Saturday, 26 October 2013

Ten years on and the debts get bigger

PERSONAL finance calamities like that of the couple whose small loan grew into a £384,000 debt could soon be a thing of the past after measures announced in the Queen’s Speech last week to crack down on loan sharks and curb lending by credit companies.
Tony and Michelle Meadows, of Merseyside, fell behind with the repayments on the £5,750 they borrowed in 1989. By this year their debt was 67 times bigger than the original loan.

At Liverpool County Court, Judge Nigel Howarth set their debt aside. But many borrowers have not been as fortunate.  Successive Directors-General of Fair Trading have grappled with the widespread problem of personal debt for years. In 1991 Sir Gordon Borrie published a report, Unjust Credit Transactions. He had been asked by the Conservative Government to report on what changes in the law were needed. A few months ago, the Office of Fair Trading reminded us that the changes he recommended are still awaited.
Agonising as debt problems are for thousands of families — and Britons are an estimated £1,000 billion in debt — most involve reputable lenders whose terms are not inherently unjust. In the hard core of “unjust” transactions, the lenders are on the fringes of the market and engage in what Sir Gordon called “socially harmful lending”. This phraseology echoes the Crowther committee, which reported in 1971 that there was “a level of cost above which it becomes socially harmful to make loans available at all”, and that some people were of such poor financial standing that they “ought not to be eligible for loans from the private sector”.
Nor is the question simply one of exorbitant interest rates. In the Meadows case the annual percentage rate was 34.9 per cent. Pretty steep, you might think, but actually quite modest in comparison with some of those cited by Sir Gordon, rising to more than 1,000 per cent. What seems to have prompted Judge Howarth’s highly unusual decision is that interest was charged on arrears of interest as well as on the original loan, and that the lender induced the couple, as a condition of lending the £2,000 they had asked for, to take a further loan of £3,750. The judge regarded this as a disguised cost of credit, which meant that the loan had been mis-stated and was thus unenforceable.
The Consumer Credit Act 1974 tried to tackle the problem by introducing the concept of an “extortionate credit bargain”. Section 171 states that if a debtor or surety alleges that a credit bargain is extortionate it is for the creditor to prove the contrary. The Act declares that a credit bargain is extortionate if it requires the debtor to make payments that are grossly exorbitant, or if it otherwise grossly contravenes the ordinary principles of fair dealing. It gives the court wide ranging powers to set aside or alter such an agreement. Judge Howarth expressly found that the agreement before him “does grossly contravene the ordinary principles of fair dealing”.
Yet surprisingly few debtors have made use of these provisions. The optimistic inference is that there are very few extortionate transactions. A more realistic one is that cases are few because the courts have given the impression that it is even harder to show that a bargain is “extortionate” than it was, under the old Moneylenders Acts, to show that it was “harsh and unconscionable”.
One of few cases to have gone as far as the Court of Appeal is Coldunell v Gallon (1986). The creditor had lent money to a very elderly couple on the security of their home, knowing that they intended to lend it to their son. The son ran off with the money, and the Court of Appeal held that the lender had been under no obligation to see that the aged parents received independent advice: it was sufficient that the creditor “acted in the way that an ordinary commercial lender would be expected to act”.
Certain cases have been dealt with more sympathetically by the courts, not under the provisions on “extortionate” lending but under the law on undue influence. Guarantors whose known relationship to the borrower raises a presumption of undue influence have sometimes been relieved of liability if the lender took no steps to ensure that they received independent advice. Such guarantors are often women providing security for a male borrower — leading to what one female academic described as “sexually transmitted debt”.
Decisions such as Judge Howarth’s are likely to remain rare. If there were too many of them, loans for those with a poor credit record would dry up. In the meantime, credit card companies will soon be subject to strict guidelines, loan sharks will be raided, prosecuted and fined, and people who run up massive debts will be able to get help from an independent ombudsman rather than face court procedures. And all lenders will have to explain the costs of credit, before and after an agreement, to protect vulnerable people from taking on far more than they can afford.
The author is a barrister and CAB adviser.

All this was a decade ago and the authorities have done nothing.  Debt has escalated and there are those who rejoice in the present situation.  We still have a ‘new people’ who believe that debt is acceptable and is preferable to ‘doing without’.  When ‘doing without’ is mentioned it is rammed down every ones throat that we all have the Right to Have!  No, we do not!  If you cannot afford something, then you cannot afford it.  That is why it is cruel, cynical and just plain wrong to tell the whole nation that they should purchase their own homes. If, by purchasing, they mean being in a permanent condition of unaffordable debt, then that it wrong.  If the Germans and French can survive and in the German situation prosper by renting, so be it!  Let’s get back to living comfortably and not dying in poverty. 

When we die all those material gains disappear as easily as our ashes get blown away in the winds.
In the above sections it mentions interest rates of under 40% as being excessive.  Wonga charges over 4000% (that is four thousand percent), and the queues outside their shops says this is more than acceptable?  I will just shake my head in angst for the coming generations.