Queens University Belfast: Certificate in American Business Practice

Leah Rea (40084324)

Business Report Subject: Payday loan companies, their operation and
governing legislation, a comparative study between the USA and the UK.
~ Study USA project requirement.
Due: 30/06/2015
Report: An analysis and comparative study of payday loan companies in both
the United States of America and the United Kingdom and the relevant
regulatory legislation of each jurisdiction.
Purpose of Report:
Payday loan companies are a widely used option for those seeking short-term loans to cover
the costs of unforeseen circumstances between pay cheques. They originated in the United
States (hereafter the US) prior to their operation and growth of same in the UK. Such loans
were sought more frequently during the recent economic crisis which operated on a global
scale and therefore affected both the US and the UK. However, subsequent investigations in
both countries have revealed that these companies charge abnormally high interest rates
which could exploit the more economically vulnerable borrowers and inevitably trap these
borrowers in a destructive cycle of constant borrowing to pay the accumulated interest alone.
There have been warnings in both the US and the UK that vulnerable borrowers are prone to
exploitation by payday lending. The UK responded to these concerns with implementing
recommendations derived the report from the Competition and Markets Authority to the
Financial Conduct Authority. In the US, the Consumer Financial Protection Bureau is due to
release the first draft of federal regulations to govern a wide range of these loans. It is to be
determined whether the implementation of such protective legislation will assist borrowers
and prevent payday loan companies from exploiting the vulnerable.
This report seeks to:
1) Analyse the existing operational structure of payday lending in each jurisdiction;
2) Determine whether the existing operational structure of payday lending could exploit
vulnerable borrowers in each jurisdiction;
3) Identify and compare the existing laws and regulations operating in each jurisdiction;
and

4) Consider the response of the legislature in each jurisdiction regarding whether the
existing laws and regulations should be amended or undergo reform in each
jurisdiction.
The report will reiterate the importance and the necessity of governmental regulation of
payday loan companies in both the US and the UK. The result of this report will ultimately be
to confirm that the level of protection afforded to vulnerable borrowers is proportional to the
level of governmental action in the form of the implementation of legislation. The report will
highlight the similarity in both jurisdictions in terms of:

Borrower misunderstanding of loan terms, use of short-term loans for long-term

solutions and lack of understanding the ramifications of the costs and risk accrued by

this practice,
Lender failure to ensure borrowers understand their terms and the consequents of

rolling-over loans and accumulated interest, and

Subsequent exploitation of vulnerable borrowers by payday loan companies seeking
to maintain their competitive edge over rivals in a competitive, growing market.

It will emphasise that payday loan companies must continue to be subject to close scrutiny by
financial conduct authorities in both jurisdictions to ensure the protection of vulnerable
borrowers.
About this report:
This report originated following a brief discussion of payday loan companies in the authors
Personal Financial Planning module of study.
Research was undertaken to determine:

the extent of operations of payday lending in both the US and the UK;
the legislation governing such practices; and
the subsequent response in both jurisdictions following from concerns of
irresponsible lending practices.

Information was collected from multiple sources:

Newspapers, both national and local in the US and the UK;

Online outlets of national and local Press in the US and the UK;

Official reports available on governing bodies websites pertaining to investigatory

results; and
Financial websites.

