Payday lenders accused of relying on indefinite access to customers’ bank accounts, rather making affordability checks
The Office of Fair Trading believes payday lenders have been relying on a controversial way of collecting repayments to reduce the risk of lending, rather than paying for affordability checks on prospective borrowers.
Payday lenders typically collect repayments using continuous payment authorities (CPAs), agreements which give the lender an indefinite mandate to take money from a borrower’s credit or debit card and to alter the amount deducted. CPAs have caused considerable problems for consumers as they give them far less control over their payments than direct debits, and are difficult to cancel.
The OFT believes the access CPAs provide to customers’ accounts has given payday lenders confidence that they will be able to get their money back without checking the customer can afford to repay a loan.
A spokesman for the regulator said: “We are concerned that lenders are, in effect, using CPAs to ‘securitise’ the loan, and so may not make adequate checks on affordability.”
Credit reference agency Call Credit handles checks for 80% of payday loan applications. However, spokesman Duncan Bowker says that while some lenders pay for both credit and affordability checks – looking at the credit already available to an applicant and comparing it to their income stream – others simply opt for credit checks.
He added: “We can’t account for all of [the payday lenders], and there are new entrants to the market all the time.”
Consumers have complained that payday lenders use CPAs to make repeated efforts to collect money when the initial collection has failed, sometimes reducing the amount they try to collect on the basis that it is better to collect some money than none.
The OFT has published guidance to stop lenders using CPAs without the informed consent of the borrower; they must also find out why a payment has failed and whether the borrower is in financial difficulties, and should not try to take payment if there is reason to believe the customer has insufficient funds in their account. They should explain adequately how CPA works and how it can be cancelled.
The new rules could reduce the profits of payday lenders, forcing all to pay for credit and affordability checks and reducing their ability to extract money from struggling borrowers.
The new Financial Conduct Authority, which is due to take over part of the duties of the Financial Services Authority and the OFT in 2013, will also have the power to set a cap on exorbitant interest rates charged by payday lenders.
And in a further move that could affect the profitability of payday lenders if emulated by other media, the parenting website Mumsnet has announced that it has become Britain’s first “legal loan shark free zone”.
Justine Roberts, Mumsnet chief executive said: “We haven’t taken advertising from legal loan sharks for some months now as it has become obvious from our forums that payday loans can cause misery for families. There are clear problems with this industry, and until it is cleaned up, we don’t want anything to do with it.”