This is an historic moment, but more could be done right now to tackle rip off lenders

After fifteen years of campaigning on the issue, we are delighted that Government today included provisions within the Financial Services Bill to provide regulators with the power to cap the cost of credit agreements.

The Government amendment sets out a general power for the new Financial Conduct Authority to make rules that:

• Prohibit the charging of certain types of fees which it considers to be unacceptable; and


• Prohibit the charging of costs above an amount which it specifies as unacceptable.

Further to this, the FCA is to be provided with a power to prohibit ‘rollover’ lending, which is commonly used by payday lenders.

In the event of a breach of any such rules, agreements will be unenforceable, with any payments made by the borrower recoverable from the lender, and the lender will be liable to pay compensation to the borrower.

Welcoming the Government amendment, Damon Gibbons, said:

“This is an historic moment. After fifteen years of pointing out how money lenders have been exploiting the poorest households we finally have cross party agreement that direct action to cap prices and prevent other abuses is needed . The legal loan sharks are now on borrowed time. However, we have to move forwards as a matter of urgency and the FSA should now launch a consultation to help shape the new rules as early as possible.

But more can and must be done now to protect consumers. The FCA will not be taking on the responsibility for the regulation of consumer credit until 2014. In the meantime, and faced with a possible future crackdown, many money lending companies will inevitably take one last opportunity to rip off some of the poorest households in the country.

To prevent this, the Office of Fair Trading should immediately revise its Irresponsible Lending Guidance by indicating a level of credit costs the charging above which it will take as prima facie evidence of an irresponsible lending business model. We recommend that these ‘benchmark costs’ be initially set at £20 per £100 lent for payday loans and £65 per £100 lent for door to door money lenders.

It is now six years since the Competition Commission found that home credit lenders were making excess profits. At the time of the Commission’s inquiry, Provident Financial was charging £65 per £100 lent. It is now charging £82 per £100 lent, yet its cost of capital have not increased significantly and, with improved data sharing in place across this sector it has better information available to it to assess the risk of default. By our calculation, Provident has made at least £30 million in excess profit in the past two years alone. Insisting it reduces its prices back to the level charged in 2006 would be a good start on delivering on the promises to tackle the money lenders made in Parliament today."

Protecting low income borrowers in the credit crisis

Debt on our Doorstep and Ian McCartney M.P have now finalised their report on measures that government can be taking to protect low income borrowers in the credit crisis. The full report is available from the link below.

The report has now been submitted to the Department of Business, Enterprise and Regulatory Reform and the Treasury and we are hopeful of a meeting in the near future.

In the meantime, the proposal to cap prices in non-competitive areas of the credit market is gaining further support with Transact members voting this as one of their top three priorities for action in a survey at the end of 2008. Following the Transact Annual conference London in November, we understand that there will be a number of regional debates organised on this issue in Spring 2009.

Protecting low income borrowers in the credit crisis

Channel 4 Exposes Lies of Payday Lenders

Channel 4 News has exposed the irresponsible lending of payday lenders, which offer high interest loans without checking whether or not borrowers can afford to repay and without bothering to check basic details such as earnings, before offering to extend loans for up to 6 months.

Commenting on the footage, Damon Gibbons, Chair of Debt on our Doorstep said:

"Channel 4 must be congratulated on bringing the reality of payday lending to light. Lenders are constantly telling us that they are responsible and comply with guidance from the OFT and their trade associations. This report reveals that this is simply not true. We hope that the Office of Fair Trading will look carefully at the footage and consider what restrictions now need to be placed on payday lender's consumer credit licenses."

The coverage is available from the link below starting 5 mins and 40 seconds into the clip entitled Payday Loans (broadcast on Tuesday 9th September)

http://link.brightcove.com/services/player/bcpid1529573111

OFT launches consultation on Responsible Lending

The Office of Fair Trading has announced the start of a year long project looking at responsibility in lending, and published a scoping paper for consultation. This is available from the OFT from the link below with a deadline for responses of 24th October 2008.

http://www.oft.gov.uk/shared_oft/business_leaflets/consumer_credit/oft1012.pdf

Dood supporters are encouraged to respond to the consultation arguing for the widest possible remit to be given to the project, in order to allow it to investigate and make recommendations on all matters from advertising, through to lending decisions, and decisions concerning recovery action. We will be examining the issues in more detail over the period of the consultation and will issue further news and views on the website in due course.

Fuel Poverty Measures Should Show the Way to Affordable Credit

A report in today's Observer (see below) highlights the need to force energy companies to introduce 'social tariffs' to ensure that low income households can access the energy services they need at prices they can afford. Efforts to encourage the industry to establish voluntary mechanisms to look after these consumers have failed, according to the National Energy Association and Npower. The result has been an horrendous increase in the level of fuel poverty -households are defined as being in fuel poverty where they spend more than 10% of their disposable income on fuel bills.

