ASIC has started legal action against two payday lending businesses alleging they are avoiding their responsible lending obligations.

ASIC’s civil proceedings in the Federal Court of Australia are against Gold Coast-based Teleloans Pty Ltd and Finance & Loans Direct Pty Ltd.

The companies claim they do not have to comply with certain consumer protection laws under the National Consumer Credit Protection Act 2009 (National Credit Act) because their loans are exempt under a short-term credit exemption.

ASIC alleges the companies, based on their business models, do not operate under the exemption and must comply with all of the obligations under the National Credit Act, including specific responsible lending obligations and caps on fees and charges that relate to so called payday loans.

ASIC Deputy Chairman Peter Kell said, ‘These proceedings will ensure that payday lenders do not deliberately structure their businesses to circumvent laws that protect consumers. This is particularly important as the consumers who access these small amount loans can be financially vulnerable.’

The proceedings are listed for a directions hearing in the Federal Court in Brisbane on 25 July 2014.

Background

In order for credit providers to meet the short term credit exemption, a customer cannot be charged more than 5% of the loan amount in fees and 24% in interest per year.

ASIC will present to the court five loans where the combined fees and charges of Teleloans and Finance & Loans Direct were as high as 160% of the loan amount.

On 1 July 2013 enhancement provisions were introduced into the National Credit Act. Loans were defined in three broad categories: short-term credit contracts (less than $2000 and less than 15 days); small amount credit contracts (less than $2000 and less than 12 months) and medium amount credit contracts (between $2001 and $5000 and less than 24 months).

Under the new laws, short-term credit contracts are prohibited.

In relation to small amount credit contracts, there is a limit on fees and charges of up 20% of the amount borrowed on any upfront charge and a limit of 4% of the amount borrowed as a monthly charge. Credit providers must also verify a customer’s financial situation by obtaining and considering bank statements for the previous 90 days before providing the loan.

ASIC is seeking the following orders from the court:

• declarations that the short term credit exemption did not apply to particular loans provided by Finance & Loans Direct

• an order restraining Teleloans and Finance & Loans Direct from claiming the short term credit exemption in circumstances where the exemption does not apply.

• a declaration that Finance & Loans Direct entered into a prohibited short-term credit contract, and Teleloans assisted with that credit contract, and orders restraining them from entering into or assisting with any further short-term credit contracts.

• orders restraining Teleloans and Finance & Loans Direct, when entering into small amount credit contracts, from imposing fees and charges that do not comply with the fees and charges permitted under the National Credit Act.

Editor's note 1:

The matter will be heard in the Federal Court, Brisbane on 27 October 2014.

Editor's note 2:

The matter was heard in the Federal Court, Brisbane on 27 October 2014. Justice Logan reserved his judgment.