Ever wondered what happens to old loans when new legislation comes into effect? In the past few years, the payday loan industry has been totally transformed by new payday loan regulations – so what happens to loans taken before?! Quick Loans Express explores.
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In this article, we focus our attention on the issue of the price cap. What happened to those borrowers who took out a loan in 2014 before the FCA implemented the cap? We examine what provision if any, the FCA made for these people. Finally, we give consumers advice about what to do when new laws are announced for financial products like new payday loan regulations.
Let’s start by briefly explaining the new payday loan regulations like the price cap for short-term loans.
The Price Cap: New Payday Loan Regulations
From 2nd January 2015, the FCA announced that the new rules for the high-cost short-term industry would be:
- the interest rate for the outstanding sum owed on a loan could be no more than 0.8% per day
- the cap on default fees (for late payment) was set at £15
- the total cap on a loan was no more than double the amount borrowed (including all interest, fees and additional charges).
The cap applied to all charges including those for administration and debt collection. For loan roll-overs, the cap applied to each new loan agreement in the same way as it did for the original loan.
What about Borrowers with Pre-Cap Payday Loans?
The question of borrowers who had taken out a loan before 2nd January 2015 hadn’t been covered adequately in the original legislation. It was brought to the attention of the FCA by payday lenders during the consultation period in the latter half of 2014. Therefore, the FCA had to adjust the rules accordingly.
The FCA pointed out that previous legislation (including limitation on roll-overs and the misuse of CPAs) had already caused a shrinkage in the payday loan market throughout 2014. Cash loan lenders and payday lenders had also tightened up their lending criteria since they knew that the implementation of a price cap was in the pipeline. As a result of these two factors, the FCA believed that the numbers of people struggling with debts from before 2015 and not eligible to the limitations of the cap would be very low. So what did they decide?
Re-Financing a Pre-2015 Loan
The FCA decided that if a payday loan agreement was modified after 2nd January 2015, then any charges imposed beforehand had to be taken into account when calculating the price cap. This modification covered changes in the loan agreement like a roll-over (and not variations unrelated to price like a change of address).
The FCA recognised that this ruling might make a payday lender reluctant to refinance a loan in this changeover period. Therefore, they advised any firms with borrowers struggling with pre-2015 loans (including those refused a roll-over).
Although the price cap legislation wouldn’t cover these borrowers, they would be covered by previous industry guidelines. They reminded lenders that they were obliged to comply with the FCA Principles for Business and CONC 7 in their Sourcebook. This states quite clearly that lenders should treat consumers in arrears or who default with due consideration. This fair treatment includes the suspending, waiving, reducing or cancelling of any further interest or charges.
Advice about Changing Legislation
It’s possible that other financial products in the high-cost short-term market will have legislation imposed on them when the FCA releases a final report in the spring of 2018. What should borrowers do if they find themselves in a similar situation to people who took out instant payday loans in 2014 under the old rules?
Evaluate the Situation
When you use any financial product, you should make sure you know all about it and equally importantly, your rights. Evaluate the situation when new legislation is in the offing. See whether it would be possible to delay buying the product until the new legislation is in place. This will give you greater consumer protection.
Contact your Financial Service Provider
If you have problems (such as in the repayment of a loan), you must contact your financial service provider as soon as you realise. Don’t wait until you’ve already defaulted on the terms of the cash loan. Don’t put your head in the sand either. Ignoring all communications from them isn’t going to make the problem go away.
In your call to your financial service provider, explain the exact problem and how you intend to rectify the situation. Give a timeline of when you’ll be able to pay.
If you expect your problems to last some time, ask for forbearance and/or an affordable repayment plan. When new legislation has been imposed, firms tend to be more willing to meet defaulters halfway. This is partly because the unscrupulous tend to leave the market.
Complaining about Financial Service Providers
If you have repeatedly contacted your financial service provider and they’re reluctant to compromise, it might be time to complain. If you feel you’ve exhausted all avenues with the firm, you can address your complaints to the Financial Ombudsman Service. The FCA has made it clear that additional charges are unacceptable if agreeing led to an unacceptable risk of harm to the consumer. If you’re worried about how to formulate your complaint, organisations like Citizens Advice can help you.
When new industry regulations like new payday loan regulations come into effect, it’s evident that there must be a cut-off point. Applying new legislation to previous financial agreements wouldn’t be fair to the businesses which operated in good faith and based their business model on the old rules.
Unfortunately, this usually means that some consumers miss out because of the timing. This doesn’t mean, however, that you are left to fend for yourself. The pre-existing legislation is there to offer you a degree of protection. Don’t be afraid to contact the firm to ask for help. As we have seen in the case of payday loan legislation, the remaining firms are the ones you can trust, the ones that comply with the rules.