There are lessons here for those seeking to ensure access to financial services, and to affordable credit for people on low incomes. The Financial Inclusion Taskforce is behind the game. Whereas the Government has set binding targets for the energy industry to eliminate fuel poverty in England by 2010 and across the UK by 2016, no such ambition has been set out for the Financial Inclusion Taskforce or the financial services industry to establish access to affordable credit. In fact, even the term 'affordable credit' remains undefined by the Taskforce. Despite this lack of precision, a recent mapping exercise has been conducted by the Taskforce to establish those areas of Great Britain that have the least access to affordable credit. The results are confusing as they give no indication of the level of resources necessary to solve the problem of rip off credit provision to the poor. And there is no evidence of effective pressure being exerted by the Government or Taskforce on banks to meet even those gaps in provision that have been revealed. The Growth Fund for credit unions and third sector lenders of just £45 million being devoted to this purpose is woeful in its inadequacy.

Debt on our Doorstep's research last year into the debt burdens of low income households revealed that the poorest households are paying an average of 11- 12% of their incomes on unsecured debt repayments. Using the same definition of poverty as is used in relation to fuel, that puts somewhere approaching one fifth of the population, those in the lowest income quintile, in debt poverty. As Alistair Darling approaches his budget preparations, he would do well to set out some targets and mechanisms to deal with this including a responsibility for banks to deliver services to low income communities at affordable prices.

Energy companies should be appladed for recognising the need for Government intervention to force a level playing field in the industry and to secure services for low income consumers. Now is the time for banks to accept that the financial services market requires the same medicine.

--------------------------------------

Npower admits laws needed on fuel poverty
Tim Webb
The Observer,
Sunday March 9 2008

This article appeared in the Observer on Sunday March 09 2008 on p3 of the Business news & features section. It was last updated at 00:04 on March 09 2008.

RWE Npower has privately admitted that energy companies will only tackle fuel poverty effectively if the government forces them to do so.

The energy industry has been trying to resist moves to force companies to do more to help the soaring numbers of 'fuel poor' in this week's Budget. The government has set a legally binding target to end fuel poverty in England by 2010, and across most of the UK by 2016.

But in a letter to energy regulator Ofgem in September, Npower admitted that the government's approach to date, to encourage companies to offer more subsidised or 'social' tariffs to poorer households on a voluntary, as opposed to compulsory, basis would not work.

'At present, government is encouraging the delivery of a social action solution within a voluntary framework,' the company said in the letter. 'It is doubtful whether this is the most efficient approach and it is also seemingly inconsistent with a market framework.'

It went on: 'We believe that the interest of the fuel poor is best served by a mandatory social tariff and this is the only means by which the government's 2010 and 2016 objectives can be achieved. There is no obvious reason why these targets will be delivered within a competitive retail market.'

This weekend, the government was still considering how to address fuel poverty in the Budget. The companies are expected to escape a windfall tax if they contribute a 'voluntary' levy to help those struggling to pay their bills.

Energy companies currently spend just 0.11 per cent of their £24bn turnover on tackling fuel poverty on average. Spending varies: British Gas, owned by Centrica, spends 0.49 per cent of its turnover, while Scottish and Southern Energy and Npower spend just 0.07 per cent. Many of these supposedly cheaper tariffs are actually more expensive than the tariffs offered to other customers. For example, British Gas's social tariff for gas and electricity is on average £96 more expensive per year than for ordinary customers paying by direct debit.

At the end of last month, Energy Minister Malcolm Wicks reiterated to fuel poverty charity National Energy Action that the government would not introduce mandatory social tariffs.
Jenny Saunders, chief executive of National Energy Action, said: 'It would be preferable to have a legislative framework, rather than rely on the goodwill of companies for a one-off gesture. Some companies are doing their bit but to have a genuinely socially just energy market the government will have to intervene.'

Fuel poverty is defined as a household which spends more than a tenth of its income on heating and lighting.

Does the world really need the Jordan Credit Card?

From the Sunday Mirror

EXCLUSIVE After the jewellery, the lingerie and books.. it's the Jordan credit card
By Lara Gould Tv Editor 24/02/20

Glamour model Jordan aims to inflate her assets even further - by launching her own credit card.

The 29-year-old - real name Katie Price - is planning a "pink and girlie" card targeted at young women. A source said: "Katie sees this as the next step in developing the Jordan brand. She's lent her name to a string of other products and campaigns so why not move into the financial sector?"

But the idea has caused outrage among consumer groups, who fear the card could lure impressionable youngsters into debt. Jordan has already put her name to a lingerie range for Asda and a line of jewellery for Argos and has written a series of books, including her latest autobiography Pushed To The Limit. She also plans to bring out her own range of jewellery, clothing and cosmetics.

