A Guide to the Evolution of Payday Loans – Are they Fit to Survive? – Chapter 5

Are debt collectors annoying you? Many consumers complain that payday lenders lack forbearance when it comes to debt collection. Quick Loans Express examines what’s legally allowed, what has changed and where there’s room for improvement.

This chapter explores how payday lenders treat loan defaulters. We’ll examine:

Story Highlights:

  • OFT’s opinion of payday loan companies’ debt collection tactics
  • The OFT’s Debt Collection Guidance
  • Do payday lenders practice fair debt collection?
  • Companies charging unreasonable fees
  • Debt collection or specialist debt advice
  • The FCA: dealing with payday loan defaulters
  • Changes treating defaulters fairly since 2014
  • Conclusion

Payday Loans Debt Collection

Interestingly, the vast majority of consumers pay off their loan in time. Therefore, the question of defaulting on loans only affects a small number of borrowers. However, it’s an important issue to consider as forbearance and fair treatment are two characteristics of an ethical lender. First of all, we will examine payday loan companies in 2011-12 when the OFT was preparing their report. You might be shocked by the standard company practices at this time. After considering fees, using CPAs and their debt collection tactics, we’ll compare and contrast this to the current standards.

OFT Consider Payday Loan Companies’ Debt Collection Tactics

Apart from the excessive use of rollovers (which often trapped borrowers in spiralling debts), the payday loans sector often attracted a lot of criticism before 2014. This was because of their unfair and sometimes unethical treatment of borrowers who were unable to repay their loans, along with their debt collection tactics.

In their report, OFT stated that lenders could have avoided many problems by conducting proper affordability checks in the first place. However, once they granted the loan, the OFT was concerned that lenders should treat defaulters fairly. People who are truly in financial difficulties need creditors to be understanding and considerate. Furthermore, they emphasised their Debt Collector Guidance, which they published in November 2012. Let’s examine this in more detail.

What is Fair Debt Collection?

The OFT Debt Collection Guidance lays out how creditors should treat people unable to repay a credit agreement.

First of all, they stressed that debtors shouldn’t be subject to aggressive practices and inappropriate cohesion. The lenders should never be deceitful, oppressive, unfair or improper. Specifically, unfair practices include contacting debtors at unreasonable times or intervals and pressurising them to repay more than they could afford. Other oppressive tactics included expecting full repayment within an unreasonably short period of time.

Fair Debt Collection Practices

Even before their investigation, the OFT realised the most people were complaining about payday lenders’ aggressive debt collection practices. Although they pointed out that these complaints only concerned a small minority, these companies represented a significant share of the market. Their tactics included bombarding debtors with phone calls – both on their mobile and at work – up to 16 times a day.

Furthermore, lenders would harass borrowers by phone and use CPAs repeatedly to recover as much of the debt as they could. They did this irrespective of the consequences for the borrower when they cleared out their bank account. The OFT ordered lenders not to use CPA in a way which was “unreasonable, disproportionate or excessive and fails to have regard to the possibility that a borrower is in financial difficulty.”

Of the 686 complaints received by the OFT in this period, 61% concerned unsatisfactory debt collection tactics. Many others addressed the high charges for arrears and defaults. Let’s compare what they expected to what actually occurred.

Payday Lenders Charging Unreasonable Fees

The OFT’s guidelines stated that any fees or additional charges on borrowers’ accounts in arrears should “reflect the actual and necessary costs”. This includes the cost of measures taken to recoup the sum borrowed. Is this what they found in their investigation?

No, not really. They discovered that one lender charged an average of £179 in fees during the 35 days after the repayment due date. These fees included the initial missed payment fee; the 7-day delay fee; the default fee after 35 days. They even charged separately for sending letters informing the customer that they were in arrears.

Debt Collection or Specialist Debt Advice?

As far as debt collection was concerned, 27 out of the 50 quick online loan companies in their survey had dedicated debt collection teams. By contrast, only 10 had specialist teams to deal with customers facing financial hardship. Their conclusion: it was more important to companies to recoup their money at any cost than to help customers. Treating people struggling financially with sensitivity and forbearance seemed to be at the bottom of their priorities.

