Field, Chris --- "Pay day lending: an exploitative market practice" [2002] AltLawJl 12; (2002) 27(1) Alternative Law Journal 36
[*] Chris Field is Executive Director, Consumer Law Centre Victoria.This is an expanded version of a paper presented on 11 October 2001 at the VCOSS Social Policy Congress held in Melbourne on 10–12 October 2001.© 2002 Chris Field (text)© 2002 Jane Cafarella (cartoon)
[1] We are now one of the most unequal countries in the Western World: Colebatch, Tim, ‘Income Divide Widening, World Study Finds’, Age, 27 January 2001, p.3.
[2] Robinson, Paul, ‘The Gulf Widens, The Myth of a Fair Society Shatters’, Sunday Age, 4 February 2001, p.4.
[3] Robinson, above, ref 2, p.4.
[4] Field, Chris, Lowe, Catriona and Osboldstone, Glenn, ‘A Good Serve — What Effect has the Goods and Services Tax had on Low-Income and Vulnerable Consumers?’, (2001) May/June Consumer Rights Journal at 11. Caskey has argued that the expansion of fringe credit providers (particularly pawnbrokers and cheque-cashing outlets) could be attributed to broader socio-economic changes: Caskey, John, Fringe Banking – Check Cashing Outlets, Pawnshops and the Poor, Russell Sage Foundation, New York, 1994. Unemployment and declining real wages impact upon the demand for short-term credit, see Ramsay, Iain, ‘Access to Credit in the Alternative Consumer Credit Market’, Office of Consumer Affairs, Industry Canada/Ministry of the Attorney- General, 2000 <http://www.strategis.ic.gc.ca/pics/ca/ramsayen.pdf> p.3.
[5] Pay Day Lending — A Report to the Minister for Fair Trading, <www.consumer.qld.gov.au/scripts/publications.exe> p.14. One author has written about her own experience of borrowing $200 over a period of two weeks for a total fee of $74.50. The effective annualised interest rate for this transaction, the author suggests, is 972%: Petschler, Louise, ‘How to borrow @ 972%’, (2001) 86 Consuming Interest at 6. Pay day lenders here and overseas do not accept the conversion of fees charged to interest rates, principally on the basis that loans are short-term — not for 12 months or longer: Pay Day Lending — A Report to the Minister for Fair Trading, p.12. This does not take into account, however, that consumers often roll over their loans, nor that annualised rates are the accepted way for the cost of credit to be described. Pay day lenders have also suggested that, even if annualised rates were appropriate, the true figure would be 250%: Bryant, Rob, ‘Pay Day Lending Industry Booming’, AM, 5 September 2001. Transcript available at <www.abc.net.au/am/s358431.htm>.
[6] McIlveen, Luke, Milligan, Louise, and Leech, Graeme, ‘Crackdown on Pay Day Loan Sharks’, Australian, 4 April 2001, p.4.
[7] Petschler, Louise, above, ref 5, p.8.
[8] See, for example, the Illinois Department of Financial Institutions, Short Term Lending Final Report 2000 at 26 available at <www. state.il.us.dfi/shorterm>.
[9] Information attained by the author in a number of interviews/ conversations with community-based financial counsellors and consumer support workers. In particular, the author thanks Phil Lennon and Jackie Galloway for the information that they have generously provided.
[10] Illinois Department of Financial Institutions, above, ref 8, p.26.
[11] Nader, Ralph, ‘Legal Loan Sharking’, 1 September 1999 from his nationally syndicated newspaper column, In the Public Interest.
[12] Information reported to the author, above, ref 9; Merri Rose, Queensland Minister for Tourism, Racing & Fair Trading has stated ‘[a] customer obtained a $50 pay-day advance to be repaid in two weeks. This was ‘rolled over’ with the amount outstanding increasing each time, until 10 months later, the consumer owed $900. So the $50 pay-day advance ended up attracting a fee of $192 a fortnight’, Media Release, 9 December 2001.