The mum of three, who recently spent more than £43,000 on her latest round of plastic surgery, has applied to have an official Jordan logo registered, featuring her naked silhouette.
She will be the first British star to front their own credit card - a trend kicked off in the US four years ago by rap music mogul Russell Simmons and tycoon Donald Trump - star of the American version of The Apprentice.

But Damon Gibbons, of Debt On Our Doorstep, said: "This is a totally irresponsible idea. Jordan is a very influential celebrity who has a lot of young fans who want to be just like her. Giving them a credit card endorsed by Jordan herself will encourage youngsters to spend cash on living a lifestyle they wouldn't normally be able to fund.

"Uk debt is currently up to around £1.3trillion. The last thing young people need is to be sold a glossy celebrity-backed credit card."

Jordan, who lives in a £3million farmhouse in East Sussex, has an estimated £30million fortune with pop singer husband Peter Andre.

Last night a spokeswoman for the model said: "This is something we are in talks with financial companies about doing in the next year.

"It will be the Katie Price credit card and it will be her own card rather than something Katie just puts her name to."

Dood Workshop on Responsible Lending Proposals

Damon Gibbons, Chair of Debt on our Doorstep, will be leading a workshop at the forthcoming Debt conference hosted by Kirkby Unemployed Centre, Merseyside on 28th February.

The workshop will focus on Dood's Responsible Credit 'proposals for action' which were launched in late 2007, and Gibbons will provide an update on Debt on our Doorstep and the European Coalition for Responsible Credit's perspectives for the current credit crisis.

Further details concerning the conference are available from Helen Jones at KUC, helen.jones@kuc.org.uk

Responsible Lending: Proposals for Action

Debt Campaigners Declare October 23rd ‘Responsible Lending Day’ and call on Government to raise its game to tackle UK Debt Crisis.

Debt on our Doorstep, the campaign for fair and responsible financial services, has declared October 23rd to be the UK’s ‘Responsible Lending Day’ and called on Government to raise its game to tackle irresponsible lending and Britain’s growing debt problem.

The day will see the Westminster launch of Debt on our Doorstep’s 17 page report into debt in the UK which sets out proposals for action in 8 areas including calls for:

Banks to disclose how they serve low income communities and meet the need for affordable credit

Regulation of the credit card industry to be tightened to ensure they take proper account of a borrower’s ability to repay and for a ban on unsolicited increases in credit limits and credit card cheques

Longer term funding for projects to tackle illegal money lending and for the introduction of a criminal offence of usury.

Lenders to also advertise APRs of agreements with payment protection insurance included so that borrowers can see the true cost involved

Calling on Government to draw up a properly resourced national strategy for debt advice provision

Launching the report, Damon Gibbons, Chair of Debt on our Doorstep, commented:

“The Government has so far underplayed the role of irresponsible lending in causing debt, and continues to allow the industry to target high cost credit at people on low incomes as a means of increasing profit.

We are now seeking some fundamental changes to the UK’s credit society – asking banks and mainstream lenders to prove that they are engaging with low income communities and can offer them the products they need. If the Government is willing to pump money into the financial services sector to offset the impact of the ‘credit crunch’ then it must start to seek better services for people in return.”

The launch takes place at 5pm in Committee Room 5 of the main building of the Houses of Parliament with the following speakers:

Prof Iain Ramsay, University of Kent Law School (Chair)
Damon Gibbons, Debt on our Doorstep
Mark Lazarowicz MP (Lab) & Chair, All Party Parliamentary Group on Debt
Ed Vaizey MP (Conservative)
Adam Price MP (Plaid Cymru)
Danny Alexander MP (Lib Dem)
Anne Pettifor, Advocacy International and author of 'The Coming First World Debt Crisis'

The first Responsible Lending Day also features a British Bankers Association conference in London on these issues, but which is taking place at a cost of £400 per head and has minimal involvement from consumer groups.

A full copy of the proposals for action are available from: http://www.debt-on-our-doorstep.com/files/responsible%20credit%20proposals%20for%20action.pdf

One million householders use credit cards to pay mortgages or rent

More than a million householders have used credit cards to pay their mortgage or rent in the past 12 months, according to a new survey published today by Shelter in its magazine ROOF.

In a desperate attempt to stay on the housing ladder a growing number of young people, including first-time buyers, are turning to credit cards, with almost seven and a half per cent of people aged 18 and 24 saying they had done so in the last 12 months.

The survey, conducted by YouGov for ROOF magazine, polled two thousand households following the Northern Rock crisis. Six percent of respondents who pay mortgages or rent said they had relied on a credit card to make payments, equating to a national figure of more than a million householders.

