October 30, 2004

Usurping Usury

One of the big stories in the news over here, other than the US Presidential elections, is that a court actually said that it was possible for a loan agreement to "grossly contravene the ordinary principles of fair dealing."

For my American readers this may sound strange. After all, in this age of consumer credit protection, there are restrictions on how lenders can swindle money out of borrowers. There are caps on the level of interest that can be charged. Even department store credit cards top out at less than 25% APR.

This is not the case in the UK. What prompted the judge at Liverpool County Court to make the above statement as he wiped out the remaining debt of Tony and Michelle Meadows? The Meadows had borrowed 5,750. After paying back about 25,000 they still owed 384,000. No, there is no typo there. They borrowed about $11,000. They paid about $50,000. They still owed about $750,000. The Mafia was not involved.

The case was in court because London North Securities, which bought the original note from Home Loan Northern, was seeking a repossession order on the Meadows' home. The Meadows had gone to Home Loan Northern to borrow 2,000 for a home improvement loan. They were persuaded to borrow an extra 3,000 to pay off their mortgage and then charged 750 for an insurance policy they didn't want. They missed payments, so the 34.9% APR began to accrue against the late payment penalties, interest, and legal fees. Even though they managed to fork out 25,000, they could never get ahead.

Loan companies like Home Loan Northern are reaping windfalls like this by preying on the poor and those with bad credit. But at 34.9%, Home Loan Northern isn't even in the same league as Provident Personal Credit. Provident sends agents door to door, particularly in council estates, hard selling loans. They've yet to find a poor person they can't make poorer still.

At this point, my American readers may need to sit down. Provident offers a credit card. The annual percentage rate is 152.3%. Unbelievably, the rate for their specialty, cash loans, is even higher. They lend money at 177% APR. I am not making this up. I am using their own numbers, openly published on their website.

You can see now why this ruling in Liverpool has rocked the country. It has no precedential value. No other judge is bound by it. It has, however, broken the ice. In commenting upon the case, the presiding judge at Central London County Court said that other judges might be encouraged to make similar decisions. The Government, which has repeatedly shelved interest-capping consumer credit legislation, may actually want to do something now.

Posted by david at October 30, 2004 02:52 AM | TrackBack