The Australian Securities and Investment Commission (ASIC) has flexed its muscles in relation to the responsible lending regime and obtained a significant victory in the Federal Court of Australia.
The judgment reinforces the importance of accurate and complete record keeping by lenders.
The case (ASIC v The Cash Store Pty Ltd (in liq)  FCA 926) was largely resolved on its facts rather than through any statement of legal principle but has a number of points of interest for those considering the New Zealand legislation.
The Cash Store (TCS) ran a nationwide business offering short term, low value payday loans on behalf of another company, ASA, from which it was funded. The loans were for up to AUS$2,000 and TCS would lend up to between 35% and 50% of the customer’s next scheduled pay packet. Many customers had multiple or overlapping loans.
TCS also marketed to its customers a form of consumer credit insurance (CCI) called a “payment protection plan”. This was charged at a fixed percentage of the loan amount. It was intended to cover death and dismemberment, disablement, cancer, heart attack or stroke, involuntary unemployment and catastrophic illness.
ASIC alleged that TCS and ASA had both breached their responsible lending obligations. It also alleged that TCS had engaged in unconscionable conduct in selling borrowers the CCI policy.
The contraventions related to over 325,000 credit contracts. ASIC tendered a representative sample of 281 contracts for the purposes of establishing liability. It reserved its position on the question of how the Court could and should extrapolate its liability findings across all 325,000 contracts.
The Court found that TCS had breached numerous provisions of the legislation.
Loan officers routinely failed to make the requisite enquiries and undertake verification before arranging loans; routinely failed to inquire about purpose and objectives and about expenditure and other liabilities; and even when enquiries were made, routinely failed to verify the financial position. While TCS operated some sort of safety check process, this appeared to be a tick off exercise rather than a serious examination of the issues which TCS was bound to consider.
The breaches by TCS were also breaches by ASA as the credit provider.
The Court also held that the CCI was unconscionable. ASIC had provided actuarial data which indicated that the value of the insurance policy was extremely low on any available measure. The likelihood of most of the insured events occurring within the very short cover period was low.
The value of disablement and involuntary unemployment cover was extremely low when the average period of cover was less than two weeks and non-existent for loans for one day. CCI was sold to unemployed customers despite the fact that they were unlikely to receive a benefit from the insurance.
The court made declarations that TCS and ASA had breached the reasonable lending provisions and that TCS had engaged in unconscionable conduct. The question of penalties is reserved for a further hearing.