It has been discussed for a while and it is finally happening. The Office of Fair Trading (OFT) recently launched its review of the UK payday lending sector. This investigation was spurred by widespread concerns that some less than scrupulous lenders are taking advantage of customers.
No credit check loans are designed to help people out of difficult financial situations, not increase their money problems.
The recent economic crisis has made it difficult to qualify for loans bank offered. This has driven more people to payday loans, short-term financing designed to be repaid with the next paycheck. These are not cheap loans, as APRs reach into the thousands.
In response to criticism that these rates take advantage of desperate consumers, the OFT will visit 50 major payday lending companies and conduct on-site investigations.
The watchdog aims to find out whether lenders are approving financing without first verifying that borrowers can afford to repay it. Other concerns to be investigated are whether particular segments of the population are being targeted and how frequently loan rollovers are occurring. Rolling over a payday loan causes additional interest and other charges to accrue.
The OFT will also find out whether borrowers who wind up in financial trouble are subjected to fair treatment.
An initial phase of the investigation, now completed, involved a review of more than 50 payday lending websites. The OFT prepared its findings and presented these to the main trade agencies in writing, noting that several improvements in advertising standards were warranted.
This next phase involves determining whether the lenders are complying with irresponsible lending guidance and the Consumer Credit Act. The results of the investigations will be used to refine industry standards and deter companies that do not meet consumer credit license requirements.
OFT consumer credit director David views any shortcomings on the part of these lenders as unacceptable and he indicated that the OFT is prepared to address these in words as well as action. In addition to collaborating with trade bodies to improve standards, the OFT will “not hesitate to take enforcement action,” he said. This includes revoking lender operating licenses, if warranted.
Until now, the OFT has taken the stance that payday loans APR should not be restricted. In 2010, the group determined that this financing was useful to UK consumers where were unable to find another legitimate lending source. The lenders fill a gap that left exposed, could force these individuals to borrow money illegally from loan sharks.
Due to reports of aggressive behavior by payday lenders, the OFT may now be changing its position regarding this industry.
Following the 2010 OFT high cost credit review, licenses were surrendered by 43 companies and an additional 13 were subjected to action that ensured their credit licenses would be withdrawn. Results from the upcoming investigation are scheduled to be published later this year.
Mr. Fisher noted that growth in the payday lending sector since 2010 and the current difficult economy make this the opportune time to review the industry and increase protection for UK consumers.