Any references, statistical data and quotations gathered from used sources are referenced
throughout. A complete and listed bibliography follows the conclusion of this report.
Newspapers, both printed and online editions feature heavily as sources, as the author wanted
to convey the rapid development of the payday loan practice, especially in the UK, and the
response of the regulatory authorities regarding instigating investigations. Furthermore, there
is a lack of academic articles in the specific area this report seeks to cover. It is submitted that
as the main investigatory research into payday lending has been undertaken in both
jurisdictions by charities which seek to assist those suffering in debt, or by independent
regulatory authorities such as the Office of Fair Trading (OFT) in response to consumer
advocate organisations concerns, there is a case to be made that vulnerable borrowers are
liable to exploitation.
Introduction: A summary of payday loan companies.
Prior to examining the operation of payday loan companies and the governing legislation
within each jurisdiction, it may be useful for the reader to be provided with an explanation of
payday lending. This analysis of the operational structure will also determine whether
borrowers are liable to exploitation.
Payday lending can be characterised by small-monetary, short-term, unsecured lending1 to
borrowers who are typically experiencing short-term cash flow difficulties, generally as a
result of unforeseen and unexpected costs e.g. a car breakdown or incurred medical expenses
such as dental work. They can be acquired through storefront or online companies. Some
insured depository institutions, including banks, have failed to adequately and properly
assess, minimise and control the associated risks of their payday lending programmes. Such
associated risks include the fixed rate of APR, which will frequently be found to be of an
almost hyper-inflated rate. This is because these loans have such short terms to maturity2;
1 Federal Deposit Insurance Corporation (FDIC)
https://www.fdic.gov/bank/analytical/fyi/2003/012903fyi.html (last accessed
17/06/2015)
2 Ibid.
3

therefore the cost of borrowing can range from 300 percent to 1,000 percent, or more. Whilst
payday loans tend to be used to cover short-term issues, if additional loans are secured or the
original loan is rolled-over by the borrower, the costs become long-term, triggering the
steep APR. To prevent usury (unreasonable and excessive rates of interest), some legal
jurisdictions in the US limit the annual percentage rate (APR) that any lender, including
payday lenders, can charge. Some state jurisdictions outlaw payday lending entirely, and
some have very few restrictions on payday lenders. Caps on such interest rates in the UK
came into effect in 2015.3 The failures of such insured depository institutions have been
uncovered through investigations in both the US and the UK, which will be discussed in this
report.
The resulting consequences of such deficiencies in risk management practices for payday
lending programmes can be severe. Such severity depends on the company itself, and the
circumstances of the borrower. Nonetheless, such consequences are evident in both the US
and the UK, as this report demonstrates.
How payday loans work:
1. Person A encounters short-term financial problems. They seek a small loan as a
solution. They may shun their bank for fear of costs, or cannot be approved for a
short-term loan.
2. Payday loan company B can provide the required loan, to be paid back within a short
period of time.
3. Person A becomes the borrower, and Company B the lender.
4. A will usually offer a post-dated cheque to B to cover the eventual repayment of the
loan, including interest.
5. B agrees to defer presentment of the cheque until the As next payday.
6. At the next payday, A may redeem the cheque by paying the loan amount plus the
finance charge, or B may cash the cheque.
The situation may prove problematic should A lack sufficient funds to pay additional
obligations, such as bills, upon repaying the loan plus accumulated interest to B. A may have
to acquire a secondary loan from B to fulfil these financial obligations.
There are significant risks posed by engaging in borrowing from payday loan companies.
There have been accusations from independent investigatory bodies in both the US and the
3 Peachey, K. Payday loan charges cap takes effect BBC News (02/01/2015)
http://www.bbc.co.uk/news/business-30641877 (last accessed 12/06/2015)
4

UK that these risks are not properly advertised or discussed with the borrowers.4 Whilst the
higher pricing on payday loans promises higher revenues and wider margins for lenders, for
borrowers the high interest rate charges pose a challenge in paying back the loan. More often
than not, borrowers find that the amount of interest owed in excess of the fixed amount they
borrowed is the primary reason for their failure to pay back. As previously mentioned, payday
loan companies often charge abnormally high interest rates, which has attracted criticism that
these companies exploit the more economically vulnerable borrowers and inevitably trap
these borrowers in a destructive cycle of constant borrowing to pay the accumulated interest
alone.
In both the US and the UK, the number of payday lenders has grown in recent years as more
companies have been attracted by the higher fees earned on payday loans, as well as an
increasing high level of consumer demand for such short-term, small denomination credit.
New payday participants include large regional or national multi-service providers of payday
loans and large regional or national payday loan entities. There is widespread evidence to
suggest that the increase of borrowers with payday loan companies is directly proportional to
the global economic recession.5 The number of people turning to payday loans to help them
meet the cost of short-term financial difficulties has also increased in both the US and the
UK.
This report will provide a comparative analysis of the operation of these payday loan
companies and the governing legislation. Firstly, the report will examine the users of such
payday loans in the US and the UK.
Who are the borrowers?
Evidence suggests that payday loan borrowers both in the US and the UK are typically those
currently experiencing cash flow difficulties and find that there are few, if any, lower-cost
borrowing alternatives available. Contrary to payday loan companies advertising, this report
4 For the US, see: Center for Responsible Lending
http://www.responsiblelending.org/payday-lending/ (last accessed 17/06/2015);
for the UK: Daily Mail online, More than 100 MPs sign motion to end 'legal loan
sharking' (21/09/2010) http://www.dailymail.co.uk/money/article-1313905/More100-MPs-sign-motion-end-legal-loan-sharking.html (last accessed 20/06/2015)
5 Burton, M Keep the plates spinning: Perceptions of Payday Loans in Great
Britain Consumer Focus (August 2014)
5