Shelter chief executive Adam Sampson described the results as shocking, and added: “The number of people hit by the credit crunch, interest rate hikes and unaffordable housing costs are rapidly rising.

“For many people trying to keep a roof over their head desperation is driving them to short-term, high-cost borrowing. Ordinary people are being forced to seek more risky and expensive ways to stave off the threat of eviction and repossession.”

Most credit card companies charge interest at between 15 and 18 per cent – nearly 50 per cent above even the highest mortgage interest rates of 11 or 12 per cent in the sub prime sector.

But for people with poor credit ratings the card companies can charge interest rates of up to 40 per cent, a staggering five times above the average mortgage rate.

Stuart Freeman, director of services at Community Housing Advice Service, which offers advice on housing and debt, said: “There is such pressure on people’s budgets that paying your mortgage or rent by credit card, then paying that card with another card is becoming the norm for many people.

“It leads to an ever spiralling maze of debt, and eventually the credit simply runs out.”

The poll also found the practice more prevalent in men than women with seven per cent of men admitting to using credit cards compared to six per cent of women.

The situation is worst in the Midlands and Wales with nine per cent – almost one in ten – households in the region using credit cards to keep a roof over their head. Northern England and London were closer to the national average at six per cent whilst Scotland polled at just three per cent.

Part of the problem stems from irresponsible mortgage lending allowing people to overstretch themselves financially, forcing them to use credit cards to stay afloat. However Heather Keates, Director of Community Money Advice, said lenders shouldn’t shoulder all the blame.

“If someone is making minimum payments on their credit card and they have four or five cards, when they are credit checked they don’t look like a bad risk because companies don’t have the whole picture.

She added: “It’s fine if you pay off the balance every month, but I would suggest that the majority of people don’t – they just pay off the minimum, so the debt starts to spiral.”

Shelter’s Adam Sampson continued: “Clearly this is a huge problem which will only become more widespread as housing costs continue to rise.

“We would urge anyone struggling with the cost of their mortgage or rent to seek independent financial advice or log onto www.shelter.org.uk urgently before resorting to such desperate, and ultimately more expensive, measures.”

In the ROOF magazine article, Damon Gibbons, Chair of Debt on our Doorstep comments:

"One in ten is a phenomenal figure and shows that people are significantly overcommitted. It shows they are concerned that they could face repossession action for not paying their housing costs and are keen to try and maintain those payments if at all possible."

He called for a national strategy for debt advice services to ensure access to assistance for those in financial difficulties:

"What is clear is that better advice is needed to help people rearrange their finances and pay less on unsecured credit before this problem escalates. We don’t have a national strategy for debt advice provision and somebody has got to address this issue fast."

Westminster Launch of Responsible Credit Proposals

Invitation to the Westminster Launch of Our 'Responsible Lending' Proposals & AGM, Tuesday 23 October, London

Irresponsible lending in the US sub-prime mortgage market has now fed through into a 'credit crunch' for UK banks, causing upward pressure on mortgage and lending rates for all consumers. With increasing evidence of irresponsible lending practices in the UK, there has never been a better time to lobby for improved regulation of the financial services industry.

Following the success of our own responsible credit conference in Edinburgh in May, we will be launching a new set of proposals for action to MP's to address irresponsible lending practices at the Houses of Parliament on Tuesday 23 October (time tbc). A number of MP's from across the political spectrum, as well as agencies involved in our campaign will be speaking at the event.

The launch will be immediately preceded by a Campaign Forum and Annual General Meeting, 3 - 4:30pm at the Abbey Centre (behind Westminster Abbey at 34 Great Smith Street, London SW1P 3BU )

Please let us know if you are able to participate by emailing, faxing or posting back the form below.


[ ] I plan to attend the Campaign Forum and AGM on 23 October. Please send me a map and agenda.
[ ] I want to attend the "Responsible Lending" Parliamentary launch. Please send me more details.
[ ] I am unable to attend. Please note my apologies.

Name .........................
Organisation .........................
Email .........................
Address .........................
......................... Postcode ......
Please return to: Debt on our Doorstep, c/o CAP, Central Buildings, Oldham Street, Manchester M1 1JT, OR fax 0161 2375359 OR e-mail to info@debt-on-our-doorstep.com
________________________________________

Irresponsible Lending Hits Home - Northern Rock is only the start

Irresponsible Lending Hits Home: Why Northern Rock is only the start

Debt on our Doorstep and the European Coalition for Responsible Credit today issued a stark warning that the Northern Rock crisis, considered by many commentators an after shock of the US sub-prime lending disaster, is in fact a precursor of wider problems that will be witnessed in the UK over the next 12 months.

