Fees and charges almost half loan amount
In the largest civil penalty brought about by ASIC to date, Canada-based payday lender The Cash Store has
been ordered to pay $18.9m for violating consumer credit laws.
Seven breaches of the Credit Act
Among other violations, the Federal Court found that The Cash Store (TCS) sold "useless" consumer credit insurance to customers, most of whom were on low
incomes or Centrelink benefits.
In total, TCS breached seven different parts of the Credit Act,
while Assistive Finance Australia (AFA), which funded the loans, breached six. TCS made about $1.3 million from the sale of the bogus insurance.
The main charge brought by ASIC was that the loans were not suitable for the customers.
"This is a landmark case for the consumer credit regime and is essential reading for all credit licensees," said ASIC Deputy Chair Peter Kell. "The
significant size of the penalty imposed shows ASIC and the Court take these obligations very seriously, as must all lenders, no matter how small the loan
Eighty stores and lots of loans
Until September 2013, TCS operated as a payday lender, with all loans financed by AFA. It had approximately 80 stores throughout Australia and wrote about
10,000 loans per month of up to $2200, each for a short period (usually two weeks or less).
Fees and charges at The Cash Store – now in liquidation – generally added up to about 45% of the loan amount.
CHOICE reported last year that one
of Australia's biggest payday lenders, Cash Converters, showed a profit increase of 38% for the third quarter of the 2014 financial year (ending in March)
compared with the same quarter in 2013.
Responsible lending rules
To meet responsible lending obligations, credit providers – including payday lenders – must take the following steps:
make reasonable inquiries of the consumer about their requirements and objectives in relation to the credit contract;
take reasonable steps to verify the consumer's financial situation;
assess whether the credit product is unsuitable for the consumer and only proceed if the credit product is not unsuitable; and
give the consumer a copy of the assessment if requested.
Since March 2013, payday loans of up to $2000 that have to be repaid in 15 days or less have been banned; fees are currently capped at 20% of the amount of the loan and interest at 4% per month.