New rules are set to be enforced by the financial regulator on 1st July which will curb the freedom which payday lenders have been abusing for too long now. Payday lenders will no longer be able to roll over loans more than twice, nor will they be allowed to make phantom snatch-and-grabs on unwitting borrowerís bank accounts to claim what they are due.
Payday lenders have thrived in recent years through their provision of short term loans, paid back on a weekly or monthly basis. They have defended themselves from vociferous criticism directed at their annual interest rates of 5000% by stressing that most debts are paid back far before this level of interest amounts.
However, this response has failed to appease the industries critics, who have highlighted that the real danger in the borrowing costs of the loan come from the excessive interest and late charges that are applied to a borrowerís outstanding balance if they default on a payment; an occurrence that has been all too frequent during the post-recession era when many people have found it hard to access finance from conventional lenders such as banks and building societies.
The rules set for implementation are intended to prevent lenders from offering loans to desperate borrowers, who cannot viably afford to repay them over the specified time period. Additionally, anticipatory measures are included to safeguard those who struggle with escalating costs.
Britainís notorious payday lender, Wonga, claim that only a small percentage of their customers will be adversely affected by the ban on lenders rolling over loans more than twice. Referencing the companiesí personally gathered data, 4% of loans were extended once whilst only 1.4% were extended twice and only 1.1% had been extended 3 times; 93.5% had never been rolled over. The general consensus levelled at payday lenders, such as Wonga, is that a minority no matter how small, is still too much to be subjected to such coercion. Wonga itself was recently rightfully indicted for sending correspondence from fake law firms haranguing struggling borrowers.
Controversial, covert CPAs
Payday lenders have encountered criticism for their covert usage of continuous payment authorities (CPAs) on borrowersí savings. Many have been left with pittance due to Wongaís aggressive money-recouping tactics and in some cases parents have not been able to acquire essentials for the family.
Lenders have used CPAs recurrently in attempts to reel in their cash, claiming partial payments covertly if they fail to receive full payment from a borrower on the day specified in their loan contract. However, under new regulations payday lenders will only be able to make two failed attempts to regain the full repayment through a CPA. Following this, they must directly contact the borrower and begin negotiations.
The official launch of the new regulations has been met with general acclaim and praise from charity groups and consumer organisations, who have argued that the move is a significant step in the right direction. Nevertheless, calls for further reforms to be instigated have remained with it being suggested that the FCA should go further and restrict the number of rollovers a lender can make to one, rather than two. Other proposals have included a cap in the amount of interest a payday firm can charge on any of their products, and an extension in the period of time a borrower receives between CPAís if their lender fails in their first attempt whilst using this measure.
Chief executive of the Consumer Finance Association (CFA), which acts for the major players in the payday lending game, emphasised that members were solemnly pledged to meeting new rules:
ìThe industry has already changed significantly for the better, and short-term lenders are now leading the way through initiatives such as real-time credit checks.
ìHowever, over-regulation is a real risk, as it will reduce choice for consumers and leave them vulnerable to illegal lenders. With tighter affordability checks in place, 50% less loans are being granted than a year ago, and we are already seeing major lenders leave the market.î
ìThose that remain are facing the prospect of a government price control. So despite the fact that borrowers consistently tell us how much they like and value short-term credit, if the regulator turns the screw too far and drives reputable lenders out of the market, these borrowers will be forced to look for credit elsewhere and this creates a perfect market for illegal lenders.î