Car repossession, sexual harassment and death threats: introducing the new payday loans
The ëLogbook loansí industry, which ask borrowers to secure their loans against their car, are to be investigated by the Financial Conduct Authority (FCA), over claims that they have used rogue practice to recover outstanding debts.
Allegations of sexual harassment, forceful car repossession and even death threats are set to be looked into by the FCA, who today took over from the Office for Fair Trading as industry regulator.
ëLogbook loansí have become prominent in recent times for enabling people to access short term, lump sums of finance, in a time when banks and other major lenders have been unwilling to provide loans to anyone who does not have a credible credit report.
The loans are typically marketed as ëfast cashí with ëzero credit checksí, and borrowers can access a larger amount of cash than they would be able to do so from other short term finance lenders, such as payday loan companies.
However, the borrower is actually in a far more dangerous and volatile arrangement with a logbook loan provider than a payday one, as lenders typically ask for 50% of carís value as security on top of charging over 500% APR on the loans, meaning that lenders stand to see the balance of their debt accumulate supremely quickly, and risk losing their car under contractual terms unless they repay on time.
The FCA have identified their concern about the logbook loan industry, arguing that they are supplying borrowers with ëbad value for moneyí, and put them in danger of ësignificant harmí, by exploiting their financial vulnerability and desperation caused by short term cash flow problems. The allegations of rogue recollection practice have also been described as non compliant with trading regulations, and will be looked at closely in order to ascertain the future of the companies.
"Logbook lenders have borrowers over a barrel," says Christopher Woolard, director of policy, risk and research at the FCA.
"People don't realise their car can be seized if they fall behind in repayments, with lenders often forcing borrowers to pay large amounts to keep their vehicle when they can't afford to."
An FCA study found that over 40,000 people took out a logbook loan in 2013 alone, with the average borrowing sum estimated to be around £1,000, though some people acquired finance as high as £50,000. In one instance, the FCA reported that a borrower had been left stranded on an empty road by an enforcer of a logbook loan provider, who had been sent to obtain their repayment manually.
The borrower told the FCA: "I was on my way to work Ö a lorry was following me and came up next to me. This man was at the window; he reached in and took the keys. He looked like a police officer. He told me if I found £1,200 right there they wouldn't take the car. They wouldn't let me get my stuff out of the car".
Other reports of misconduct included receiving death threats from a logbook provider, being sexually harassed for repayment, and be physically man handled by an enforcer.
Watchdog must bite
The Citizenís Advice has argued that further problems have also arisen from the providers necessitating that people secure their cars against the loans, as borrowers who are aware that they will have to renege on their deal have sought to sell their cars to unsuspecting buyers, who are then forced to hand over their new car.
They also highlighted that their own research has indicated that over a third of logbook loan users have been mistreated and subjected to improper practice by their lender. It outlined that a number of the people it has helped have been forced to pay back as much as 8 times their original loan, and called for a number of new regulations to be implemented to tackle the problems present within short term borrowing at present.
Gillian Guy, chief executive of Citizens Advice says: "The logbook loans business is rife with lawless practices. Citizens Advice has helped people who have been subjected to abusive behaviour, sexual harassment and even death threats by lenders trying to take away their cars. Consumers also face confusing charges, sky-high interest rates and inadequate credit checks, making the industry a toxic mix of irresponsible lending and bullying debt collection."
Mr Guy called on the FCA to do everything in its power to clean up the industry, including the introduction of a number of severe measures that would make certain recollection practices illegal and subject to hard line punishment.
FCA chief Woolard identified that the organisation would act fast to make the necessary changes to the industry, and promised to mould the sector so that it put the ëcustomers interests firstí.
"We expect firms to treat everybody fairly ñ so we are putting logbook lenders on notice. Our new rules give us the power to tackle any firm found not putting customers' interests first."
The FCA has already signalled its intention to reform the payday loan sector, following a huge number of calls for them to clamp down on their activity and give more protection to borrowers who are struggling due to the backdrop of the recession at present.
Provisional reforms that have been discussed are the introduction of compulsory debt advice to be given by the provider to the lender upon application for a loan, a cap on the total interest a lender can charge on a loan, the termination of endless harassing calls when borrowers are in arrears, and harder punishments on firms that fail to comply with industry regulations.
They have already finalised policy to be implemented in July which will see people unable to ëroll overí their loans more than two times, and the end of the continuous payment authority which allows providers to continually debit a borrowers bank account for repayment, regardless of whether anything is in there or not.