Bank of Lithuania: Without regulation being tightened, instant credit market issues will only increase in scale
The consumer credit market data for the first half of this year reveal that the number and amount of payments overdue continues to rise fast and that in increasingly more cases the debt is transferred to third parties for enforcement (to the court and in a pre-trial way). Some clients of instant credit lenders who are unable to repay their debts also put their property at risk — the number of arrests of property has been growing at fast rates.
“The latest statistical data and information collected during inspections show that the problems in the consumer credit market persist. Mainly — superficial assessment of solvency, which leads to customers’ sudden indebtedness. Obviously, the present regulation by law is insufficient to avoid rising debts, bad credit histories, arrests of property and unfortunate aftereffects,” says Ingrida Šimonytė, Deputy Chair of the Board of the Bank of Lithuania. “The Bank of Lithuania is currently compelled to act post factum in addressing complaints and punishing for violations, behind which lie already accumulated troubles, although a much more positive impact might be expected from their prevention, the strengthening of which requires amendments to the Law on Consumer Credit.”
The trends in the first half of this year show a fast increasing number of credits above EUR 290 granted. Their number rose by 67 per cent year on year (the number of credits granted — by 154 thousand), while their amount — by 48 per cent, to reach EUR 100 million. Increasing lending in larger amounts resulted also in a faster increase in customers’ debts. The number of credits overdue for 60 consecutive days increased by more than 11 per cent and reached 174 thousand. Every third consumer credit was repaid with a delay of more than two months. One-third of those who were late to repay a debt were persons aged up to 25.
The actual degree of indebtedness is disguised by the extended credits statistics: every fourth credit was extended at least once, of which as many as 40 per cent were extended five times and more.
Growth in customer debts entails growth in the number of credit agreements under which the debt of extended credits is being transferred to third parties for enforcement. As of 30 June 2015, 136.4 thousand consumer credit agreements were transferred for credit enforcement: 61.3 thousand for enforcement by applying to the court (a year-on-year increase of 46%), 75.1 thousand — for enforcement in a pre-trial way (a year-on-year increase of 11%).
According to the data from the Central Mortgage Office, the number of arrests of property, initiated by consumer credit lenders, has been growing particularly fast as well. At the beginning of 2013, there were 629 such arrests (as of 1 July 2015), while this year (as of 1 July 2015) — already 7,847; thus, their number increased by more than 12 times. Over the first half of this year alone, the number of arrests of property rose by 36 per cent.
“Despite the efforts to shift responsibility for irresponsible behaviour to customers, the data provided by credit lenders show that 5 per cent of customers who had indicated in their applications as having no income or that it was not stable, were issued a credit nonetheless. According to the data from Sodra, such customers comprise as many as 21 per cent,” said I. Šimonytė.
According to her, the Bank of Lithuania as far back as in 2013 submitted proposals on how to improve the Law on Consumer Credit in pursuit of responsible lending.
It is proposed to introduce an obligation for a consumer credit lender to collect documents evidencing income and liabilities, so that the credit lenders were unable to rely solely on the information provided by the consumer, unsubstantiated by any documents. Currently, credit issuers are trying to avoid mandatory checks, claiming that they do this “where necessary”, as provided by the Law; however, the debt statistics and comparison of data with the data from Sodra clearly are witness to the effort to comply with the Law formally rather than with its spirit.
Moreover, the responsibility for the irresponsibly assessed possibilities for a customer to repay a credit should not rest on the credit taking party, as it is at present, but on the credit issuer, i.e. where a credit extending company has unduly assessed the customer’s solvency, in cases of a delay in payments, the consumer should not pay the credit issuer not only penalties and fees, but the interest fixed in the agreement as well.
It is also proposed to cut the annual percentage rate of charge for consumer credit, to limit the possibility of concluding a consumer credit agreement without prior consideration, to obligate the consumer credit lenders to verify all of the information received from customers, to provide for additional requirements for advertising, proportional fines for violating the Law.
The proposals submitted by the Bank of Lithuania have been included in the amendments to the Law on Consumer Credit, prepared by the working group set up by the Seimas, the draft of which was registered in June this year. The Bank of Lithuania expects these amendments to be debated during the Seimas’ autumn session.
Having since 2012 taken over the oversight of the consumer credit market, the Bank of Lithuania has dealt with 48 cases of violations to the Law on Consumer Credit according to claims received or on its own initiative; in as many as 40 cases (87%) it applied enforcement measures. Fines were imposed on ten consumer credit lenders, in the amount of EUR 85 thousand. Some companies have appealed against the decisions in the court; therefore, the supervisory authority will announce publicly the violations of the provisions of the Law only after the termination of the judicial proceedings.