Prospa removes unfair contract terms for small business borrowers and guarantors

ASIC has announced that following an ASIC review, online small business lender Prospa Advance Pty Limited (Prospa) has agreed to certain recommendations from ASIC in relation to removing or amending some of its standard form small business loan contract to address terms being unfair under the unfair contract terms provisions of the ASIC Act.

Prospa postponed its IPO in June after discussions with ASIC about its loan agreements.

The changes include addressing problematic terms outlined in ASIC Report 565: Unfair contract terms and small business loans, and changes to other terms which could have operated unfairly for borrowers and guarantors.

ASIC says its surveillance of other lenders’ small business loan contracts is ongoing.

Changes to Prospa’s loan contract
ASIC says Prospa has agreed to make the following changes to its standard form small business loan contract:

  • amended the early repayment clause so that borrowers can now prepay their loan early without requiring Prospa’s consent, and instead of discounts being at Prospa’s discretion Prospa will now apply a published Early Prepayment Policy so borrowers can determine the discounts they can expect to receive if they do pay back their loan early;
  • amended the ‘unilateral variation’ clause to limit Prospa’s ability to unilaterally vary contracts to specific instances. Prospa has also extended the notice period to 60 days where Prospa intends to vary fees;
  • amended clauses defining events of default to add remediation periods and materiality thresholds and to permit changes to control of the Borrower with the lender’s consent (not to be unreasonably withheld);
  • removed a broad ‘cross-default’ clause which allowed Prospa to call a default under the loan contract due to any default under another finance document related to the loan (for example, guarantee or security document);
  • restricted the borrower’s indemnity to ensure that:
    – the borrower is required to indemnify only Prospa, its employees and agents (and not third parties that are not parties to the contract such as receivers or contractors); and
    – the borrower is not required to indemnify Prospa for losses or costs incurred due to the fraud, negligence or wilful misconduct of Prospa, its employees, officers, agents, contractors or receivers appointed by Prospa;
  • removed an ‘entire agreement’ clause which absolved Prospa from contractual responsibility for conduct, statements or representations made to borrowers about the loan contract;
  • limited the class of people who can provide guarantees under the loan contract to:
    – people who are actively involved in the management of a borrower’s business;
    – if the borrower is a company, people who are directors or shareholders of the borrower; and
    – if a shareholder of the borrower company is a company, directors or shareholders of that company.
  • inserted a 5-business-days’ notice provision to guarantors about:
    – borrowers who are 30 calendar days behind their agreed repayment schedule; and
    – the commencement of legal proceedings against a borrower or the appointment of a receiver.
  • limited the guarantor’s liability so that the guarantor is not liable for any increase in the amount of the loan principal and interest agreed at the start of the loan(but the guarantor is liable for fees and reasonable enforcement costs).
  • inserted a provision to obtain the consent of the guarantor:
    – where there is a discharge or release of any security held by Prospa given by the borrower or a guarantor; and
    – where there are multiple guarantors, before releasing a guarantor.
  • limited the actions of lender-appointed attorneys where there is an event of default under the loan contract so that an appointed attorney cannot act in a way that prefers the interests of the attorney over the interests of the borrower or guarantor.

ASIC will be undertaking further monitoring of Prospa’s charging of late payment fees to assess whether the manner in which the fees are being charged is unfair in practice.

Prospa has agreed that all customers who entered into or renewed contracts from 12 November 2016 will have the benefit of the changes agreed with ASIC. Prospa will be communicating these changes to its small business customers with the amended contract coming into effect in early October.

Prospa is a signatory to the Online Small Business Lenders Code of Practice, published by the Australian Finance Industry Association, which includes standardised price disclosure to allow borrowers to review and compare unsecured small business loans.

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