Payday Loans. A Flintshire CAB social policy report. for People in Flintshire? Flintshire Citizens Advice Bureau. the charity for your community

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1 the charity for your community cyngor ar bopeth citizens advice bureau Flintshire Citizens Advice Bureau Payday Loans Are They Causing a Problem for People in Flintshire? December 2013 A Flintshire CAB social policy report

2 Contents 3 Executive Summary 4 Introduction 5 Background & Key Events over the Last Twelve Months 6 Problems with Payday Loans - Our Clients' Stories 8 Survey Findings 11 Conclusion 14 What to do when things go wrong 15 References: I wish I never used them 2

3 Executive Summary It is estimated that four million people are likely to take out a payday loan in the next six months. Alongside this increase in use, the Citizens Advice service has seen a ten-fold increase in the proportion of our clients receiving advice on debt that included a payday loan over the last four years. There have been a number of reported problems with payday lending including irresponsible lending, high interest and collection charges, and a lack of forbearance by the lender when the borrower experiences financial difficulty. This report looks at how people in Flintshire are affected by these problems at a local level. The findings of the report are drawn from analysis of our clients experiences with payday lenders (case studies) and a survey completed by Flintshire CAB clients who had obtained a payday loan. The key findings from the survey are: Only 20% of respondents who obtained a payday loan were able to repay the loan on time. 71% of respondents said the lender did not ask about their personal finances or perform an affordability check. Only 7% of respondents were asked to provide evidence of their personal finances and general situation to the lender. Only 27% of respondents were told that a payday loan should not be used for long term borrowing or if in financial difficulty. Of those who had problems repaying the loan, 91% of respondents were not told about free and independent debt counselling organisations. Our case studies include: A client whose payday loan increased by 400% within a three month period. A client whose payday loan increased by 3500% within an 18 month period due to interest and excessive collection charges. A client who is an undischarged bankrupt who was able to obtain three payday loans totalling 1200 showing that no credit checks had taken place. A lender who used the continuous payment authority (CPA) to withdraw funds from a client s account leaving them unable to pay their bills. Recommendations Flintshire CAB believes that the payday lending problem could be solved with action on two fronts; greater regulation of the payday lending industry and promoting the use of affordable credit. Whilst there have been calls for payday lending to be banned, there is a concern this would lead to increased use of other problematic forms of lending or high cost credit including illegal money lending (loan sharking), Bills of Sale/log book loans (not regulated by the consumer credit act) which were nearly banned by the previous Government and pawn broking. A key objective of Flintshire CAB is to tell our client s stories. We use these stories and our statistical data to inform and mobilise our social policy work. During 2014 we will continue to campaign for better regulation and feed our local evidence in to Citizens Advice campaigns. We will continue to inform our clients of the alternatives to payday loans and ensure that local people are kept informed about the issues involved with payday lending including the consequences. 3

4 Introduction What is a Payday Loan? A payday loan is a short term unsecured loan. The term of the loan can be anywhere from one to thirty days (until the borrowers payday ) and advertised interest rates are often very high. For example, the representative APR advertised by some well known lenders on their websites are as follows: Quick Quid 1734% APR [1], The Money Shop % APR [2], Mr Lender 4849% APR [3] and Wonga 5853% APR [4]. Payday loan shops are now common place on most high streets as well as being readily available online. Advertisements can be seen during popular television programmes and in local and national newspapers. The loan will often be paid into the borrower s bank account within one hour, with some lenders guaranteeing it will be there within fifteen minutes. Repayment is normally by a continuous payment authority (CPA) from the borrowers debit card. The CPA allows the lender to make repeated attempts to collect the money if the first attempt is unsuccessful. The lender may allow the borrower to defer or roll over the loan repayment to the following month, for example, if they are unable to repay the loan as agreed. To do this the borrower will usually have to repay the interest on the loan and a roll over fee. A standard rollover fee may be in the region of 15, although this varies between lenders. Citizens Advice report that an estimated four million people will take out a payday loan within the next six months [5]. Reasons a borrower may take a payday loan include: 4 To help in an emergency situation (e.g. car repairs) They only require a short term loan; most high street banks only offer loans over a longer period They have a poor credit history and struggle to obtain a loan from a high street lender To pay essential bills such as rent, gas or electricity To cover repayments to other creditors History of payday loans Payday loans originated in the United States of America (USA) in the 1990s. In the UK it has been a rapidly growing industry during the last five years. Cheque cashing services were the precursor to payday loans. The payday loan industry in other countries such as the USA and Canada is specifically regulated. Currently in the UK, the payday loan industry is regulated only by existing consumer credit provisions, with no specific rules or regulations for this type of credit. Problems with Payday Loans There have been a number of problems associated with payday loans and payday lenders. Key issues reported include: Irresponsible lending - no credit checks/ affordability checks or inadequate affordability checks completed by the lender Difficulty cancelling the continuous payment authority (CPA) either with the lender or the bank Loans frequently being refinanced or rolled over when not paid despite this suggesting the borrower may be experiencing financial difficulties Poor communication with lenders and difficulty contacting internet based lenders A lack of forbearance shown when borrowers get into financial difficulty High debt collection charges being placed on loans when not repaid on time Lenders pursuing victims of identity theft for repayment of fraudulent loans

