Loan firms warned over reckless lending
The payday loan industry has been warned to improve the way it lends money and collects debts, or face fines or possible closure.
In an interim report the Office of Fair Trading (OFT) has said that most of the 50 big firms under inspection do not operate fully by its rules, and that reckless lending and aggressive debt collection are a real cause for concern.
Now formal investigations into several payday lenders over aggressive debt collection practices are underway.
The OFT publishes its full report in the new year, at the culmination of an investigation which it started in February 2012.
Updated rules
The OFT is worried about the “poor practices” which its enquiries have been uncovering, and which resonates with many of the criticisms that consumer groups have been making of payday lenders.
Among the OFT’s concerns are that
- lenders do not check properly if their borrowers can afford to repay the money they have borrowed
- too many loans are not repaid on time
- the loans are then extended too often
- lenders are too aggressive when borrowers fail to repay promptly
The regulator has become especially worried about the way payday loan firms use a type of repayment agreement called a continuous payment authority (CPA), using a credit or debit card to ensure they are repaid automatically.
The OFT has updated its rules for the industry to make it clear that if borrowers sign up for a CPA, it must be with their explicit agreement and that borrowers are told fully how the CPA works and how to end one.
Lenders must not keep on trying to drain cash from their borrowers’ accounts if there is not enough money available to meet the debt.
The revised guidance makes it absolutely clear to lenders what is expect from them when using continuous payment authority to recover debts, and send a clear message about its misuse.
The UK’s most high profile payday lender, Wonga, said it welcomed the OFT report and its recommendations, which add to a new industry code of practice that was announced in the summer and which comes into effect next week.
“Regarding continuous payment authority, which is also used by a broad range of businesses outside of consumer credit, we believe it is an important method of collection and we share the OFT’s concerns that it must not be misused,” said a Wonga spokeswoman.
The Financial Ombudsman Service (FOS) has found a small but increasing number of people complaining to it about payday loans and that payday loans had a habit of making a bad situation worse.
A spokesman said the main reason for people complaining was that the loan had been unaffordable and should never have been granted in the first place.
“In the first half of this financial year – April to September 2012 – we received 271 new complaints; this compares to the 296 complaints brought to our service during the whole of last year (2011-12) – and we are currently upholding eight out of 10 cases in favour of the consumer,” said an FOS spokesman.
(source – http://www.bbc.co.uk/news/business-20406659 )