[13] Fox, Jean Ann, The Growth of Legal Loan Sharking — A Report on the Payday Loan Industry, Consumers’ Federation of America, November 1988, p.5; Ramsay, Iain, above, ref 4.
[14] Petschler, above, ref 5, p.8.
[15] Syvret, Paul, ‘The Quick and the Debt’, The Bulletin, 6 February 2001, p.30.
[16] It is evident that these items of collateral are used from pay day lending contracts (clients names and other identifying material deleted) provided to the author by Phil Lennon, Financial Counsellor. Merri Rose, Minister for Tourism, Racing & Fair Trading has stated ‘she was aware of a couple … [that] just two days after their repayment was due, the lender repossessed their car … The lender then demanded an extra $500 in repossession and ‘late’ fees before the consumer could get the car back’: Merri Rose, above, ref 12.
[17] Pay Day Lending — A Report to the Minister for Fair Trading, above, ref 5, p.5.
[18] Butler, Danny, ‘Payday Lenders Take Extra $48m’, Herald Sun, 5 September 2001, p.4. The figures quoted in the article were provided by the author.
[19] Pay day lending began in the United States, where it has grown from being virtually unheard of in the early 1990s to an industry of between 8000-10,000 lenders with a turnover in the multiple billions: Woodstock Institute Alert, March 2001, Number 16 available at <www. woodstockinst.org>.
[20] ‘The group operated a chain of almost 70 franchised stores through Australia and New Zealand at its peak’: ‘Bond rejects blame for failure of financial group’, 11 December 2001, AAP. Interestingly, Alan Bond is alleged to have played a part in the downfall of the group. The infamous businessman allegedly reneged on purchasing the UK franchise rights to the group for $1m. ChequEXchange director, Alan Endresz states in the same article ‘[w]e certainly would not have gone into liquidation if he [Bond] had paid us the money’.
[21] Meetings were held throughout the early part of 2001 and involved representatives of, among others, the Australian Consumers’ Association, Consumer Credit Legal Service (Vic), Consumer Credit Legal Centre (NSW), Financial and Consumer Rights Council Victoria, Queensland Legal Aid, Redfern Legal Centre, Good Shepherd Youth and Family Service, Consumer Law Centre Victoria, and a number of other consumer advocates including Fiona Guthrie. The author was present during these meetings.
[22] ‘[S]o as to result in its practical prohibition’: Stutsel, Matthew, ‘Mandatory Comparison Rates and Pay Day Loans’, (2001) September–November Commercial Law Quarterly at 10. Pay Day Lending — A Report to the Minister for Fair Trading, above, ref 5 at iv recommends against banning pay day lenders.
[23] See, for example, Hockey, Joe, Commonwealth Minister for Financial Services and Regulation, ‘Action needed on pay day lending’, Media Release, 3 April 2001, describing the lenders as part of the ‘twilight zone of Australian finance’ and Watkins, John, New South Wales Minister for Fair Trading, ‘NSW leads the way on pay day lending’, Media Release, 3 April 2001. Minister Watkins described pay day lenders as ‘bottom feeders that charge crippling interest rates’. The protest was reported extensively in print, radio and television media, see, for example, McIlveen, Luke, Milligan, Louise, and Leech, Graeme, above, ref 6.
[24] Giddings, Jeff, ‘Casework, Bloody Casework’, 17(6) Alt.LJ 261 at 262. The campaign against finance company AVCO is one example of the past work of the national consumer movement.
[25] Giddings, Jeff, above, ref 24, p.265.
[26] Consumer Credit Code, s.7(1).
[27] Rose, Merri, Queensland Minister for Tourism, Racing and Fair Trading, Green Light for Loan Shark Charges Cap, Media Release, 13 July 2001. For a more detailed analysis see Bingham, Paul and Niven, David, Credit Handbook, Leo Cussen Institute at 21.
[28] The Consumer Credit Amendment Regulation 2001 have introduced two further changes. The first will exempt banks from the operation of the amended s.7(1) as the Code changes are not intended by government to affect bank fees. The second lowers, from $200 to $50, the amount of credit where the Code does not apply. Pay day lenders sometimes lend amounts of less than $200 (though rarely less than $50).