5 Background & Key Events over the Last Twelve Months The Good Practice Charter On the 26th November 2012 a Good Practice Customer Charter [6] for payday and short term loans was implemented by a number of trade associations representing payday lenders. The charter applies to any lender who is a member of the Consumer Finance Association, the Consumer Credit Trade Association, BCCA or the Finance & Leasing Association. Most, if not all, of the well recognised payday lenders are a member of one of these trade associations. The charter sets out a number of key promises including the carrying out of a sound, proper and appropriate affordability assessment and credit vetting for each loan application and before the loan is rolled over. The charter also promises that if a borrower experiences financial difficulty they will freeze interest and charges if a repayment plan is agreed or after a maximum of 60 days of non-payment and that the lender will tell the borrower about free and independent organisations who can help. The Office of Fair Trading (OFT) On 6th March 2013 the OFT released their final report on their Payday Lending Compliance Review [7]. Particular areas of non-compliance included lenders failing to conduct adequate assessments of affordability before lending or before rolling over loans, failing to explain adequately how payments will be collected, using aggressive debt collection practices and not treating borrowers in financial difficulty with forbearance. The OFT said the fifty leading lenders, each of which was inspected, must demonstrate within 12 weeks that they are fully compliant, or risk losing their credit licence. On 18 September 2013 the OFT released an update on the compliance review. Nineteen of the fifty leading lenders criticised in the report had informed the OFT that they are leaving the payday market. Four of these have surrendered their consumer credit licenses. Three further lenders outside of the leading fifty lenders had surrendered their licenses with a further three being revoked by the OFT. The Financial Conduct Authority Launches a Consultation on Consumer Credit and Payday Lending The Financial Conduct Authority (FCA) is taking over regulation of consumer credit (including payday lending) from the OFT on 1 April The FCA published a consultation paper[8] asking for feedback on their proposals for regulating the credit industry. Specific proposals for the payday lending market include limiting the number of times a loan can be rolled over to two, limiting the number of times a lender can attempt to take payment of the loan using a CPA to two, and a clear risk warning on any advertising. The High Cost Credit Bill & Banking Reform Bill Paul Blomfield MP for Sheffield Central is trying to legislate his High Cost Credit bill [9]. The bill is due for its second reading in Parliament on 17th January Key features of the bill include: Giving the FCA the power to define what a high-cost credit agreement is Place restrictions on the amount of credit that can be advanced Restrict the level of default charges Restrict the number of times a loan can be rolled over On 25th November 2013, the government announced that as part of the Banking Reform Bill [10] currently being passed through Parliament, there will be cap on the costs of payday lending. It has been reported that the cap will place controls on charges, including arrangement and penalty fees, as well as on interest rates [11]. 5