14 companies also operated an employee incentive scheme to encourage employees to recover some or all of the borrowed money. In their investigation, they found examples of call scripts instructing staff to use phrases like “Your problem is not our problem”. In contrast, only 16 firms directed their defaulters to not-for-profit debt advisory services.

Debt recovery advisors said the focus was on getting their money back rather than negotiating a repayment plan. Companies who want to help customers should freeze/reduce interest and other charges or suspend their collection activities. Although many companies claimed they would negotiate, debt advisory services stated that they typically refused to reply. Moreover, if they did reply, they were often uncooperative, difficult to negotiate with and obstructive.

The FCA: Debt Collection & Defaulters

Since the FCA took over responsibility for payday lenders, several of the problems mentioned in the 2013 OFT report are now non-issues. For example, lenders can now only make two unsuccessful attempts at CPAs. Additionally, lenders can no longer take out a part-payment, and can only charge default fees up to £15. This is a drastic drop compared to £179 for a 35-day delay in making a loan repayment!

Unfortunately, debt collection tactics and fair treatment of borrowers didn’t become part of the official FCA legislation. However, the FCA did incorporate it into the Consumer Credit Handbook as an advisable business practice. Guidelines in the CONC state that lenders should give defaulters a reasonable time to defer payments. Additionally, they should accept any reasonable repayment plan – with token payments, if necessary – in this period. Furthermore, they recommend that lenders should suspend, waive, cancel or reduce charges when a client obviously has financial difficulties.

Debt Collection Since 2014: Treating Defaulters Fairly

Now, the majority of payday lenders are responsible and abide by a Good Practice Customer Charter. However, both Citizens Advice and Step Change continue to find examples of companies mistreating customers when they went into arrears with their payday loans.

Citizens Advice reported that only 44% of customers who contacted their lenders were able to agree on a repayment plan. Step Change found a bleaker situation with only 29% successfully negotiating an affordable repayment plan with their payday lenders.

Nearly half of the debtors in the 2016 Citizens Advice survey had all charges frozen. In addition, companies referred 60% to free debt advisory services. Just under half of the participants in the StepChange study were given details of free debt advice.

Additionally, just under a quarter of participants received notices demanding repayment after notifying their original creditor of their financial difficulties. Moreover, companies threatened 11% of defaulters with enforcement action, including county court hearings. Meanwhile, lenders offered 4% a new same day loan although they were obviously struggling to pay the debt they owed.

Debt Collection: In Conclusion

In their 2014 study, the Competition & Markets Authority found that 88% of short-term loans were fully repaid on time, early or a day late. Finally, the 2016 Social Market Foundation survey found that 92% of people were borrowing without incurring additional costs. As you can see from the statistics, payday lenders have made great strides in improving their debt collection practices and putting the customers’ needs first.

The FCA cap on the owner of the debt’s total repayments has abolished sky-high fees and other default charges. However, the issue of forbearance and unacceptable debt collection processes remains a subject for concern.

Insisting that borrowers make their repayments (especially after they have supplied proof of a change in circumstances) is a short-sighted business practice. It would be far more suitable to allow token repayments or agree on an affordable repayment plan. This would ensure that the lender received at least some money until the defaulter’s circumstances changed. Above all, such tactics are a sign that the lender isn’t following a Good Practice Customer Charter. Here at Quick Loans Express, we are fully committed to lending responsibly. This is not only at the loan application stage but throughout the life of the loan. Of course, if you encounter difficulties with repayment, our experienced agents will help you come to an agreeable arrangement.

Taylor Rose
Taylor has been an avid writer since her early school days. At 5, she was creating candy floss planets where heroic candy canes stood up to the evil Russel Sprout. Later, she was documenting historic events, and her writing was always appreciated by all who read it. After working as a program developer for many years, she traded her successful career to make a living out of her writing skills. Nowadays, Taylor helps the Quick Loans Express blog bring current and useful information to people looking for helpful financial advice online – hopefully with a fun twist!

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* Warning: Late repayments can cause you serious money problems. For help, go to moneyhelper.org.uk.