BERR Consults on Consumer Credit Directive

The Department of Business, Enterprise and Regulatory Reform is consulting on the implementation of the Consumer Credit Directive. The consultation, which was launched with little fanfare on the 14th April, will run for only 8 weeks (as opposed to the usual 12), in order to provide lenders with a longer lead in time to accommodate any changes.

The UK process for implementation of the Directive has been dominated by industry interests, with 'expert groups' established comprising of industry representatives whilst consumers have been provided with few opportunities for input. The curatiled consultation period will once again put them at a disadvantage in making their response.

The consultation document is available from http://www.berr.gov.uk/files/file50962.pdf

The Directive covers:

the information that must be provided to consumers at pre-contract, contract, and post contractual stages

information to be included in advertisements

early repayment

APR calculation

a duty on lenders to provide adequate explanations of the credit offer

an obligation to check the creditworthiness of the consumer

the right for consumers to withdraw from an agreement within 14 days

Dood Calls on MEP's to protect UK consumers

No Downgrading of Consumer Protection in the EU – Consumer and Social Organisations protest the Latest Move of the Parliament on the Consumer Credit Directive

The European Coalition for Responsible Credit (ECRC) and Debt on our Doorstep (DooD) today issued calls for MEP’s to stand up for UK consumers and to resist the latest proposals to water down protections contained in the EU Consumer Credit Directive.

The move comes in response to a new draft of the Directive being introduced into the European Parliament by the Rapporteur, Mr. Kurt Lechner of the Internal Market and Consumer Affairs Committee.

Commenting on the new proposal Professor Udo Refiner, Chair of the ECRC said:

“Consumer organisations from fifteen European states have been shocked in recent days to find that a significant weakening of consumer rights is being suggested in the European Parliament. There has been no consultation with national parliaments or with consumer representatives, on this new draft of the Directive, which appears to have been drafted with the assistance of the credit industry.”

Damon Gibbons, Chair of Dood called on UK MEP’s to take action in the Parliament to protect UK consumers.

“We are calling for MEP’s to intervene and reject the new draft. There has been no debate in the UK on these issues, yet consumers here stand to lose valuable protections. This all comes at a time when there is an obvious need for greater responsibility in lending. The last thing we need from Europe is a green light for lenders to con UK borrowers.”

Full text of the media release and details of the proposed amendments can be downloaded here

Cash Converters take fright as Queensland accepts the need for rate caps

Payday lenders won't wear interest cap

From ABC Far North Queensland, 19th October 2007
By Derek Tipper

Payday lenders and financial counsellors disagree about the need for controls on interest charges on short-term loans, as the Queensland Government decides on the value of an interest rate cap.

Ever needed cash quickly and borrowed the money from a short-term lender? Whether you understand these transactions as payday loans or as the lenders prefer to call them, micro credit, chances are you paid back much more than the average $250 of the loan.

Each week borrowers need anywhere from $100 to $1000 to make ends meet. Spooked by stories of borrowers paying back $5000 on a $100 loan the Queensland Government is proposing to follow other states and cap the interest rate charged on these loans at 48 percent.

The move has the support of financial counsellors and consumer advocates like Indigenous Consumer Assistance Network general manager Aaron Davis. Mr Davis said many of his clients simply do not understand the concept of interest and are not capable of entering into a contract.

The industry is dead set against an interest cap. Rob Leggett, the Queensland President of the Financial Services Federation argues it would drive scrupulous operators out of the business of pay day lending because they simply couldn't make a profit. Mr Leggett said a cap was just bad business.

One of the biggest players in the industry, Cash Converters, is so concerned about a cap they have adopted a marginal seats campaign, lobbying 33 Queensland MPs whose electoral margins are smaller than the number of 11,000 signatures on a petition tabled in the Queensland Parliament opposing the proposed interest rate cap.

Cash Converters has also posted a video on You Tube purporting to depict customers supporting the need for payday lending, they also bought a full page ad in the Sunday Mail urging the government to reconsider.

Cash Converters General Manager Ian Day said a 48 percent cap would discriminate against low income earners and others who struggle to get credit. Mr Day said while scrupulous lenders oppose an interest cap they support regulation of the industry. But financial counsellors working with borrowers who get into trouble with these loans are not convinced.

David Tennant, chair of Australian Financial Counsellors and Credit Reform Association said claims by pay day lenders that a 48 percent interest cap makes their business unviable had not been borne out in the states, such as Victoria and New South Wales, where a cap already exists.
Mr Tennant said any lender that could not make a profit under a 48 percent interest rate cap should leave the industry.