6 Problems with Payday Loans - Our Clients Stories The following case studies are actual cases seen and dealt with by Flintshire CAB advisers and caseworkers. Client A - High Interest and Charges Client A is a single person with a child aged two years old and in receipt of Income Support. She recently ended an abusive relationship, and was referred to Flintshire CAB by the Domestic Abuse Safety Unit for help with her finances. Client A took out a loan of on 3rd May 2013 from Wonga via the internet. The loan was taken out to pay essential household bills and to buy food. This was not repaid on time due to financial difficulty and overindebtedness. Her paperwork showed that by 19th August 2013 the balance had increased to due to interest and default charges. The debt had increased by 400% in a relatively short period of time. Interestingly, the Consumer Finance Association says on its website that it is a myth that shortterm loans are very expensive and charge extortionate interest rates. Client B - Excessive Collection Charges Client B took out a payday loan with Speed Credit in January She borrowed 100 to pay general living expenses. She was unable to repay the loan due to a significant drop in income caused by redundancy and pregnancy. She tried to negotiate reduced payments with Speed Credit without any success. Speed Credit then transferred the debt to Northern Debt Recovery and then on to Marshall Hoares. Each of these companies which operate from the same address placed collection charges on the debt. Client B informed us that at one point the charges were 90 per day. Interest also continued to accrue. She also informed us she was receiving threatening telephone calls and s from Marshall Hoares. Client B sought advice in July 2013, nearly 18 months after taking the loan out. During this time the loan had increased to This case study shows a clear lack of forbearance on the part of the lender. Client C No Credit/Affordability Checks Client C took out three payday loans to meet his monthly outgoings. At the time of taking out the loans, the client was an undischarged bankrupt. The loans taken out were 560 from CFO Lending, 195 from Wageday Advance and 430 from Swift Sterling. The client had a monthly income in the region of 900 per month. It appears that at least two of these lenders had not undertaken any affordability checks as it seems unlikely that he would be able to repay a loan of 430 or 560 from an income of 900 when already struggling to meet monthly outgoings. Under the Good Practice Customer Charter these lenders have agreed to carry out a sound, proper and appropriate affordability assessment and credit vetting for each loan application. It also appears that no credit checks had been undertaken by the lenders as this would have flagged up that the client was an undischarged bankrupt. 6

7 Client D Problems with Continuous Payment Authorities (CPAs) Client D took out three payday loans and was unable to afford the repayments when due. The lenders used the CPA to withdraw funds from her bank leaving her unable to pay her bills and buy food. The client was in financial difficulty when taking out these loans and again, it would appear that no credit or affordability checks were completed. Client D contacted her bank (Halifax) via their customer helpline number and asked the bank to stop the CPAs. The client was told that they were unable to do this and that she would have to go into her local branch and make an appointment to discuss stopping the CPAs. As the client was unable to take time off work to do this, ultimately she opened a new bank account with an alternative bank and had her income transferred to this new account. Flintshire CAB issued the client with a food voucher, allowing her to access an emergency provision of food from the Flintshire Foodbank as all funds had been taken from her bank account. This case study shows fault on the banks part as well as the lender. Financial Conduct Authority (FCA) guidelines state that banks should stop these payments immediately when requested by their customers. Client E Victim of Fraud The client identified that something was wrong a week after the incident occurred. He reported this to the police with help from his support worker and a crime reference number was obtained. The support worker wrote to all payday lenders involved but did not receive any responses. The client was referred to Flintshire CAB by his support worker for specialist debt help. Flintshire CAB issued a complaint letter to all the payday lenders involved. Two of the six lenders (Txtloan and The Lending Stream) agreed to write off the debt. Three of the lenders have not responded (Peachy/ Cashongo, MEM Consumer Finance and CFO Lending Ltd). The sixth lender, Minicredit, has refused to write off the debt. Minicredit has said it will only write off the debt if the police can prove who applied for and used the funds. Unfortunately for the client, the police investigation did not result in an arrest, conviction or prosecution. Minicredit are holding the client liable for the debt. The rates of interest are far too high Client E is a single person in receipt of Income Support and Disability Living Allowance. Client is a recovering alcoholic and is receiving help from a support worker at the Substance Misuse Services & Counselling Centre. In November 2012, Client E was the victim of fraud. His bank card and PIN number were stolen from his home. A number of payday loans were applied for, six loans were made and the money was taken from his bank account via a cash machine. 7

8 Survey Findings Following the implementation of the Payday Lending Good Practice Customer Charter, Citizens Advice issued a national survey to monitor the success of the charter. Flintshire CAB took part in the survey and captured the information on a local level which we then fed into the national campaign. We asked all clients who came to bureau seeking advice on various issues if they had recently taken out a payday loan, and asked those who had to take part in our survey. We took a snapshot of our clients experiences in Flintshire during a specified period in time. The results are detailed below. The survey was split into two sections; the first section asks questions about the application process. The second section asked questions specifically aimed at those who had difficulty repaying the loan. Section One Thinking about your payday loan. These questions focus on the application process and were asked to all respondents. Q1. Did the lender make it clear how much it would cost you to repay the loan? Q2. Did the lender make it clear how you would repay the loan? Q3. Did the lender ask questions about your personal finances and general situation to check that you could afford to repay the loan? Q4. Did the lender ask you to provide documents about your personal finances and general situation to check that you could afford to pay back the loan? Q5. Did the lender tell you that a payday loan should not be used for long term borrowing or if you are in financial difficulty? Q6. Did the lender tell you what to do if they had a complaint? 8

