Amendments of the Financial Services Bill in the United Kingdom may force payday lenders to rethink their services.
A bill, which was implemented in January, is being amended by the British Parliament to require more monitoring and regulation of payday lenders by the government in hopes of keeping lenders from taking advantage of the underbanked population. Once the changes are in place next year, more information about the ways of the unbanked and underbanked may bring new risk management challenges.
The amendments would limit the number of times a borrower can rollover a loan to three times, freeze the interest rates for any borrowers that are in a hardship and require a minimum of 30 days of "breathing room" for borrowers to sort out finances. The bill would also create a new monitoring framework and bigger fines if payday lenders break the law.
The bill was created because the Office of Fair Trading (OFT) found annual interest rates on payday loans were over 4,000 percent last year. The Office also found that while payday lenders often provide needed service to the underbanked and unbanked populations, there are also few other loan alternatives for the underbanked. Still, the OFT threatened drastic measures if there are not improvements in interest rates.
To open a payday loan service, lenders will be required to show the Consumer Finance Association (CFA) their business plan to receive a license, as well as keep up with records with the intensified government monitoring. With these amendments, credit bureau software can help lenders avoid fines or closures.
Though the CFA claims the industry is "highly regulated," the new changes may create alternatives as payday lenders are forced to cut back on raising interest rates or deny loans to borrowers with multiple loan rollovers.