In a joint statement, Damon Gibbons, Chair of the Debt on our Doorstep campaign, and Professor Udo Reifner, Chair of the European Coalition for Responsible Credit urge the UK government to place new obligations on British banks to both act responsibly and ensure access to credit for low income households. They argue that assistance to the banking industry at this time should not be given on a no-strings basis and that an urgent review of the role of bank policies that exclude the poor should now be undertaken with a view to removing the market segregation that gives rise to sub-prime lending and has led to the current crisis

"This crisis has been caused by irresponsible lending practices in the U.S, and we know from the FSA's work in recent months that UK sub-prime lenders have also been irresponsible. As mortgage costs rise in the UK, low income consumers will face the same problems as their American counterparts, and this will magnify the impact of the credit crunch in the UK. Ultimately, lenders will become more restrictive in their lending; on the face of it a good thing, but in reality it will drive low income households into further difficulties and leave them in the hands of predatory and extortionate lenders.

We call on the Government to place greater duties on mainstream lenders to meet the credit needs of low income communities; for them to be obliged to act with responsibility and to provide access. The current segregation in the credit market must be abolished as this has directly given rise to the current crisis. Only with those obligations in place, can central bank and government assistance to the banking industry be justified. What we need now is banking for, and not against, the people."

Full statement follows:

The cause of the current crisis : US lender irresponsibility and greed

The causes of the credit crunch affecting Northern Rock clearly lie in the irresponsible lending practices of US sub-prime lenders. Mortgages have been provided to low income households in a variety of predatory and extortionate ways on the assumption that house price rises would protect the lender from the risks of default. However, not content with providing honest products that would enable poor people to access home ownership, the lenders constructed products that allowed them to be exploited (for example adjustable rate mortgages, and mis-sold 'liar loans' that did not require brokers to check applicants income details). At the heart of the problem was a 'get rich quick' mentality of US sub-prime lenders and a lack of ethics or responsibility to the borrower in the long term. With the downturn in the U.S economy these excessive risks have now come home to roost. Mortgage foreclosures in the US are at a record high, and the human cost is impacting at a political level with the US Government forced into intervening to protect genuine borrowers from bankruptcy.

Global financial services transmit risks from the US to Europe

The risks taken on by US sub-prime lenders have now been transmitted to mainstream credit markets in Europe through a variety of weird and wonderful methods of debt securitisation that were bought into by banks across the globe. In the same way that US sub-prime lenders did not care about the financial position of their applicants, the UK and European banks paid no attention to the true value of these financial instruments. As a result, no lender in the UK and Europe truly knows their own exposure^[1]. Not knowing the level of exposure to these 'junk bonds' affects even those banks that have large levels of deposits. Even they are now unwilling to lend out cash without demanding a much higher price than previously - leading to rate rises that will ultimately cause problems for all households with mortgages or outstanding credit. The central banks have a choice of intervening with cash handouts for financial institutions that are worse hit; effectively subsidising the irresponsible with tax payer's money; or sitting back whilst more households struggle to cope with increased mortgage costs.

The Credit Crunch

Meanwhile the credit crunch affects more than those that are exposed to sub-prime risks. Northern Rock does not have much direct exposure. But, as a relatively small holder of deposits, its business model requires it to have access to large amounts of credit to fund further lending. In recent statements, Northern Rock states that they had recently scaled back their lending. That may be true in comparison to the past few years during which the company sought to grow at exponential levels.

But Northern Rock was also guilty of underestimating the likelihood of interest rate increases and had sold large numbers of mortgages on cheap fixed rate loans in order to attract a major market share. It had borrowed its own money on short term, variable, rates but lent on a longer, fixed term basis. As a result, many of its borrowers are now paying back at lower rates than it must itself pay back its own creditors. To address this, Northern Rock had to raise finance to lend further. When it could not afford to obtain this at market rates it went to the central bank for help. For this reason, despite central bank assurances, the so-called naive and 'herd' behaviour of depositors seeking to take out their savings from Northern Rock is, in fact, rational behaviour. The company is not viable in today's changed market place, and that is reason enough for depositors (acting as small investors) to decide to switch their money elsewhere.

Those UK bankers that have been at the forefront of applauding the free movement of capital around the globe and have consistently advocated for the liberalisation of capital controls with little sympathy for the countries they deprive of investment, now find that they are victim to the same effects as their depositors remove their investments on en masse all over the country.

What Next in the UK?