ICAN'S Aaron Davis said there was an alternative to the current pay day lending products, with organisations offering interest free loans for the purchase of necessities. Queensland Attorney General Kerry Shine confirmed Queensland will have an interest rate cap but was not prepared to say what the interest rate would be.

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.

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.”

South Korea: Limiting Rates and Tackling Exclusion

Dood Comment on South Korean Initiatives:

Recent reports (see below, and previous post) from South Korea demonstrate how measures are being taken to tackle both extortionate lending and financial exclusion. There are lessons to be learnt from this approach in the UK and the proposal to require financial instiutions to make services available to low income consumers echoes calls in the UK for a universal banking obligation and a US style Community Reinvestment Act.

From The Korea Times: 28th February 2007

1 in 5 Adults Denied Bank Loans

By Lee Hyo-sik

One out of every five Korean adults are denied loans and other financial services from banks and other institutional financial firms because of poor credit ratings and unstable job status, an opposition party lawmaker said Wednesday.

Rep. Shim Sang-jeong of the minor opposition Democratic Labor Party (DLP) said many of them have no choice but to borrow from private moneylenders who charge excessively high interest rates.

Citing data submitted by the Financial Supervisory Service (FSS), Shim said about 5.64 million adults aged 18-90 were unable to carry out normal financial activities with institutional financial services companies at the end of last year, accounting for 16.3 percent of the country’s 34.7 million adults, up 10.2 percent from 2005.

``These days, a large number of people, even those in their 20s and early 30s, have no choice but to go to private lenders for funds as banks and other establishments refuse to grant loans or issue credit cards to them because of their poor credit history and insecure job standing,’’ Shim said.

She said in reality, more people are disallowed various financial services than the statistics show, insisting that at least 7.2 million adults, or 20.8 percent of the total, are denied loans and credit cards.

The government estimates that about 5.6 million people borrowed money from private lenders last year, paying about 200 percent interest per year on average, much higher than the legal limit of 66 percent set by the government.

The number of registered loan firms stood at 16,780 as of the end of September, while the number of unregistered moneylenders is estimated to be above 25,000, according to the FSS.

To help people with poor credit records and low incomes enjoy everyday financial services, Shim suggested the government should require institutional financial firms to grant loans to low-income households, and set up a state-funded micro-credit institution to provide small amounts of finance to people with little means.(emphasis added by Dood)

With many people defaulting on their loan interest payments because of excessively high interest rates and becoming credit delinquents, the National Assembly is set to revive a ceiling on the interest rates private lenders can charge borrowers.

Last week, politicians agreed to lower the legal limit on annual interest rates to 40 percent of the principle from the current 66 percent. It is expected to pass the bill at a session planned next month.

The governing Uri Party proposed setting the interest rate limit at 40 percent per year last September, while the DLP insisted on adopting a 25 percent interest rate ceiling.

The agreement came after the Ministry of Finance and Economy, which had initially opposed the reintroduction of the interest rate cap, dropped its earlier position to support the measure.

Deputy Prime Minister and Minister of Finance and Economy Kwon O-kyu said last week that the government will ensure the measure has its intended effect. Kwon had initially opposed such a restriction last July when he was appointed as the country’s top economic policymaker.

``We will strengthen the monitoring of private moneylenders to protect borrowers from high interest rates,’’ Kwon said in an address to Uri Party lawmakers.

He also said the government, with the cooperation of associations of private moneylenders, will crack down on moneylenders who are operating illegally.

South Korea: Minister Changes Position to Cap Rates

From korea Times: 22nd February 2007

By Lee Hyo-sik

Finance-Economy Minister Kwon O-kyu has changed his position and now supports placing a ceiling on the interest rate private moneylenders can charge borrowers, mostly people with low incomes who turn to alternative sources for funds.

During a National Assembly hearing on Wednesday, Kwon, who is also deputy prime minister, said that it is necessary to revive state control on interest rates charged on such loans, overturning his earlier position. He openly opposed such a restriction last July when he was appointed as the country’s top economic policymaker.

Kwon said the government has found that there are many people who cannot cope with the excessively high interest rates charged by private moneylenders, and that these people should be protected by a state-initiated social safety net.

Also, Vice Finance-Economy Minister Chin Dong-soo said yesterday during a weekly press briefing that the government should not let ``loan sharks’’ that charge interest rates over the legal limit take advantage of people with low incomes.

