Consumer Personal Loans: Legal and Regulatory Analysis
Most countries around the world have put almost similar laws and regulations that guide personal consumer lending. However, almost identical, the laws and regulations are made by each nation to suit consumers in their respective jurisdictions. Of the measures put in place in various countries are- Introducing capping on consumer loans, disclosures, risk warning and advertising, and enforcing responsible lending among lenders.
Capping Credit Cost
- Generally, most countries have put capping legislation on consumer loan products. The capping is mainly on the interest rate and the general cost of credit. The assessment done by some countries has shown that introduction of caps has a decisive role in mitigating consumer exploitation. Capping legislation has also led to a reduction of defaults and over-indebtedness to consumers.
- For Instance, in Poland, the Act amendment on financial supervision in Banking Act of 5th August 2015 and coming to force on 11th march 2016 introduced a cap on Non-interest cost of credit, “which cannot be higher than 25% of the total credit (loan) amount plus 30% of the total credit (loan) amount per annum.” Additionally, “the non-interest charges will no longer be permitted to exceed 100 percent of the total amount of the credit.”
- In South Africa, the presence of staggered capping for short-term consumer credit has discouraged reckless lending. The rate cap stands at 5% in the first year and 3% in subsequent years.
- In 2013, Chile introduced a law capping on the nominal interest rate, which gradually reduced the rate from 54% previously to 36% currently.
Disclosure, Risks Warnings and Advertising
- Most countries have set out regulations for lenders to disclose the terms and conditions of personal loans. In the disclosure document, consumers are advised on the cost of credit they are about to take. Disclosure of such information is meant to encourage borrowers to assess their choice better and find an alternative source of financing.
- In some Jurisdictions, lenders are advised to include warnings that redirect consumers to the web page of the financial regulator.
- A study conducted by the European Commission noted that well-designed information disclosure also supports a more effective decision-making journey by consumers to compare offers or by facilitating their understanding of the loan products’ characteristics.
- In Hong Kong China, lenders must provide a copy of the terms of the agreement to the borrower and, since December 2016. Lenders the country are required to keep written, video, or audio records, which shows that they explained to the borrower all terms and conditions of the loan agreement before entering into such a contract.
- In Ireland, the Central Bank of Ireland (CBI) requires all Moneylenders to display the warnings in prominent codes. It is also a requirement for lenders to “prominently indicate the high-cost nature of the loan on all loan documentation where the APR is 23% or higher.”
- In the United Kingdom, High-Cost Short Term Credit (HCSTC) must also carry a prominent risk warning that redirects consumers to the website of the authority in charge of debt advice in the country, the Money Advice Service.
- Most countries around the world have emphasized lenders to apply responsible lending obligations when lending personal loans to consumers.
- In the Czech Republic, the consumer act of 2016 introduced stricter measures on creditworthiness assessment. Lenders are required to "collect detailed information on clients' income and financial liabilities and are under the obligation to verify information given by the consumer according to a particular situation."
- On 19 November 2015, Lutheran president signed amended and supplemented Law on Consumer Credit, which was adopted by the Lithuanian Parliament. The amended law, which came into effect in February 2016, required lenders to ''inspect databases and available registers whenever assessing customer creditworthiness. Lenders are required to update information on the creditworthiness of consumers in case of an increase in credit amount. The lenders were previously required to do so if information obtained from the customer was insufficient.
- In 2010, Japan introduced limits that prohibit lending to consumers amount exceeding one-third of one's annual income. Previously, persons were allowed to borrow as much the lending firm could offer.
The research team set out to determine the law and regulations applied in different countries when lending to personal consumer loans. The team was able to identify almost similar rules that were implemented in nearly all countries the team picked. The team determined that rate capping, disclosure, and risk warnings as the principal regulations which have been amended in 10 years by different countries to suit and protect consumers in their jurisdiction.