State to tidy up chaotic fast loans market

Photo: Marko Saarm / Sakala

As soon as fast loan firms appeared on our business landscape, problems promptly surfaced – sky high interest and credit cost rates; fast transfers of debts to bailiffs; people caught in debt spirals; assuming of loans on children’s accounts; and the like. Thus, the fast loan debts have grown into a social problem.

Lately, economy ministry has been looking into the fast loans market; at the end of January, results thereof were presented to the Finance Committee of Riigikogu.

Working group weighs proposals

At the initiative of economy ministry, a working group was formed; in addition to economy ministry, it also includes ministries of finance, justice, and social affairs; Financial Supervision Authority, and Consumer Protection Board, which are supposed to bring fourth proposals for the government to discuss. The officials hope the government will then hand tasks to ministries, to go on working with the proposals falling in their respective domains, then filing draft legislation.

How fast loan firms are planned to be regulated, isn’t clear as yet. According to Indrek Niklus, private law department chief at Ministry of Justice, they deem regulation of the issue as important.  

«In light of the issue, we have for instance proposed lowering the credit cost ceiling. Therefore, we have already imposed limits to credit cost size, and creditors are under legal obligation to check the consumer’s ability to pay the loan back,» said Mr Niklus.

Also, creditors must provide customers with vital information regarding the contract sighed. In consumer credit contracts, it is not permitted to claim contractual penalty; also, the consumer is granted the option to demand reductions of interests on account of late payments.

«Also, we have considered limiting accessory expenses i.e. collection costs and a ban on use of arbitral tribunals in matters related to fast loans,» said he.

The above measures should help deliver consumers from unreasonable costs like payments for letters reminding them of debts etc.

As an example of how to regulate fast and consumer loans, Finland is the first choice. The Finnish law is obliviously more radical than the new European rules.  

According to Rain Sepp, CEO of fast loans company Credit24, their amendments of law were obviously done in a hurry, as many issues do now work and the expected results haven’t been achieved. For instance, 50 per cent (plus Euribor) was established as credit cost rate ceiling for under €2,000 loans.

«What happened was that some companies raised their loan limit to €2,010, and the old prices continued,» said Mr Sepp.

According to Mr Sepp, a much more effective measure is separating fast loans business from the debt collection business. «The problem is that if partners own both fast loans and collection businesses, there is no motive to only make optimal loan decisions i.e. only to lend to good clients or those that can pay the loans back,» said Mr Sepp.

«At times, the profit comes from collateral claims or even real estate sales. With these two things together, the companies are not aiming at good credit decisions, rather to earn on the entire loan cycle of the customer,» he added.

Ten-fold claims

To put it simply: loan market has two business models – one diligently assesses the clients and only loans to those able to pay it back. The other model is throwing the money out of the window, so to speak, and then head after it. «In my opinion, collateral claims are of the Devil,» says Mr Sepp. «Ten-fold claims are no fiction; these are the extreme cases, but they do exist,» said he.

The other example is Latvia, where creditors not under financial supervision undergo obligation to be licensed and to report.

The last week but one, sod dems in Riigikogu initiated a bill pursuant to which it will be the Financial Supervision Authority (FSA), not Consumer Protection Board, executing supervision on fast loans market. FSA chief Kilvar Kessler said at the beginning of February that they are basically ready to do that.

«I have said that we are the servants of the people; if the desire is there, if the legal framework is there and we have the resources, we would do it diligently,» said Mr Kessler.

Fast loans market

•    over a 100 companies, 50 per cent of the volume generated by 6 companies

•    loan balance (at end of 2012) €118m

•    growth 30 per cent a year

•    numbers of clients 130,000 – 140,000

•    credit report (Krediidiinfo) holds 65,344 problem claims

Source: economy ministry