An increasing number of young and old with neither good credit records nor regular jobs have turned to private moneylenders for funds over the past year as they are denied loans from banks and other financial firms.

A ministry official also said yesterday that it has decided to lower the legal limit on annual interest rates private lending agencies can charge on loans to 50 percent of the principle from the current 66 percent.

On the same day, the Ministry of Justice said it will consider restoring state control on interest rates on loans, nine years after it abolished the regulation in 1998 at the request of the International Monetary Fund (IMF). As part of its yearly business plan for 2007, the ministry said it will likely limit the yearly interest rates on loans to 40 percent.

Last September, the governing Uri Party proposed setting the interest rate limit at 40 percent per year, while the progressive Democratic Labor Party insisted on adopting a 25 percent interest rate ceiling.

The government estimates that about 5.6 million people borrowed money from private lenders last year, paying about 200 percent interest per year on average.

There were about 16,000 private moneylenders registered with the government as of June, but some 40,000 illegal moneylenders are estimated to operate in the country.

According to the National Information Credit Evaluation (NICE) firm, one of the local credit rating agencies, outstanding balance of loans extended by loan sharks increased to 796 billion won in 2006 from 570 billion a year earlier.

Oregon needs a rate cap on all consumer loans

From the Statesman Journal, Oregon

MICHAEL LEACHMAN

March 15, 2007

There's an easy way for Oregon to help low-income families in our state be more stable and productive, and to protect middle-income families who get caught by debt problems when, for example, medical bills mount unexpectedly: Oregon could protect these families from irresponsible lenders.

Oregon currently allows most consumer lenders to charge whatever interest rates they can squeeze out of their customers, no matter how desperate those customers may be.

Some Oregonians think that the state Legislature solved this problem last year when it enacted an annual interest-rate cap of 36 percent on payday loans, to take effect this coming July.

Unfortunately, payday lenders have already found a way around the rate cap, even before it goes into effect. Because the rate cap will apply only to "short-term" consumer lenders, payday outfits are avoiding the cap simply by altering their loan product a bit and obtaining a new "conventional" consumer lender's license from the state.

The cap on payday loan interest doesn't protect consumers from other greedy lenders. Car-title lenders, for example, will remain free to charge unlimited rates of interest and fees. Check-cashing outfits also face no limits on their fees; these outfits are not even required to obtain a license from the state.

Gov. Ted Kulongoski has proposed a series of bills to improve the situation. One bill (House Bill 2205) makes it more difficult for short-term payday lenders to avoid the rate cap taking effect in July by morphing into "conventional" lenders. Another bill (HB 2204) extends the 36 percent interest-rate cap on short-term payday loans to short-term car title lenders. A third bill (HB 2202) requires check-cashing outfits to limit the fees they charge to cash government and payroll checks.

Each of the governor's bills won the support of at least two-thirds of the Oregon House of Representatives. They now await action in the Senate.

Low- and middle-income Oregonians can applaud these bills. They would take Oregon a couple of significant steps forward in protecting desperate families from irresponsible lenders.

To fully protect consumers from greedy lenders, though, additional steps are necessary. Most importantly, Oregon needs a reasonable blanket interest-rate cap on all consumer loans. The only way to keep lenders from finding loopholes that allow them to skirt an interest-rate cap is to extend the cap to all consumer loans.

There are now more payday lenders in Oregon than McDonald's and 7-Elevens combined. These outfits are canaries in Oregon's mine shaft, warning us of the dangerous levels of desperation among our families. We can relieve the pressure by cutting down on the profit being made off economically strapped families. It's the responsible thing to do.

Michael Leachman of Portland is a policy analyst for Oregon Center for Public Policy in Silverton. He can be reached at mleachman@ocpp.org.

Families stuck in payday lending trouble

From The Roanoke Times, Saturday 17th March

Helen O'Beirne

O'Beirne is responsible lending coordinator for the Virginia Partnership to Encourage Responsible Lending.


The bad news: Predatory payday lending is still alive in Virginia, at least until our next General Assembly session. Every year this problem goes unaddressed, payday lenders strip $160 million in excessive fees from the paychecks of hardworking Virginians.

The good news: People are getting it. Gov. Timothy Kaine gets it. He publicly declared his intention to impose a limit on the amount of interest payday lenders could charge.