[29] ‘From tomorrow: lenders will have to tell borrowers the fees and charges that are payable, whether security is required and the terms of the loan; loan contracts have to be in writing and lenders will be required to give a copy to the borrower; lenders will also be required to assess whether borrowers have the capacity to repay the loan; if it can be established later it was clear they had no capacity to repay the loan, the borrower has the legal right to walk away from the contract and all fees, including interest, will be waived and/or refunded.’ Merri Rose, Minister for Tourism, above, ref 12.
[30] The position in New South Wales, Victoria and the Australian Capital Territory is discussed next. The regulatory position in Tasmania is different. By operation of the Payday Lenders Moratorium Act 2001, pay day lending in Tasmania was effectively banned. The Act expires on 1 December 2002.
[31] Rose, Merri, above, ref 12.
[32] Based on a significant number of contracts viewed by the author.
[33] Rose, Merri, above, ref 27. ‘Debtors ‘necessities of life’ will be protected under the proposed laws with ‘blackmail security’ laws making it illegal to sell up essential household items.’ and ‘We want to stop these people giving loans to high-risk customers and then using the beds, fridges, cutlery, kids’ toys etc as security.’: Rose, Merri, above, ref 12.
[34] Rose, Merri, above, ref 27. The Western Australian Government has introduced the Consumer Credit (Western Australia) Amendment Bill 2001 that will provide ‘in the case of a short term credit contract, the regulations may require interest charges and all credit fees and charges under the contract to be included for the purpose of calculating the maximum annual percentage rate under the contract’: s.4. The government has stated that it ‘is currently considering setting a total cost of credit maximum of 48 per cent for short-term credit’: Griffiths, N., W.A. Minister for Racing and Gaming, Second Reading, Consumer Credit (Western Australia) Amendment Bill 2000, Hansard of the Legislative Council, 20 September 2001.
[35] By the operation of the Consumer Credit (New South Wales) Amendment (Pay Day Lenders) Act 2001.
[36] Goldring, Maher, McKeough, Pearson, Consumer Protection Law, Federation Press, 1998, p.4.
[37] For an overview and analysis, albeit a highly unsatisfactory one, see Taskforce on Industry Self-Regulation, Industry Self-regulation in Consumer Markets, August 2000.
[38] A statement by the (then) Commonwealth Minister for Consumer Affairs, Warren Truss in ‘Foreword’, Department of Industry, Science and Tourism, Codes of Conduct — Policy Framework, March 1998, p.1.
[39] For a strong account of market failure in the banking industry see, Connolly, Chris, and Hajaj, Khaldoun, Financial Services and Social Exclusion, Financial Services Consumer Policy Centre, University of New South Wales, March 2001. Despite initiatives such as the Banking Code of Practice, consumer advocates argue that self-regulation in the banking industry has not ensured adequate consumer protection.
[40] Consumers’ Telecommunications Network, Small Enterprise Telecommunications Centres Limited, Australian Consumers’ Association and Consumer Law Centre Victoria, Consumer Groups Announce Boycott of Telco Self-regulatory Group, Media Release, 3 December 2001. For a study of the practical effect of self-regulation on market behaviour see Communications Law Centre, Unfair Practices and Telecommunications Consumers, January 2001. I have argued that self-regulatory instruments, such as self-regulatory Australian Communication Industry Forum codes have failed consumers. See, for example, Field, Chris, ‘In the Public Interest — Assessing the Effectiveness of Codes of Practice and ADR Schemes’, (2000) May/June Consumer Rights Journal at 9.
[41] Put another way, ‘[w]e do not accept that, as a general rule, self-regulation as the only or principal form of consumer protection is effective or desirable … it sets up the suppliers or producers of the commodity as judges in their own cause and makes it likely that the balance of any scheme of self-regulation will favour the suppliers rather than the consumers: such is human nature’: Goldring and others, above, ref 36, p.13.
