Pressure Grows for Rate Cap in Queensland

The following is an article from the Courier & Mail, Queensland, Australia - 3/08/2007

Mum's 240% interest scare

KAREN Deakin doesn't want to see another payday lender again. A loan bearing 240 per cent interest rates tends to do that.

Like many who sign up for short-term credit, the Brisbane pensioner did not read the fine print of her contract saying what the true interest rate was.
The lender was too busy telling her about the small weekly repayments.

"It's just terribly wrong," Ms Deakin, 41, of Loganlea, said yesterday.

"There should be something done to stop people like this taking advantage of people who are desperate."

In October 2005, she borrowed $1500 from a Beenleigh lender on Brisbane's southside to help pay a few bills. The contract – completely legal – was for one year with a weekly repayment of $80, amounting to about $4300 by the end of the term.

Had Ms Deakin borrowed the same amount on a standard credit card rate of 15 per cent, she would have paid $80 a week for five months, paying about $100 interest.

When the contract and repayments expired last October, however, the lender kept taking the repayments out of her account every week.

Ms Deakin only noticed this last month when she received a receipt for the extra $3000 she had paid.

Ms Deakin may not have found herself in the predicament she is now in if Queensland's Fair Trading Minister Margaret Keech had kept her promise to protect Queenslanders from exorbitant payday lending interest rates.

In some cases, it had been reported, that rates of more than 1600 per cent were being demanded.

In an admission which has infuriated consumer groups, Mrs Keech yesterday admitted her self-imposed mid-year deadline to cap exorbitant rates had not been met.

The missed deadline comes after nine years of Government inaction and broken promises.

Queensland lenders can still charge consumers whatever they want, despite other states introducing rate caps of about 48 per cent in 2001.

Mrs Keech said the legislation hadn't gone to Cabinet because

finalising the consultation process took longer than her department had anticipated.

"I expect to finalise the Government's response to this issue, including proposed legislation, in 2007," she said.

Consumer groups such as Legal Aid Queensland are furious after falsely believing help was finally on the way.

The group recently settled a court case against a lender charging 1642 per cent annually.

The loan was ostensibly at 9 per cent, but had to be repaid in 48 hours, making the annual rate astronomical.

"We're still waiting," LAQ chief executive Jenny Hardy said.

"In the meantime, our clients are still hurting as they struggle to pay off their debts."

The Courier-Mail revealed last year a list of promises from ministers to review and cap rates dating back to July 1998.

Opposition fair trading spokesman Mark McArdle yesterday called on the Premier to intervene.

"Empty promises from empty vessels," Mr McArdle said.

"If the minister can't even commit herself to a deadline and make it happen, then the Premier has got a real problem and should be doing something."

Mrs Keech indicated she intended to introduce a cap – expected to be similar to 48 per cent – to limit the cost to consumers.

However, such a move would be one lenders such as National Finance Services Federation Queensland president Rob Legat claim will devastate the industry.

Mr Legat said it was wrong to ask a business to fix its income, which would effectively happen under cap legislation.

Use Unclaimed Money to Tackle Rip Off Lenders

Money from dormant bank accounts should be used to fund affordable credit and banking services for the worst off, the National Housing Federation has recommended.

The Federation says the scheme would create a viable alternative to rip off doorstep lenders, which target those households most in need of small scale credit, particularly social housing tenants. With sky-high interest rates, borrowers can quickly be sucked into spiralling debt.

In its submission to the Treasury’s Commission on Unclaimed Assets, the Federation has identified a way of making cheap loans and a range of other financial services available to low income families nationwide.

Money that has been left untouched in bank accounts for 15 years would be used as capital to boost existing non-profit lenders, such as credit unions and community development finance institutions (CDFIs), and extend their services throughout the country.

Credit unions and CDFIs currently offer affordable loans, savings schemes and cheap white goods to people on low incomes, but provision is patchy and their availability is a postcode lottery.

Under the Federation’s proposals, these lenders would be developed into a powerful network of financial service providers working in every region, or even a single national agency.

Housing associations would also contribute resources to the new facility, and would use it to offer loans, savings schemes and financial advice to their tenants. Around 60% of social housing tenants are financially excluded.