Members of the House of Delegates get it. They passed an interest rate cap of 72 percent for payday loans -- still twice the normal usury limit for Virginia's small loan companies, but a much more reasonable rate than the 400 percent payday lenders typically charge.

And the general public gets it. Concerned citizens from across the commonwealth continue to voice their discontent over the exploits of payday lending. Faith groups call it usury, moral outrage. The business community is ashamed to be associated with payday lenders. Labor leaders decry the maltreatment of their members.

This issue is not going away. Including Virginia, legislators in at least 13 states have introduced legislation this year that would place similar interest rate caps on payday and car title loans to all their citizens. Virginia's General Assembly was the first legislature to consider such a measure in 2007, and could have been the first to enact the law, providing true leadership in a movement that continues to grow across the country. But the payday industry hijacked the process, using a slick public relations campaign and lobbying blitz to push its own idea of "reform."

There was a reason they were so willing to accept these so-called reform measures -- each had been tried in other states, and each had failed to stop the abuses. In other words, the payday lending industry's version of reform was a package of half measures that, at the end of the day, would allow them to conduct business as usual -- debt trap and all.

When it became clear that the industry was never interested in real reform that addressed the abusive aspects of payday lending, Kaine called their bluff and announced his objective to amend the bill when it reached him by adding an annual interest rate cap of 36 percent. If it's good enough for military families, its good enough for all Virginians, the governor told the press.

The industry killed the bill rather than agree to this cap.

Payday lenders depend on repeat borrowing and exorbitant interest rates for their survival. But these elements are what makes payday lending so financially devastating. Giving an industry built on loan flipping an exemption from the state's interest rate cap was a bad idea in the beginning, and it's still a bad idea today.

Virginia's firefighters, police officers, teachers, nurses and service workers all deserve to keep their hard-earned cash for real needs, rather than handing it over week after week to predatory lenders who have them caught in a trap.

This issue is sure to be on the agenda next year. The industry will again try to head off real reform by offering weak provisions that don't threaten their ability to operate loan-flipping businesses. And a strong and growing coalition of advocates from every point on the political spectrum will return with new energy.

It can't come soon enough. Every day that payday lending isn't brought under control, another hard-working Virginian is paying exorbitant interest and cycling deeper into inescapable debt traps that spell financial ruin for their families.

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

South Korea to reinstate interest rate ceilings

Korea Times - 15th January 2007


By Lee Hyo-sik
Staff Reporter

The government has decided to place a ceiling on interest rates private moneylenders can charge to retail borrowers, mostly people with low incomes who turn to alternative sources for funds.

It will revive state control on interest rates charged on loans, nine years after it abolished the regulation in 1998 at the request of the International Monetary Fund (IMF), according to the Ministry of Finance and Economy.

An increasing number of young and old with neither good credit records nor regular jobs have turned to private moneylenders for funds over the past year as they are denied loans from banks and other institutional financial firms.

"Interest rates charged by most private moneylenders must be brought down as many people default on their payments because of excessively high interest rates. We have decided to put a cap on interest rates and lower the current legal limit of 66 percent on private lending agencies", a ministry official said.

He also said the government will crack down on "loan sharks that charge interest rates over the legal limit to minimize damage to people with low incomes and provide financial rewards of up to one million won to those who report the illegal business practices of unregistered private lenders.

"However, we have not yet come up with an exact figure for the interest rate cap. We will make it public after studying the private money lending industry and consulting with the Ministry of Justice", he said.

The governing Uri Party has proposed setting the interest rate limit at 40 percent per year, while the progressive Democratic Labor Party insisted on adopting a 25 percent interest rate ceiling.

The government estimates that about 5.6 million people borrowed money from private lenders last year, paying about 200 percent interest per year on average, much higher than the legal limit of 66 percent set by the government.

There were about 16,000 private moneylenders registered with the government as of June, but some 40,000 illegal moneylenders are estimated to operate in the country.

According to the National Information Credit Evaluation (NICE) firm, one of the local credit rating agencies, outstanding balance of loans extended by loan sharks increased to 796 billion won in 2006 from 570 billion a year earlier.

Interest rate caps back on the agenda around the world

The Irish debate on interest rate caps (see report dated 10^th January 2007, on this site) is being repeated across the globe.