The UK's own sub-prime housing market has been booming in recent years^[2]. As mainstream banks withdrew credit from low income households, and as house prices increased, the sub-prime lenders moved in. Regulation of this sector of the market has historically been weak. In 2005, the FSA warned that 60% of sub-prime mortgage loans were sold without proper knowledge of the applicants financial circumstances. In addition, they reported concerns about the suitability of sub-prime mortgages being sold as a means of debt consolidation:

"...in 80% of cases, there was lack of evidence to show how the recommended sub-prime product met the customer's needs and circumstances; and in 67% of those cases which involved debt consolidation, firms could not demonstrate that they had taken account of the additional requirements related to debt consolidation mortgages and thus it was unclear whether the recommendation was appropriate" (FSA press release, September 2005)

Despite having issued good practice guidance to mortgage lenders and brokers, the FSA found on conclusion of a further investigation in July 2007 that:

"None of the lenders adequately covered all relevant responsible lending considerations in their policies. For example, some firms' lending policies contained unclear affordability or self-certification requirements...In many cases, lenders did not apply their own policies in practice. For example, some firms failed to check the plausibility of information, as required by their own lending policy...There were also failings by lenders to monitor the application of their policies, which resulted in the approval of potentially unaffordable mortgages."

These regulatory failings, coupled with rising mortgage rates and an increased overall debt burden amongst UK low income households is starting to lead to increased defaults and repossessions. Only last month, the Council of Mortgage Lenders in the UK revised their repossession figures to take account of the increased activity of sub-prime lenders in this respect.

The problems that we are witnessing in relation to the current US sub-prime market problems will be repeated in the UK, causing the credit crunch to become further entrenched. The initial response of lenders will be for them to transform themselves into the advocates of responsible lending - repeating the so-called 'flight to quality' that caused the mainstream markets to desert low income communities in the late 1980's and 1990's, and which created the conditions for the rise of sub-prime lending. As the credit crunch impacts on both the housing and consumer credit markets, more and more people will become excluded from mainstream credit. Predatory Home Credit and Payday lenders must be rubbing their hands at such a prospect.

Why we need banking for the people

In the final analysis this process will result in a further entrenchment of the current segregated credit market - with larger numbers of people cast outside mainstream financial services being charged increased prices.

As genuine consumer advocates of access to responsible financial services, we urge the UK Government to think for the longer term and to introduce measures to expand credit through mainstream financial services to people on low incomes. We ask for them to end the current dual market for credit that has given rise to this current crisis. An injection of capital to financial institutions now must be coupled with requirements to meet the needs of the whole population for financial services at fair prices with strengthened regulation. We call for financial services to meet their obligations - to provide both access to credit and to exercise ethics in the provision of that credit. Now, more than ever before, we need banking for the people.

 

---

^[1] A fact reinforced by the September market summary from the Council of Mortgage Lenders (see their website).

^[2] Datamonitor report that the UK sub-prime market has been growing since 2004 and that gross lending increased by 28% in 2006 alone with exposed lenders including DB Mortgages (Deutsche Bank), Abbey, Alliance & Leicester.

Consultation on Credit Licensing 'Fitness' Conditions

The delayed consultation on the 'fitness' conditions for consumer credit licensees has today been issued by the OFT with a deadline for responses of 21st September 2007.

The consultation, which has been brought about as a result of changes to the licensing provisions contained in the Consumer Credit Act 2006, seeks to incorporate the concept of 'responsible lending' into the licensing framework for all consumer credit lenders. Although the consultation document references this fact, and provides some limited insight into the meaning of 'responsible lending' it goes onto promise that further guidance on this issue will be provided at a later stage - although no date is set for this, and it is unclear as to whether there will be a separate consultation on the matter.

The sections in the current consultation document on 'responsible lending' (paras 2.24 - 2.26 of the document) include the following:

"We consider irresponsible lending to include failing to make a proper and diligent assessment of the potential borrower's ability to repay a loan in full and to make all the periodic payments as they fall due.

The OFT would consider it irresponsible for lenders and intermediaries not to take reasonable care in making loans or advancing lines of credit in revolving credit card agreements. Reasonable care would include taking steps to find out and check the borrower's creditworthiness, and ability repay the debt and to meet the full terms of the agreement. For example, we would not consider offering new lines of credit to borrowers who are exhibiting typical signs of inability to repay existing debts (such as missed payments or always making only minimum repayments on a credit card account) to be responsible lending.

The OFT plans to produce guidance for the credit market to identify practices that we consider may be irresponsible lending. "

Debt on our Doorstep has today written to the OFT requesting clarification as to whether or not there will be a separate consultation on the concept of 'responsible lending' as a result.

We will be providing members with an opportunity to feed into the Debt on our Doorstep response to the consultation over the coming two months.

South Africa: New Responsible Lending Law

South Africa: New Law attempts to balance responsible lending and borrowing

Article from Independent Online - South Africa 1st June 2007

The exploitation of consumers by unscrupulous money-lenders that have led many poor people into debt traps will become a criminal offence under the new National Credit Act, which comes into effect on June 1.

However, consumers have been warned by the National Credit Regulator and banks that dishonest disclosure of income and expenses could result in some of their new-found protection being forfeited under the new Act.

