for better protection of consumers who are taking out reverse mortgages. We committed to these reforms at the last election and I am pleased to be able to speak in favour of the bill which gives effect to them.

The effect of the disclosure requirements in the bill will be that reverse mortgage lenders and brokers will be required to talk to consumers about different borrowing arrangements. They will be required to show those consumers how the equity in their homes might be reduced according to how much they choose to borrow through a reverse mortgage amendment and through potential movements in house prices. Senior Australians who are likely to access reverse mortgages can be extremely vulnerable if they take out the wrong loan and either exhaust the equity in their home through a reverse mortgage or end up with a debt which exceeds the value of their home.

These are only a few of the measures contemplated in the bill before us but I am pleased to stand in support of them for the protection of those who are vulnerable to difficulties presented by short-term loan arrangements and for the better protection, particularly, of senior Australians who maybe likely to take out reverse mortgages. These measures are long overdue and I commend the Minister for Financial Services and Superannuation for bringing them to the parliament through this legislation and for his efforts with industry and consumer advocates to take this bill through its lengthy period of consultation.