Draft Credit Bill: small amount credit contracts

The Assistant Treasurer and Minister for Financial Services and Superannuation, Bill Shorten, has released 2 more draft Parts of the proposed National Consumer Credit Protection Amendment (Enhancements) Bill 2011, relating to small amount credit contracts for comment.

The reforms will introduce Australia’s first national cap on costs for ‘small amount’ contracts: defined as contracts with a credit limit of $2,000 for a term of less than two years. From 1 July 2012, small amount credit lenders (often called payday lenders or micro lenders) will be limited to charging a maximum establishment fee of 10 per cent of the total amount borrowed and a maximum monthly fee of two per cent of the total amount borrowed each month for the life of the loan.

Other key measures in the draft legislation are:

  • A prohibition on refinancing or increasing the credit limit of small amount contracts;
  • Requirements for short term lenders to disclose the availability of other options, with internet based lenders required to have a link to the ASIC website at moneysmart.com.au.
  • A credit provider must not enter into a credit contract (other than a small amount credit contract) if the annual cost rate of the contract exceeds 48%.
  • A licensee must not provide credit assistance to a consumer by suggesting that the consumer apply, or assisting the consumer to apply, for a small amount credit contract with a particular credit provider if the licensee knows, or is reckless as to whether, the consumer is a debtor under another small amount credit contract.

The Government will also release a discussion paper with more detailed proposals to improve access to alternatives to payday loans.

Consultation on the draft legislation closes on 5 September 2011.

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