[42] There is considerable thinking on these concepts that cannot be afforded adequate coverage here. It is worth noting, however, the limitations of triple-bottom line and corporate responsibility. Most businesses operate their core business measured against a financial bottom line. Peripheral activities meet ‘social obligations’. For example, the core business of banks — providing financial services — is measured almost exclusively against a financial bottom line. This justifies unfettered staff redundancies, fee increases and branch closures — all measures fiscally responsible and socially irresponsible. Banks donate money to charities and suggest this is a part of their social obligation. What is needed is for these non-financial threads to be woven into core business operation. Corporate responsibility should also be measured in terms of the length to which industry will go to avoid regulation by restructuring operations whilst effectively providing the same core product or service. Iain Ramsay has argued that it is a characteristic of the alternative credit market to restructure their operations to avoid regulation. Ramsay, Iain, above, ref 4, p.28.
[43] Pay Day Lending — A Report to the Minister for Fair Trading, above, ref 5, p.iv.
[44] Pay Day Lending — A Report to the Minister for Fair Trading, above, ref 5, p.30.
[45] Pay Day Lending — A Report to the Minister for Fair Trading, above, ref 5, p.30
[46] Pay Day Lending — A Report to the Minister for Fair Trading, above, ref 5, p.30. The report also observes that ‘there would be competition policy implications for an outright ban and the policy would be difficult to defend’, p.30. Pay day lenders state that pay day lending, or micro-lending as they prefer to call it, provides a welcome and needed service to consumers. Petschler, Louise, above, ref 5. p.7.
[47] Pay Day Lending — A Report to the Minister for Fair Trading, above, ref 5, p.30.
[48] For an account of these types of loan sharks see Queensland Office of Equity and Fair Trading, ‘Fringe’ Credit Provider — A Report and Issues Paper, May 1999. Interest rates of 150%-240% per annum were reported.
[49] In addition to commercially viable low-interest loan schemes, it is also important that we examine the effectiveness of no interest loan schemes and consider a significant expansion of these schemes. One of the architects of these schemes sets out their virtues in Hahn, Barry, ‘No interest loans — more than just a good idea’, 1 Consumer Rights Journal 1, November/December 1996 at 12. The website of the New South Wales Council of Social Service sets out a significant amount of information on these schemes <www.ncoss.org.au>. Of course, the underlying drivers of poverty must be tackled, including the adequacy of fixed income payments, health, education, job opportunities and levels of wages.
[50] Connolly, Chris, and Hajaj, Khaldoun, above, ref 39, p.23. For an account of banks re-investment in the communities in which they operate, including proving low-interest loans, see Beddoe, Kate, ‘The Long Kiss-off’, (2000) Summer Consuming Interest at 8.
[51] Syvret, Paul, above, ref 15, p.30.
[52] The legality of ‘penalty’ fees charged by banks warrants much closer consideration. It is arguable that these fees are not a genuine pre-estimate of the loss that a bank or financial institution suffers as a result of a default/breach by the consumer, but really amount to penalties. Such penalties, extravagant in amount compared to the actual cost of dealing with the default and designed to intimidate consumers into contractual performance, are unenforceable: Dunlop Pneumatic Co. Ltd v New Garage & Motor Co Ltd [1914] UKHL 1; [1915] AC 79 and O’Dea v Allstates Leasing System (WA) Pty Ltd [1983] HCA 3; (1983) 152 CLR 359. A study by the Consumers’ Federation of America, for example, found that cheque dishonour fees in the United States comprised up to a 90% profit margin: Shields, J., Bounced Checks, Billion Dollar Profits, Consumers’ Federation of America, 1998. There appears to be growing momentum for fees to be levied at cost-recovery, as opposed to cost recovery and a (often lavish) profit margin: Reserve Bank of Australia, Reform of Credit Card Schemes in Australia, Media Release, 14 December 2001 that states ‘[t]he proposed reform measures [to credit cards] involve … an objective, transparent and cost-based methodology for determining wholesale (‘interchange’) fees’.
[53] Based on information gathered from the casework practice of the Consumer Law Centre Victoria.
[54] Nader, Ralph, above, ref 11, p.12.