A high street bank would also work in partnership with the scheme to provide a fully accessible basic bank account to customers, as well as back office and IT facilities to the new service.

The proposal is based on research for the Federation by the specialist consultant Niall Alexander, which is published alongside the Unclaimed Assets submission today.

David Orr, chief executive of the National Housing Federation, said: “Doorstep lenders target social housing tenants with sky-high charges. It’s time to offer a viable alternative.

“We are calling on a number of parties, including housing associations, the Commission on Unclaimed Assets, non-profit lenders and high street banks, to work together to tackle exclusion.

"If our proposals are implemented we can make a real difference to the lives of social housing tenants throughout the country.”

Bank Charges Campaign Gets Big in Japan

Today's FT reports that a landmark Japanese Supreme Court Ruling has left consumer credit lenders vulnerable to borrowers seeking to reclaim money by claiming that they have been overcharged in similar ways to the UK consumers over bank and credit card default charges.

This in a week when HSBC reported it has already paid out over £116 million to UK consumers; HBOS £79 million; and Lloyds £36 million. With the movement now going international, it now looks as if these sums will be tip of the iceberg.

India - Lack of access to bank credit cause of moneylending problems

The Reserve Bank of India has moved to limit the reliance of the rural poor on high cost moneylenders which arises because only 19% of the population are able to get access to mainstream bank finance.

In proposals issued this month, the Reserve Bank is supporting calls for all moneylenders to be registered with local states and for those states to introduce interest rate caps. Rate caps will not apply to the microfinance agencies in India which have argued against caps for some time on the basis that this will provide a
disincentive to market entry.

The proposal for interest rate caps for moneylenders will allow individual states to set their own cap provided that these are calculated by assessing the cost of funds and the cost involved in deploying those funds.

Washington Post comes out in favour of caps on payday loans

Yesterday's editorial in the Washington Post came out in favour of a 24% interest rate cap on payday loans in the state, and neatly summarised the issues relating to caps generally. Moves are currently afoot to introduce caps in 12 U.S states and the UK consumer may be wondering why it is that US payday lenders such as Dollar Financial (trading under the Moneyshop brand in the UK) continue to operate here with no limits on interest rates and fees...

The full article follows:

Salary Sinkhole
The District would be right to impose limits on payday lending.
Wednesday, August 1, 2007; Page A16

CHANCES ARE, everyone at some point has been short of cash. Most people, though, wouldn't even consider a loan if the interest totaled nearly 400 percent a year. That those who are least able to afford such exorbitant rates are being victimized by them is reason enough for the D.C. Council to follow through on plans to crack down on payday lending.

Before adjourning for the summer, the council gave tentative approval to a measure restricting the rate of interest on payday loans. Typically located in low-income neighborhoods, payday lenders offer short-term loans (generally two weeks) of several hundred dollars. All a borrower needs is a post-dated personal check and a pay stub verifying employment.

The current rate is about $16 to borrow $100 for two weeks, or an annual percentage rate of nearly 400 percent. Under the bill sponsored by council member Mary M. Cheh (D-Ward 3), payday lenders would lose their exemption from the 24 percent interest-rate cap that applies to lending in D.C. The industry is expected to pull out all the stops to block final passage, arguing that the service is needed because people without established credit have no other options. In fact, the business is rooted in the inability of borrowers to repay their loans in full and on time. People take out new loans to pay off old ones; the nonprofit Center for Responsible Lending estimates that a typical borrower (in the District that person is a single mother with little means) ends up paying back $793 for a $325 loan.

It is instructive that Congress, appalled by stories of soldiers and their families hobbled by debt, voted last year to put in place a 36 percent cap on payday loans for military personnel. At present, some 12 states, including Maryland, have moved against payday lending. One reason the industry is so alarmed by the prospect of the D.C. regulations is that they could have a ripple effect: Virginia came close to imposing restrictions this year. No doubt capping interest rates will cause some firms to stop doing business. But the experience of states such as North Carolina has shown that there is no adverse impact on consumers and that more responsible forms of lending fill the gap.