28 May 2013

Payday loans companies ‘out of control’ – report

Payday loan companies lent money at soaring interest rates to people with mental health issues, the under-18s, and customers who were drunk when they took out the loan, a debt advice charity reveals.

Citizens Advice (CA), which carried out the investigation, said payday lenders were “out of control” and urged trading watchdog the Office of Fair Trading (OFT), to ban irresponsible firms.

An analysis of 780 cases reported to CA between November 2012 and May 2013 found evidence of reckless practice which included arranging loans with interest rates of up to 4,000 per cent for under-18s, people with mental health issues, and some who were drunk at the time.

The Citizens Advice report comes as the OFT has threatened to close big payday lending firms if they cannot prove their better practice.

In June, it is expected to announce whether the payday market will be referred for investigation by the Competition Commission.

’12-week deadline to improve’

The OFT gave 50 payday lenders a 12-week deadline in March to improve their behaviour or risk losing their trading licences.

However, the CA said firms are still making inadequate checks on borrowers, leading to people being chased for loans they did not take out and struggling borrowers being harassed at home to humiliate them into paying up.

Some firms take more than they are owed from bank accounts without refunding the money, and others have drained borrowers’ bank accounts with no warning using a payment agreement called a “continuous payment authority” (CPA), according to the CA.

As well as examining 780 loans in detail, CA also looked at customer feedback on 2,000 payday loans from more than 100 lenders.

In 87 per cent of cases analysed, borrowers were not asked to show that they could afford the loan and 84 per cent of people with repayment problems were not given the chance to have their interest and charges stalled.

Improving explanations about loan cost

One area where the charity did find that payday lenders had improved was in explaining how much a loan will cost.

In 79 per cent of the 2,000 customer feedback cases, lenders were clearer about the total cost of the loan.

The OFT’s own research into the payday loan industry found that lenders appeared to rely on customers who cannot afford to pay their loans back on time.

Some payday loan companies have signed up in recent months to new codes of practice to improve affordability checks and ensure borrowers understand the costs involved.

The Consumer Finance Association (CFA), which represents some 70 per cent of short-term lenders, produced a report on their customers to a gathering of MPs, which insisted they were generally “intelligent, financially-savvy consumers”.

Tough code of practice

Russell Hamblin-Boone, chief executive of the CFA, said in response to the CA investigation:

“We have put in place a tough code of practice [launched 12 May] which is independently monitored and enforced in order to ensure that our members do not engage in the kind of practices highlighted by the Citizens Advice survey.

“These measures are raising standards and protecting the vast majority of customers who, it should be remembered, never seek help from Citizens Advice as they do not experience problems with repaying their loans.”

An OFT spokesman said: “Of the 50 payday lenders that were inspected during the compliance review, 48 have confirmed that they will provide the OFT with proof that they are fully compliant, while two have surrendered their licences.

“The OFT has also announced that it has formal investigations open into the practices of three payday lenders and, in addition, three payday lenders have also had their licences revoked since the review of the sector in March.”

Short-term loans companies have thrived on Britain’s increased living costs. Their total annual lending has more than doubled from £900m in 2008 to some £2bn.