In the U.S, The Miami Herald (2^nd January) reports on proposals to cap payday lending rates, and the inclusion of a cap at 36% for payday lending to the U.S military:

"Payday loans are marketed as short-term cash advances on the borrower's next paycheck. But previous research has found that the industry depends on repeat business or ''flipped'' loans. In fact, 90 cents of every dollar payday lenders make comes from borrowers who flip into loan renewals five or more times per year. The new report finds the average payday borrower pays back $793 for a $325 loan!

Some states don't allow the practice. They are Connecticut, Georgia, Maine, Maryland, Massachusetts, New Jersey, New York, North Carolina, Pennsylvania, Vermont, West Virginia. All hold their lenders to consumer loan laws, which usually include a double-digit interest rate cap.

Congress recently adopted this approach when the Pentagon sought protections for troops from payday lenders. The Defense Authorization bill President Bush signed in September included a 36-percent interest rate cap on such loans to military families."

Last year Japan voted to tighten the level of its interest rate cap from 29% to 20% to take effect from 2009 and Poland implemented a cap at approx 23%. And this year, Queensland in Australia is considering the introduction of a 48% cap, following the example of New South Wales.

An excellent presentation was given to the recent seminar on regulating high cost credit held by the Griffiths University in Australia by Melanie Spong from the Office of Fair Trading in New South Wales on the history and effects of rate caps. Her evidence revealed that high cost lending in Australia is due to market failure. Rate caps can stimulate markets effectively so that poor customers can get credit at reasonable rates. The speech also reports information about fringe lending in Australia, its lack of advice, and its clients who are often trapped into taking out revolving debt with no hope of ever repaying it.

Yet Provident in their response to the RTE programme in Ireland state:

"Virtually all informed opinion...now share the UK Government's view that interest rate ceilings would harm the very people they would be designed to help."

Of course, Provident also said that their products were competitively priced but after an 18 month inquiry it was found that the industry was making excessive profits of at least £75 million per year and possibly substantially more. Draw your own conclusions.

American Rip Off Lenders Form Coalition for 'Financial Choice'

A group of U.S lenders including payday lending companies and cheque cashers have formed the strangely named 'Coalition for Financial Choice' which urges Government to stop punishing the sector through regulation and suppressing 'innovation' in the alternative financial sector.

The Coalition announces its own birth by stating that financial services should be available to all, not just the wealthy, but goes on to conveniently ignore issues of price, conditions of offer, and social responsibility.

In their first publication, which is a four page justification for the existence of 'Alternative Financial Services (AFS) Providers' the Coalition expresses the view that those people excluded from mainstream financial services should not be assisted to return there:

"Frequently, in discussions such as this, a theme emerges suggesting that the low-income consumers are disadvantaged because they are forced to use AFS providers. The assumption is that their lives would be substantively (sic) improved if they could be moved "into the financial mainstream" and begin using banks and credit unions. However, the reality is that this simply won't happen. Nor should it."

The Coalition raises the spectre of illegal moneylending operations as justification for regulatory support for Alternative Financial Services providers in the same way that door to door moneylenders do in the U.K. But in reality both types of providers - door to door lenders and Alternative Financial Services such as cheque cashers - only exist because of the failure of mainstream lenders to meet the needs of people on low incomes. Talk of illegal lending points us in the wrong direction completely. Have we really decided that we should let mainstream banks - which this week in the UK will report £40 billion of profits - off the hook?

We need better provision within the mainstream financial services sector (sometimes working through the credit union and CFDI sectors if required) for low income households, and no acceptance of high cost and extortionate lending from either legal or illegal sources.

Interest Rate Caps Debate in Ireland

The Irish TV-Programme "Prime-Time" by RTE

9th January 2007
"DEBT TRAP LAID BY MONEYLENDERS"

Report of programme by European Coalition for Responsible Credit

After their critical December programme on "united in debt" concerning families tied into overindebtedness the TV station reacts to the actual public discussion on interest rate caps in Ireland. The question for Ireland is basically whether they will hold on to the English tradition of free markets where high interest rates and no restriction to moneylending to poor people are assumed to be necessary to provide especially small amounts of credit for all and give freedom to excercise one's profession for small money lenders or whether they want to adhere to the continental European philosophy rooted escpecially in catholic culture that high interest rates are isurious and should be a question of public policies and where small credit is provided through overdraft credit on bank accounts which have single interest rates for all. Trespassing a certain ceiling ("the double of the average") is assumed to be immoral or resulting from a market failure which needs administrative or judicial control.

