Many Americans would love to see the government show an interest in the business of payday lending, but the Office of Fair Trading (OFT) is in the UK. The OFT has authority over consumer affairs and competition, and the overall mission is “to make markets work well for consumers”. The agency is a non-ministerial government department that was established by law in 1973.
Payday lending offers a way for people to make short term loans that are usually paid off when the individual gets their next paycheck. These loans are supposed to help people who are infrequently short of cash and unable to qualify for a traditional or “high street” bank loan. Given the economy, more and more borrowers roll over their loans, incurring incredible interest fees until they will never be able to pay off the debt. In some cases, the lender’s collection practices have been abusive or in violation of the law.
The UK Telegraph says that,
“This type of borrowing, along with pawnbrokers, has exploded in popularity as banks have cut back on lending to high-risk consumers and the recession has caused many people to seek emergency funds.”
According to WFW Wealth News, the OFT is looking into charges that online payday loan firms are preying on and taking advantage of vulnerable people. Low income borrowers pay interest rates that can go as high as 16,000 percent on an annual basis. If the borrower keeps “rolling over” their debt, it all accrues into a money trap from which they cannot escape.
The OFT conducted a sweep of 50 online payday lender websites, looking for non-compliance with the Consumer Credit Act, particularly with respect to guidance on irresponsible lending. Specifically, the following problems will be probed:
Giving loans without checking first to see if the borrower is capable of repaying.
Deliberately targeting people who are bad credit risks and/or giving bad advice.
Rolling over customer’s loans until the interest and principal becomes impossible to repay. One problem with this requirement is that the government has not specified an exact number of rollovers or any other specific cutoff level.
Unfair treatment of borrowers who have problems and financial difficulty.
If payday lenders have failed to comply with the Consumer Credit Act’s requirements, they can lose their licenses.
Stella Creasy is the Labour MP for Walthamstow. She has had problems with the OFT failing to be more proactive in policing the payday loan industry. She takes issue with the industry as a whole, not just the worst lenders who have gotten out of line. Finally, she holds that the existing laws are too weak to be of much good.
It does not sound impressive that the OFT will “work with the trade bodies to drive up standards”. Also, whether the government will revoke licenses, remains to be seen. The Consumer Finance Association (CFA) represents about 70% of the payday lending industry and claims to welcome the investigation and discussions. But will all of that goodwill lead to a cap on the high interest rates?
The conditions are ripe for predatory payday lending, given the sad state of the economy in the UK and elsewhere. In the UK, payday loan related calls to the National Debtline have exploded from 150 calls per month just two years ago to 1,100 per month now.
The average payday loan is for £300, and the interest ranges from £13 to £18 for a short term of a few weeks. This is how the annual interest rate comes to an average of between 1,000 and 2,000 percent. The most high profile lender, Wonga.com, charges an average annual interest rate of 4,214 percent. The average income of payday loan borrowers is about £25,000.
For more information about improper debt collection tactics, The OFC has a consumer’s page on debt collection practices with several PDF download guidance pages.