The National Credit Act 34 of 2005 replaces the Usury Act, the Integration of Usury Laws Act 1996 and the Credit Agreements Act 1980, which have regulated the granting of credit since 1968. The Act will make it difficult for credit grantors to give loans to over-indebted consumers.

Gabriel Davel, CEO of the National Credit Regulator, which has legislative powers under the Act similar to the Financial Services Board, said the legislation would, for the first time in history, regulate information held by credit bureaus and provide protection for consumers entering into credit agreements.

Consumers who lied would forfeit some of the protection
"The new Act is a consumer protection piece of legislation. It is there to ensure that consumers are treated fairly in credit contracts," Davel said.

Davel said that credit card debt had grown by 128 percent during the past two years and that the latest statistics obtained by his office showed household debt had risen to R750-billion.

Credit grantors, including banks, retailers, micro-lenders and pawnbrokers who have 100 or more loan agreements or loans of R500 000 or more on their books will be required by the Act to register with the regulator. About 4 200 credit grantors have registered.

Davel said the National Credit Register, which would list consumer debt and act as a database for credit grantors, would be ready in January 2008. Credit grantors must check credit bureaus and the register before granting credit, to ensure repayment affordability.

However, he warned that consumers who lied about existing debts when opening new accounts would forfeit some of the protection afforded by the legislation.

The Act makes provision for debt counsellors to assist over-indebted consumers who fall into the debt trap.

Credit Information Ombudsman Manie van Schalkwyk said consumers could approach debt counsellors and if it was found that the consumer was over-indebted credit grantors would not easily be able to obtain a judgement.

"The debt counsellor can make a recommendation to the court that there has been reckless lending, and if the credit grantor is found guilty the agreement could be suspended and a fine of up to R1 million can be imposed," Van Schalkwyk said.

Consumers who "go into counselling" will be prohibited from obtaining further loans until the debt is repaid.

Louis Malherbe, Nedbank's home loans business analyst for the new Act, cautioned consumers to be truthful about all their debts when applying for credit.

"A mortgage originator will ask what your expenses are, including all your retail accounts, and it is vital that the consumer tells us upfront, otherwise the reckless lending provision falls away," Malherbe said.

Under the new Act it will be illegal for credit grantors to issue credit cards to consumers who have not applied for them. Costs that have been standard practice for banks, such as early settlement or administration fees, will also be illegal.

Louis von Zeuner, Group Executive Director of the Absa Group, said bank staff had been working overtime to implement new computer systems in order to comply with the Act. This had cost the bank R100-million.

"Nedbank fully supports the Act, and a huge amount of work has gone into ensuring that we grant credit in a manner that upholds the principles of the National Credit Act," said Wessels.

EU Directive Threatens to Sweep Away Consumer Protection

Consumers could lose vital protections against irresponsible and high cost credit if proposals for a new Consumer Credit Directive are ratified by the European Council of Ministers today.

The proposed EU Directive aims to create a single €800 billion-a-year EU consumer loans market by allowing cross border selling of credit, including internet credit. However, no significant consumer protections have been built into the Directive, and consumers face the prospect of taking out loans with terms and conditions set by the courts in the home country of the lender.

The EU Directive, which has not been debated in national parliaments, fails to introduce a requirement that lenders behave ‘responsibly’ and there is no common agreement across Europe as to which cost elements should form part of the APR on a loan. Many European consumers, for example in France and Germany, could see existing protections such as national interest rate ceilings undermined, whilst in the UK our consumer credit licensing requirements – recently tightened by last year’s Consumer Credit Act – can be ignored by lenders operating from the new EU states.

Professor Reifner of the Hamburg based Institute for Financial Services (IFF) and Chair of the European Coalition for Responsible Credit called on the Council of Ministers to reject the Directive at Monday’s meeting and prepare the way for national Parliaments to debate the Directive openly.

“This Directive fundamentally undermines consumer protection in all EU countries by reducing it to the lowest common denominator. Protections built up through national legislation and years of court rulings are about to be swept aside in the name of the free market. What appals us most is that Ministers have failed to demonstrate even the basic courtesy of openly debating these proposals in their national Parliaments.”

Damon Gibbons, from UK debt campaign Debt on our Doorstep, commented:

“The Secretary of State for Trade & Industry should bring an urgent debate on these proposals to the House of Commons. Consumer awareness of these changes in the UK is next to nil, and there is no mandate for the Government to sign up to this proposal on Monday.”

Singapore - Responsible Lending Requirements & Rate Caps

Changes to Singapore's responsible lending requirements have been welcomed by banks including Citibank, which continue to operate in a legislative environment that includes a duty to make full and proper assessment of borrowers' circumstances and interest rate caps on small sum credit. Article from Channel News Asia, dated 1st February 2007 follows.

By Loh Kim Chin, Channel NewsAsia

SINGAPORE: You will now qualify to apply for unsecured credit facilities with banks – if you earn at least S$20,000 a year.