9 Section Two If you had problems repaying the loan. We asked respondents to complete this section if they had difficulty paying the loans. 80% of the total respondents who answered section one also answered this section. This suggests that only 20% of respondents repaid the loan on time. Q7. Was it easy to contact the lender? Q8. Did the lender deal with you sympathetically and positively? Q9. Did the lender offer to freeze interest and charges for you if you make payments under a reasonable repayment plan? Q10. Did the lender tell you about free and independent debt counselling organisations? Q11. If you rolled over the loan, did the lender let you make the decision to extend the loan without pressurising you?* Q12. If you rolled over the loan, did the lender tell you about the risks of extending the loan?* Q13. If you rolled over the loan, did the lender make it clear how much it would cost you to extend the loan?* Q14. If you rolled over the loan, did the lender check your personal finances and general situation to see if you were able to pay back an extended loan?* * Questions relate only to those who opted to rollover or extend the loan if they were unable to repay it on the original due date. 84% of respondents who answered section two answered these questions. This suggests that a high number of respondents rolled over the loan instead of paying it on the original due date. 9

10 Average Amount Borrowed The form allowed the respondent to state the amount that they borrowed. 10 respondents answered this question. The average (mean) amount borrowed was 500. The lowest loan made was 100, whilst the highest loan made was Respondents Comments In addition to the above questions, the survey also provided a space for the respondents to add any additional information or make a comment. The following comments were made by the respondents: The rates of interest are far too high I wish I never used them I missed a payment. They took money the following day and attempted again later in the week leaving me without money. I would never use them again. They should all be banned completely The lender. keeps adding interest. A 300 loan has now gone to nearly 1000 They should all be banned completely The only reason I took the loan was because I was waiting for a benefit claim to be processed. 10

11 Conclusion In this section we look at the results from the survey and answer the question should payday loans be banned? We also present our recommendations for how the payday lending problems can be tackled. The survey shows some worrying trends and confirms the reported problems that consumers are having with payday loans. Only 29% of respondents reported that the lender asked them about their financial situation, with even less being asked to provide documentation as evidence of their situation. This is clear evidence of the often reported problem that lenders are not completing appropriate affordability checks or credit checks. When looking at those who experience difficulty repaying the loan, only 9% of respondents had interest and charges frozen to prevent the debt increasing. Even more worrying, 100% of those who rolled over their loan felt pressured in to doing so rather than agreeing an affordable, realistic repayment plan. Rolling loans over can lead to further problems as the capital is not being repaid. One particularly alarming statistic is that only 6% of those who experienced financial difficulty were told about free and independent debt counselling organisations. Only 7% of respondents were told how to make a complaint when things went wrong. These statistics show that lenders are not helping consumers to resolve their problems. Should Payday Loans be banned? Throughout the report we have quoted comments that the respondents made on the survey. one respondent made the comment that Payday loans should be banned. Despite calls for payday loans to be banned, there is a counter-argument that doing this may lead to a rise in illegal money lending (loan sharking) or the increased use of other, equally problematic forms of high cost credit being used such as Bills of Sale (log book loans) - which were nearly banned by the previous government - and pawn broking. When answering this question we also need to consider consumer choice. Banks currently do not offer short term loans with most offering a loan with a minimum term of 12 or 24 months. If there is a genuine need or desire for short term lending, until the mainstream banks start to offer suitable alternative products, consumers will continue to turn to payday lender. We recommend the following two solutions to help alleviate the payday lending problem. The first being promoting the use of affordable credit and the second being greater regulation of the payday lending industry. The evidence gathered on the above survey shows that the reported problems described earlier in the report are clearly affecting the population of Flintshire. Of the 14 key promises made by the payday lenders and their trade bodies under their Good Practice Charter, the evidence shows that the lenders are regularly keeping only two and are breaking twelve. 11

