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Citizens Advice exposes payday lender failings

Financial Reporter, 28 May 2013

Citizens Advice is urging the OFT to take tough, immediate action against payday lenders as new evidence reveals lenders are pressurising struggling borrowers to extend loans, lending to people under 18 and harassing people in debt.

The new findings, from the Citizens Advice's payday loan tracker and evidence from across the service, are revealed today, Tuesday 28 May, 12 weeks since the OFT launched its investigation into the payday lending industry.

Citizens Advice found that 12 in 14 promises to treat customers fairly were broken. It also found 3 out of 4 people struggled to repay the loan (1,539 cases) with 84% saying lenders did not offer to freeze interest rates or charges, despite vowing to do so.

Citizens Advice wants the OFT to use its powers to immediately ban payday lenders its investigation finds are causing harm to borrowers.

An in depth analysis of 780 cases reported to the Citizens Advice consumer service between 26 November and 13 May revealed evidence of:

  • Irresponsible lending: lending to under 18s, people with mental health issues and people who were drunk at the time.
  • Inadequate checks on borrowers: chasing people for debts when the loan had actually be taken out by someone else using their identity.
  • Taking more than owed: lenders taking more than they are owed then refusing to refund it.
  • Draining bank accounts: misuse of Continuous Payment Authorities by persistently raiding bank accounts without any warning leaving no money to live on.
  • Harassment: pestering people who are in debt and also hounding others at the same address in a bid to shame the borrower.
  • Refusal to agree to repayment plans: not helping people who are struggling to repay by agreeing a reasonable repayment plan.

During the same six month period 24,575 people sought online advice about payday loans from Citizens Advice.

The Citizens Advice payday loan tracker studied customer feedback on 2,000 payday loans, from 113 different payday lenders, from 26 November 2012 to 17 May 2013. The tracker monitors whether lenders are abiding by their own customer charter.

The study did find that lenders are being much clearer about how much loans will cost in total (79%).

But major failings unveiled by the study include:

  • 87% didn't ask the borrower to provide documents to prove they can afford to repay the loan.
  • 58% did not warn that a payday loan should not be used for long-term borrowing or to deal with money troubles.
  • 84% of people who had repayment problems were not offered the chance to freeze interest and charges when they were struggling to pay it back.
  • 7 in 10 (72%) actually put pressure on people struggling to repay to extend their loan.
  • 83% did not highlight the risks of extending the loan to those already in difficulties with their payday loan.
  • 95% did not check that borrowers with repayment problems could afford to pay back the loan if it was extended.

Citizens Advice Chief Executive Gillian Guy said:

The payday loan industry is out of control and is acting as a law unto itself. It has showed a complete disregard for its customers. Many have been driven into debt by irresponsible lending and their debts ballooned as lenders put pressure on them to extend the loans.

The OFT has an opportunity to wipe out the distress caused by this industry and make sure it is transformed into a responsible short-term credit market. It is vital that, following the investigation, the OFT takes swift action to protect consumers from the harm caused by these unscrupulous lenders.

James Benamor, CEO and founder of Amigo Loans comments:

The findings from today’s Citizens Advice report are shocking and demonstrate irresponsible lending in its worst form. Unless we see tougher regulation, and the enforcement of existing regulation, without delay, more vulnerable consumers will continue to be exposed to immoral practices within the industry. We support anything that goes towards stopping payday lenders selling loans to anyone who isn’t in a position to take on and pay off this debt.

People deserve better and the industry needs to learn from the likes of credit unions and other alternative providers, where decisions are made in a human way rather than by (profit-based) 'credit scoring'. Payday lenders are failing borrowers by not assessing their financial and personal situation and allowing reckless borrowing to take place.

Borrowers have complex financial situations and irresponsible lending has ballooned directly in line with the computerisation of decision making. Lenders need to remember why they exist - to help and serve customers, not just to monetise them as effectively as possible.

The industry urgently needs to get back to basics. Only humans can decide if a loan is appropriate for someone, a computer can't. Amigo Loans offers an old-fashioned lending model, widely used by banks before the local bank service was replaced by computerised credit scoring. Lending is based on trust, human relationships and through lengthy real discussions where affordability and appropriateness are considered thoroughly.

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