Recently, the Office of Fair Trading (OFT) in the United Kingdom issued an ultimatum to payday loan companies. The message is clear; that they must clean up their ways. An investigation found a widespread practice of irresponsible lending among the payday lending industry. The big question that stands out now is, “What does this mean for payday loan lenders?”
The OFT gave the top 50 firms three months to clean up or risk losing their licenses to practice lending. The problems go beyond the lending and interest rates, but also to the competition between companies and the atmosphere of desperation that these customs breed. The investigation found that there were multiple problems that included the failure to:
- Evaluate if borrowers could actually afford the loans
- Explain the process of repayment
- Provide adequate forbearance for those unable to make immediate repayment
- Practice fair debt collection practices.
The practice of lenders relying on borrowers being unable to pay back the original loan, thus forcing the borrower to take out another loan to pay off the original loan, is a widespread breach of laws and regulations. These habits are causing misery and hardships for these distressed borrowers.
The OFT proposed new restrictions and regulations that will bring about resounding changes in the industry but they also want the companies to derive a new code of practices that will demonstrate change. Proposed areas for change include advertising, interest rates, lending decisions and forbearance allowances. The new Financial Conduct Authority (FCA) will also be empowered with the ability to hunt down fraudulent and rogue lenders.
If the OFT and FCA can implement effective changes then there should be a trickledown effect throughout the industry. Bristol University recently reported that what was once thoughts of as high (interest rates as high as 300 percent) have been recorded at as much as 1700 percent. There are loan sharks that only dream of a return of investment that high and that is a criminal enterprise. A cap on the interest rates is the first place regulation needs to start. Consumers need to also be clued up about the hazards and at least compare the loans available before they commit – see here.
According to the head of the Consumer Finance Association (CFA) the owners and operators of payday loan companies recognize there is a problem and have already implemented self-regulating changes. These include checking credit-worthiness of borrowers and limiting the number of time a loan can be rolled over or extended. Some companies are also instituting forbearance practices and providing information for debt services to borrowers.
The government believes these changes are not enough, the owners argue that the consumer needs to accept some responsibility; but who is right? Shouldn’t there be an ethical standard in the world of lending and payday loans? Are these companies creating more problems than they are fixing? What does this mean for other countries with high payday loan usages?
Regulation and change is needed in the payday loan industry but do not expect it to come easy. The business owners do not want to see sweeping change and if change comes it will not retroactively fix the lives that payday loans have destroyed.
Whilst often thought of as intrinsically bad, quick same day loans are sometimes the only solution available to people in debt. As long as they are paid back quickly, they don’t have to be a huge burden and can help to get you through tough times. With a bit of organization on the customer’s part and heavy regulation of the loan company, it may be possible for these services to continue on into the future, holding a useful place in society. One though, that should be respected.