Following an ob体育 review, Prospa Advance Pty Limited (Prospa) has changed聽聽 loan terms in its standard form small business loan contract to address terms being unfair under the unfair contract terms provisions of the ob体育 Act.
The review of Prospa鈥檚 contract is part of a broader surveillance by ob体育 to examine lenders' small business loan contracts to reduce the risk of unfair contract terms.
As a result of ob体育鈥檚 review, Prospa has made a number of changes resulting in improved terms for borrowers and guarantors. The changes include addressing problematic terms outlined in ob体育 Report 565: Unfair contract terms and small business loans, and changes to other terms which could have operated unfairly for borrowers and guarantors.
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 ob体育. Prospa will be communicating these changes to its small business customers with the amended contract coming into effect in early October.
ob体育鈥檚 surveillance of small business loan contracts is ongoing, and will consider regulatory action where appropriate.
Changes to Prospa鈥檚 loan contract
Prospa has agreed to make the following changes to its standard form small business loan contract:聽
- amended the early repayment clause so that borrowers can now 聽聽聽聽 prepay their loan early without requiring Prospa鈥檚 consent, and removed 聽聽聽聽 Prospa鈥檚 absolute discretion whether to provide a discount for prepayment聽- Prospa will now apply a published Early Prepayment Policy so聽borrowers聽 can determine the discounts they they can expect to receive if they do pay聽back their loan early;聽
- amended the 鈥榰nilateral聽variation鈥� clause to significantly limit Prospa鈥檚 ability to unilaterally聽vary contracts to specific instances. Prospa has also extended the notice聽period to 60 days where Prospa intends to vary fees;聽
- amended clauses defining聽events of default to add remediation periods and materiality thresholds and to permit changes to control of the Borrower with the lender鈥檚 consent聽(not to be unreasonably withheld);聽
- removed a broad聽鈥榗ross-default鈥� clause which allowed Prospa to call a default under the聽loan contract due to any default under another finance document related to聽the loan (for example,聽guarantee or security document);聽
- restricted the borrower鈥檚聽indemnity to ensure that:
鈥撀犅犅� 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
鈥撀犅犅� 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;聽
- removed an 鈥榚ntire聽agreement鈥� clause which absolved Prospa from contractual responsibility聽for conduct, statements or representations made to borrowers about the聽loan contract;聽
- limited the class of people who can provide guarantees under the loan contract to:
鈥撀犅犅� people who are actively involved in the management of a borrower鈥檚 business;
鈥撀犅犅� if the borrower is a company, people who are directors or shareholders of the borrower; and
鈥撀犅犅� if a shareholder of the borrower company is a company, directors or shareholders of that company.聽
- inserted a 5-business-days鈥� notice provision to guarantors about:
鈥撀犅犅� borrowers who are 30 calendar days behind their agreed repayment schedule; and
鈥撀犅犅� the commencement of legal proceedings against a borrower or the appointment of a receiver.聽
- limited the guarantor鈥檚 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).聽
- inserted a provision to聽obtain consent of the guarantor:
鈥撀犅犅� where there is a discharge or release of any security held by Prospa given by the borrower or a guarantor; and
鈥撀犅犅� where there are multiple guarantors, before releasing a guarantor.聽
- limited the actions of聽lender-appointed attorneys where there is an event of default under the聽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聽or guarantor.
Prospa鈥檚 Interest Charges and Late Fees
Prospa charges a factor rate for interest on its fixed term loans. The amount of interest, which can be considerably higher than bank loans, is fixed and disclosed at the outset and does not vary even if the loan term is extended.聽 The amount of interest is therefore part of the 鈥渦pfront price鈥� of the loan and is excluded from review under the unfair contract term provisions.
Late payment fees for missed payments are, however, subject to review under the unfair contract term provisions. ob体育 will be undertaking further monitoring of Prospa鈥檚 charging of late payment fees to assess whether the manner in which the fees are being charged is unfair in practice.
Background
In March 2018, ob体育 published REP 565, which outlines changes to small business loan contracts made by the big four banks to comply with the UCT law. This report also provides guidance to the broader small business lending industry.
At the same time ob体育 announced that it will also examine other lenders' small business loan contracts to ensure that their contracts do not contain terms that raise concerns under the UCT law. ob体育 is reviewing the contracts of bank and non-bank small business lenders, including Prospa, to check their compliance with UCT law.
Since publishing REP 565, ob体育 is also monitoring the big four banks' compliance with the UCT law. In March 2017, ob体育 and the ASBFEO completed a review of small business standard form contracts and called on lenders across Australia to take immediate steps to ensure their standard form loan agreements comply with the law (refer: ).
In August 2017, ob体育 and the ASBFEO welcomed the changes ob体育 required to small business loan contracts by the big four banks (refer: 17-278MR) that have:
- ensured that the contract聽does not contain 鈥榚ntire agreement clauses鈥� which prevent a small business聽borrower from relying on statements by bank officers (for example,聽about how bank聽discretions will be exercised)
- limited the operation of聽broad indemnification clauses
- addressed concerns about聽event of default clauses, including 鈥榤aterial adverse change鈥� events of default and specific events of non-monetary default (for example,聽misrepresentations by the borrower)
- limited the circumstances聽in which financial indicator covenants will be used in small business聽loans and when breach of a covenant will be considered an event of default
- limited their ability to聽unilaterally vary contracts to specific circumstances with appropriate advance notice.