The Federal Government has passed its Consumer Credit Legislation Amendment (Enhancements) Bill 2012 through Parliament, clamping down on what it calls loan sharks by capping the limits on what lenders can charge.


"These laws will place reasonable limits on what lenders can charge. The cap on costs appropriately balances consumer protection while still allowing lenders a return that is commercial,” Minister for Financial Services Bill Shorten said.


Mr Shorten said the law will protect the country’s most vulnerable from lenders who ‘ruthlessly imposes excessive fees and charges’ on those who have no other access to credit.


"At the same time these laws ensure an appropriate balance, ensuring that important sources of micro finance, such as pay day loans, can continue to operate as responsible and sustainable businesses,” Mr Shorten said.


The Enhancements Bill introduces a cap for small amount credit contracts where the amount borrowed is $2000 or less, and the term is 1 year or less. For these loans the maximum any lender can charge is an establishment fee of 20 per cent of the amount of credit upfront and 4 per cent for each month of the loan. This provides for maximum charges of $72 on a loan of $300 over 1 month.


The legislation will also see other reforms introduced, including:

  • Applying a cap to other credit contracts based on the 48% cap currently in force in some Australian States. The Commonwealth cap addresses the range of avoidance techniques lenders currently have devised to avoid that cap.
  • Responsible lending obligations to address high risk conduct by small amount lenders.
  • For seniors who use reverse mortgages, greater certainty as to future outcomes when they enter into such contracts that the amount they are required to pay cannot exceed the value of the equity in their home (through a no negative equity guarantee).
  • Simplifying the procedures for borrowers to apply for a variation to their repayments on the grounds of financial hardship, as it is in the best interests of both parties to try and resolve these situations as quickly and simply as possible.