Lenders have a legal obligation to protect borrowers by lending responsibly. They should assess the borrower’s ability to repay without suffering substantial hardship and should not engage in unconscionable conduct – like failing to disclose fees.
Julie Gray has won the ability to head a class action on behalf of 40,000 – 50,000 people in NSW who have used Cash Converter loans over the past three years. This class action for $40 million has been brought against two Cash Converter franchises for allegedly breaching their legal obligations. She claims they charged fees they did not disclose and breached their obligations of protecting struggling Australians.
Ms Gray received 54 “pay-day” loans over 3.5 years, paying back up to 633% (where the legal level was 48%) and developing a dependency on the loans. She alleges that the stores had access to her bank statements and should not have extended her the loan when they saw she already had multiple loans and insufficient ability to repay them. As high-rate loans, there is a legal obligation that “pay day” loan borrowers are assessed for the possibility of financial hardship ensuing from the loan. She also identified fees charged well above the 48% figure – up to 633% were structured in a way that hidden fees (earning interest) were added into the repayments without her knowledge.
The “pay-day” lending sector makes less money if people take the full loan period to repay, but is very lucrative where borrowers are charged an “early repayment” fee. This allegedly was the case at Cash Converters; they disclosed the repayment plan at the legal 48% rate for a term of 24 months with dishonour fees, reschedule fees and deferred establishment fees, ie. A fee charged for early repayment of the loan. Ms Gray claims that it was not explained to her that she had 2 years to repay her loan, it was suggested that she pay in 7 months (and thus also pay the deferred establishment fee). The imbalance in financial sophistication can make it even more important as a lender to be clear about the structure of the loan and understand the lender obligations.
On top of this, undisclosed “admin fees” were allegedly charged, and earned interest bumping up the repayment amount. The question here is whether this was a deliberate system designed to get around the 48% legal limit, and profit from vulnerable people.
This class action will send a strong message to the “pay-day loan” industry that the legal obligation of protection is important, and that it is important as a borrower to understand the agreement you’re entering into. Lenders should be taking steps to communicate with and protect borrowers.
Read Julie Gray’s Statement of Claim here.