The Monetary Authority of Singapore (MAS) and the Law Ministry (MinLaw) have decided to relax the rules on such facilities.

Previously, applicants had to earn at least S$30,000 per annum.

Unsecured credit refers to things like overdraft facilities where people pay interest from the time they draw down on the sum.

The latest rules do not apply to credit cards, which still require a minimum income of S$30,000 a year.

There will also be a more conservative maximum credit limit.

Those earning between S$20,000 and S$30,000 a year can only borrow up to twice their monthly income.

But if they earn at least S$30,000 a year, they can borrow up to four times their monthly pay.

There will also be changes to the moneylenders’ regime.

For instance, for unsecured loans of S$3,000 and below, there will be no minimum income requirement but such loans will be subjected to an interest rate cap.

To mitigate the risks of over-borrowing by individuals from all income groups, MAS and MinLaw will require financial institutions and moneylenders to conduct adequate and relevant checks on borrowers before lending.

MAS and MinLaw will make the relevant legislative changes to the Unsecured Credit Regulations and the Moneylenders Rules by the middle of the year.

The new rules are expected to level the playing field among banks which are regulated by MAS, and lending by other businesses.

Banks have welcomed the move.

Citibank says it will be assessing this new area of opportunity in greater detail to serve the needs of these consumers.

This group of customers is estimated to number between 450,000 and 500,000.

OCBC says the changes will give borrowers more options and open up opportunities for a group of individuals who previously had limited access to unsecured facilities. - CNA/so

Lenders Forced to Write-Off Irresponsible Loans

The Observer (Sunday 21st January) reports on action being taken by debt advisors at East Saffordshire Citizens Advice Bureau to force lenders to write-off loans that have been made without due regard to the borrowers' ability to pay.

Examples of cases brought by the CAB include a couple with two children who started off with a loan for £3,500 and ended up owing a total of £30,000 on five loans despite the husband losing his job. £20,000 has now been written off.

A single man given eight secured loans and a mortgage totalling £120,000 by the same bank, and who has a further £155,000 of unsecured loans

Where checks on ability to pay have been inadequate or where consumers have been pestered by banks to take out additional loans despite being clearly unable to afford them, the Citizens Advice Bureau has successfully taken action through the Financial Ombudsman scheme.

In the last six years, Lloyds TSB has been forced to write off six loans made in Burton upon Trent as a result of their lax lending policies, and as a result of the banks investigation into the causes, "two members of the branch have left the organisation".

It should be noted that Lloyds were the subject of a BBC investigation in 2004 that revealed significant problems with their lending policies, and which resulted in the programme makers submitting their files to the Banking Code Standards Board (BCSB) for further investigation. No public response has been made by the BCSB concerning the results from that due to 'confidentiality' agreements that it has with the industry.

Accoring to the most recent quarterly report from the Bank of England, 29% of people in financial difficulties report that this is due to over-commitment rather than the traditional pre-cursors of debt such as unemployment or relationship breakdown. The OFT is shortly due to issue guidance on the 'responsible lending' requirements to be incorporated into the Consumer Credit licensing regime. Debt agencies will be hoping that, as a minimum it contains provisions to make lenders look at the total overall indebtedness of a borrower and to properly assess their ability to repay, prior to making a loan - two things that, on this evidence, the industry is clearly failing to do.

FSA highlights irresponsibility in mortgage lending

The Financial Services Authority (FSA) has called on firms giving mortgage advice to improve their processes after new findings showed that only one third of the firms it sampled had robust processes in place to provide customers with suitable advice.

The FSA reviewed 252 firms of differing sizes through mystery shopping,visits and questionnaires between June and October last year to establish a baseline of the process by which advice is delivered in the mortgage industry. Scope for improvement was found in all aspects of the advice process. Some of the poorer areas identified were the assessment of customer needs, including affordability; training and competence; overall systems and controls; and record keeping.

Clive Briault, Managing Director of Retail Markets at the FSA, said:

"We found significant failings in the advice giving processes in a number of mortgage firms. Poor processes increase the risk of unsuitable advice being given. It is essential that firms have robust processes in place, so that they treat their customers fairly and provide suitable advice. It is crucial that customer needs are assessed properly. Customers should consider what they can afford both now and in the future, taking into account any likely changes to their circumstances."

Examples of bad practices included:

Affordability was assessed based on the customers' income and costs of servicing debt only. No account was taken of other regular expenses incurred by the customer.

No income and expenditure assessment was carried out prior to recommendation. Reliance was placed on the customer stating they could afford the payments.

Industry average figures sourced from internet websites were used to determine the customer's affordability without checking that this represented an accurate figure for the individual customer in question and did not assess whether the client lay significantly outside the average.