The programme also broadcasted an interview with ECRC board member Udo Reifner from Germany where he describes the three continental principles of regulating moneylending under the banklaw (which does not allow low quality offers), guaranteeing universal access to bank accounts and capping interest rates at the double of the average which leaves enough space for markets to play.

ECRC members on the Continent should see that presently Ireland together with the UK are the fortresses of a mere informational attitude at the European Union and basically the orginators of the present draft of the EU Directives concerning consumer credit. It is crucial that those who want to uphold the social quality standards of consumer credit should support our members in Ireland (MABS) and the UK (DOOD) who milite for more social responsibility in credit extension.

Those who want to see this programme can go directly to the website of RTE and watch

"an excerpt from last month's Prime Time Investigates report by Adrian Lydon on money lenders whose high credit costs are placing the country's poor in a year-round cycle of debt

Prof Udo Reifner, Institute for Financial Services, Hamburg, explains why he is an advocate of capping interest rates to prevent exploitation of poor people's financial misery

Mark Little chairs a discussion on the issue with Séamus Brennan, Minister for Social & Family Affairs, Pat Rabbitte, Labour leader, and Liam O'Dwyer, CEO, Irish League of Credit Unions"

RTE link here

Ireland - Action to be take against moneylenders

The Irish Times - Money lenders' licences to be reviewed every year

Carl O'Brien

Tue, Jan 09, 2007

The Government is planning to change the way money lenders are regulated to help ensure those who charge excessive interest rates do not have their licences renewed.

The Money Advice and Budget Service (Mabs), which offers advice to the public over budgeting and debt management, will be able to recommend to the Financial Regulator on whether a money lender is charging a reasonable rate. There are more than 50 licensed money lenders in the State, some of whom charge rates of between 100 per cent and 200 per cent, according to research conducted by Ralaheen Ltd, entitled Do the Poor Pay More?

Minister for Social and Family Affairs Séamus Brennan said that under changes to legislation later this year the Financial Regulator would not be able to issue an annual money lender's licence without first consulting the Mabs agency. He also said he was taking on board recommendations in the report which found that improved access to financial services could help people on lower incomes avoid poverty and debt.

Mr Brennan said his department was in discussion with banks over establishing a new "basic banking account".
This would provide a person in need of short-term loan an overdraft at a normal rate instead of having to pay the often exorbitant rates offered by money lenders.

However, Mr Brennan's plans were criticised by Labour leader Pat Rabbitte who said the Minister's plans were long overdue and amounted to little more than "political posturing". Mr Rabbitte said the most effective way to tackle the problem was to ensure people on low incomes had access to reliable sources of credit at reasonable
rates of interest.

"Minister Brennan should enter into immediate discussions with the credit union movement with a view to providing such a service. The credit union movement has an extensive network around the country and a proven track record," Mr Rabbitte said.

Research shows that ID requirements for opening bank accounts, restrictive criteria for some free bank accounts and a lack of appropriate financial products are among the barriers facing people on low incomes in seeking to open a bank account. A recent report by Combat Poverty into financial exclusion found that people
on low incomes also excluded themselves from the banking system because they lacked confidence to engage with banks, or they felt such institutions were not interested in poor people.

Helen Johnston of Combat Poverty said its research highlighted the important role played by credit unions and post offices in providing access to savings and affordable credit facilities within disadvantaged communities.

"People on low incomes tend to be familiar with these institutions and therefore more likely to use their services. "By expanding their services to include a wider range of facilities, such as basic 'no frills' bank accounts and emergency credit, the study suggests that these institutions can further contribute to tackling financial exclusion," Ms Johnston said.

RBS criticised for extortionate lending in Germany

The European Coalition for Responsible Credit has highlighted how the Royal Bank of Scotland is circumventing German anti-usury regulation by charging excessive fees for cash withdrawals on its credit card. The Institute for Financial Services (IFF) in Germany comment :

"The Royal Bank of Scotland distributes a seemingly free credit card to people in Germany and elsewhere, which after a certain while turns into high price credit with certain inbuilt tricky characteristics. For example, cash withdrawal with this credit card will cost an extra fee of up to 4.75% for those who have no assets on the credit card account (and who does?). This is targeted at people in trouble with debt, who are tempted to use the credit card as a means to take out an instalment loan. In this case it means that the interest rate in countries like Germany, France, and the Benelux can climb up to 35% p.a. if it is for a small amount and there are delays in paying it back. This is an ingenious circumvention of continental usury regulation as well as a breach of the price disclosure rules of the EU, which seems to be legal in the UK. "