12 Solution One - Promoting the use of affordable credit and alternatives to credit There are a number of low cost alternatives to payday loans available to consumers in Flintshire. These alternatives include: Credit Unions Credit Unions offer low interest loans to their members. There are currently two credit unions operating within Flintshire; the All Flintshire Credit Union [1] and the North Wales Credit Union [1]. Not For Profit Social Enterprises Not for profit organisations which offer short term loans at a lower cost than payday and other sub-prime lenders. An example of one in Wales would be Money Line Cymru [1]. Social Fund Budgeting Loans [1] Social Fund Budgeting Loans are still available for claimants of income based benefits. Budgeting loans are interest free loans and can help with certain costs, for example, furniture, clothing, advance rent or removal expenses for a new home, traveling expenses, maternity and funeral expenses, getting and starting a job. The Discretionary Assistance Fund (DAF) [1] Crisis loans from the Social Fund have been abolished in the UK. DAF has been set up to provide residents of Wales with grants which do not need to be repaid. The two grants available are Emergency Assistance Payments to help in an emergency or when there is an immediate threat to health or wellbeing, and Individual Assistance Payments to help people to remain, or begin, living independently in the community. The fund does not provide loans. Solution Two Greater regulation of the payday lending industry. In addition to promoting affordable credit, we support calls for greater regulation of the payday lending industry. Flintshire CAB supports the Financial Conduct Authority s (FCA) proposals on limiting the use of Continuous Payment Authority (CPAs) and the number of times on which the loan can be rolled over. The FCA is currently proposing that rollovers should be limited to two, however it is arguable that this is still not enough and limiting the number of rollovers to one is sufficient; (it is a clear indicator that the borrower is in financial difficulty if they are unable to repay the loan on the first two occasions it is due). Other countries around the world already have specific legislation which governs the payday lending industry. For example, in the USA, many states have their own usury laws which forbid interest rates in excess of a certain APR (an interest cap) and, in certain provinces of Canada, there is not only capping of interest rates for short term loans, but a cap on the amount of credit which can be given to the borrower (currently 50% of their net income). It has been reported that the success of these caps and equivalents in other countries, such as Australia, has influenced the Government s decision to cap the cost of payday lending in the Banking Reform Bill, a move which Flintshire CAB supports. Flintshire CAB also supports the High Cost Credit Bill which proposes limiting the amount of credit that can be given, limiting the period during which interest and charges can be applied when a loan cannot be repaid and limiting the amount of default charges that can be added following non-payment. The High Cost Credit Bill proposes that when contacted by a debt advice provider, lenders should immediately cease any enforcement action against the borrower, agree to a repayment plan based on the ability to pay of the borrower and waive any fees, charges or interest, which may otherwise be due under the agreement over the period of the repayment plan. This will ensure that all lenders in financial difficulty will be treated fairly and sympathetically. The bill also gives the FCA the power to place a levy on highcost lenders in order to fund free debt advice for when things go wrong. 12

13 Flintshire CAB hope the findings of this report will influence local policy makers to support these bills. What Happens Next Flintshire CAB will use findings from the report to mobilise our social policy work. During 2014 we will continue to campaign for better regulation and feed our local evidence into national Citizens Advice campaigns. We will continue to inform our clients of the alternatives to payday loans and ensure that local people are kept informed about the issues involved with payday lending. The only reason I took the loan was because I was waiting for a benefit claim to be processed 13

14 What to do when things go wrong Seek Advice If you are in financial difficulty or need assistance making a complaint to the lender, we recommend that you contact your local Citizens Advice Bureau. Flintshire CAB can be accessed by telephone via Adviceline on Opening times for the Flintshire CAB open door service can be found on our website Complain to the Lender If you feel you are able to complain to the lender yourself, information and guidance can be found on the Citizens Advice website We recommend that complaints are made in writing and clearly marked complaint. If the lender does not respond within eight weeks or the response if not satisfactory, you can refer the complaint to the Financial Ombudsman Service (FOS). Information about FOS and their services can be found at The lender. Keeps adding interest. A 300 loan has now gone to nearly

15 References: [1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11] [12] helpingpaydaylenders.htm [13] [14] [15] [16] of_borrowing_e/debt_loans_e/social_fund_loans.htm [17] 15

16 Follow us on Twitter twitter.com/flintshirecab Watch our films on YouTube youtube.com/citizensadvice Like us on Facebook facebook.com/flintshire- Citizens-Advice-Bureau citizens advice bureau Report written by Daniel Mostyn-Jones, Flintshire CAB.