Cory Bernardi (SA, Liberal Party) Share this | Link to this | Hansard source

Australia’s consumer credit reliance is an issue of growing concern. The proliferation of credit cards, mortgage brokers and easy credit plans represent the majority of products which facilitate the nation’s consumer reliance on credit. The current mindset of the consumer reflects the never-ending advertising of credit in all its forms. From payment plans for TVs to rewards programs on credit cards, the methodology is the same: buy now, pay later. This in itself is cause for concern. However, tonight I want to talk about a grubbier lending practice—that of payday and short-term loans.

These modern-day loan sharks prey on low-income earners, who are especially vulnerable to this dodgy industry. Since arriving in Australia in 1998, payday lenders have captured a part of the market largely abandoned by the mainstream suppliers of credit. A typical payday loan will be a cash loan for an amount of around $200 or $250 with approximately $300 to be paid back a week or two later. Demand for these loans is high with recent estimates indicating the industry across Australia to be worth $200 million per annum with an estimated 12,800 payday loans transacted each month Australia wide.

Payday lenders, alongside other fringe credit providers, pawnbrokers and bill facilitators, can appear to be the only option for low-income borrowers. The major problem with payday loans is that the loan structure and legislative environment in which they operate can trap borrowers in debt. Every loan offers the opportunity for the borrower to roll over their debt. This is a common practice that sees the term of the loan extended at a significant additional expense to the borrower. Of course, as the loan is rolled over, the cost of the credit mounts. As the rollover costs mount, the loan is rolled over again and again while the total debt snowballs. Research indicates that most payday loans are rolled over between eight and 12 times.

Let me give you a couple of examples of how it works. In July 1999, a couple borrowed $50 from a payday lender. After rolling over the loan every fortnight, by May 2000, which was 11 months later, they owed the lender $980. This amounted to an effective annual percentage rate of 487 per cent. In South Australia recently, someone took a short-term loan of $10,000. It ultimately cost that man $1.6 million in repayments over the course of four years. This example illustrates what commonly happens when a payday loan is rolled over or a short-term loan is forced to be repaid. The most vulnerable in our community can become indebted for large amounts—and it gets worse.

At lower loan amounts, when a borrower defaults on a payment the lender debits the amount plus a fee from their bank account. Under this practice, the lender can have first access to the borrower’s income. The result can be deferment of other payment obligations such as essential utilities and groceries bills. In the event—and it is a rare event—that a payday lender does request security over the borrower’s property, if the borrower defaults on payment, essential household goods can be collected to ensure reimbursement. Deprivation of essential household items such as refrigerators, air conditioning units and heaters can cause obvious problems. The problems are commensurately greater as the amounts owed increase.

The payday lender’s method of debt recovery for significant amounts can place the borrower in very difficult circumstances. There are media reports of payday lenders using bikie gang members to recover defaulted loans. They do this through threats of violence, intimidation, often against not only the borrower but the borrower’s family members. Indeed, a number of these payday and short-term loan companies are owned and operated by bikie gang members or their affiliates, convicted drug dealers and other ne’er-do-wells in our society.

There needs to be concerted action taken by all levels of government to stem the proliferation of payday lending. The consumer credit code enacted in 1996 applies equally to every state and territory. The only exception to the uniformity of the code is a provision which allows regulations of maximum interest rates on a loan to be at the discretion of the individual state or territory government. Amendments to the code in 2001 and 2003 sought to bring payday lenders under the code and provide stricter regulations of the industry. Though this was a step in the right direction, more needs to be done to protect vulnerable consumers—for example, some states have an interest rate ceiling on loans and some do not. An interest rate ceiling is effectively a cap on the maximum rate of interest payable on the loan. Currently, New South Wales and the ACT have a rate ceiling of around 48 per cent including all fees. Victoria has the same rate but theirs does not include fees and charges, so it is very easy to dress up a loan with additional fees and charges which effectively increase the interest rate. South Australia, my home state, has no interest rate ceiling under its regulations. Therefore consumers in New South Wales are better protected than those in Victoria, who in turn are better protected than those in South Australia or Queensland. There are also disparities between how much lenders can charge for credit in the various states.

There is an urgent need for uniform regulation of the payday lending industry. Perhaps the simplest reform could be to mandate disclosure of all fees, interest and charges in terms that any consumer can understand—that is, an annualised percentage rate. Consumers will be better able to compare the real cost of their short-term loans and all types of credit within this industry and against more mainstream credit providers. Another option for amending the code is to require lenders to include in contracts and precontractual disclosure statements a schedule setting out the total cost of rolling over a loan. This schedule should set out a maximum fee of interest charges for the loan amount demanded, which is rolled over for one term, then for three, six and 12 months.

Another trend that I will briefly talk about could, if rectified, lessen the negative effects of payday lending, which is brought about by the absence of mainstream credit for low-income borrowers. The absence of mainstream credit will continue to ensure there is demand for alternative fringe sources of credit whether it is from payday lenders or other lenders operating outside the law. Until the mainstream providers have returned to the market, payday lenders and such will continue to fill that gap. While ensuring adequate disclosure of information to consumers is an important step in reducing the dangers, alternative means of credit for low-income borrowers are sorely needed.

Presently, there are some commercial and community partnership credit programs that provide an equitable loan product. These are very good products. These partnerships are important for the low-income community, offering advice and loans at an equitable cost for borrowers. These loans certainly are a step in the right direction. The problem is that these types of loans are relatively few and far between and rely on government subsidies to offset risk. Typically, they also target a specific need, such as setting up a small business or buying essential household items such as whitegoods. Two that come to mind are the no interest loan scheme of the Good Shepherd and the National Australia Bank, the Step UP Loan; and the progress loans program of the ANZ and the Brotherhood of St Laurence.

Despite the expansion of the community and corporate partnership programs, there remains demand for credit, which is met by current payday lenders. This largely unregulated and, quite frankly, shady part of the lending market will never disappear. But we can improve practices in it. The current legislative scheme does not adequately address the problems that can be caused by payday loans. Aggrieved borrowers are seldom in a position to pursue action against unconscionable lenders, and disclosure requirements are inadequate to ensure proper disclosure of fees and percentage rates. Equally, there is inequality in consumer protection, with it depending on which state you reside in. More effective reform proposals include requiring greater and more proper disclosure of fees and annual percentage rates to protect consumers against unconscionable lenders who prey on the most vulnerable among us.