argues that the majority of borrowers in both the US and the UK utilise payday lending as
recurring income. As such, this report submits that based on the available information,
borrowers in both countries may be susceptible to exploitation and be caught in a cycle of
borrowing to repay. This is due to considering the annual earnings, general backgrounds and
the reasons for securing payday loans of surveyed borrowers, detailed as follows:

In the US, the average borrower earns $22,476 (14,281.40) annually. The CFPB
survey results show that the majority of borrowers came from those making between
$10,000 and $20,000 per year; this group accounts for nearly one-third of all payday
loans. 6Approximately one in four were receiving some form of state benefits.
Furthermore, during the twelve month study period, nearly half (48%) of borrowers
had undertaken more than 10 transactions, thereby entering the roll-over period.
Ethnic minorities and those living in rented accommodation are more likely to utilise

payday loans, according to Pews Trust.7

In the UK, the average borrower earns approximately 12,000 annually. According to
the OFT, a typical payday lending customer is employed, male and earning around
1,000 monthly whilst living in rented accommodation. They are often unmarried and
have no children.8 The Public Accounts Committee (PAC) has estimated that
approximately two million people have utilised payday loan companies in the UK,
mostly to pay bills and cover unforeseen financial difficulties. 9

6 Consumer Financial Protection Bureau, Payday Loans and Deposit Advance

Products (24/04/2013) http://files.consumerfinance.gov/f/201304_cfpb_paydaydap-whitepaper.pdf (last accessed 13/06/2015) pg 18-20
7 Pew Charitable Trusts Payday Lending in America: Who Borrows, Where They
Borrow, and Why (July 2012)
http://www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs_assets/2012/pewpay
daylendingreportpdf.pdf (last accessed 20/06/2015) pg 13
8 OFT Review of High-Cost Credit: Final Report (June 2010)
http://webarchive.nationalarchives.gov.uk/20140402142426/http://www.oft.gov.u
k/shared_oft/reports/consumer_credit/High-cost-credit-review/OFT1232.pdf (last
accessed 20/06/2015) 2.23
9 PAC Public Accounts Committee (PAC) Eight Report: Regulating Consumer
Credit (20/05/2013)
http://www.publications.parliament.uk/pa/cm201314/cmselect/cmpubacc/165/16
502.htm (last accessed 20/06/2015)
6

Payday customers generally tend to be frequent users of payday advances, choosing either to
roll over their credits or to obtain additional subsequent extensions of credit. There is
evidence which suggests the cash flow difficulties experienced by many payday customers
are a long-term credit characteristic, as opposed to a mere short-term temporary hardship.10 In
addition, there is further evidence to indicate that payday customers often tend to rely on
payday loans because they have either been turned down for other forms of credit, or offered
less credit than the amount for which they had applied.

In the US, the average borrower is in payday loan debt for five months per year, using
eight loans that last 18 days each. The average borrower uses payday loans as an

additional means of income.11

In the UK, the average borrower has restricted or no access to financial services.
High-cost credit can sometimes represent the only form of borrowing available. The
average borrower frequently utilised payday loans to pay regular bills and expenses
that their income level is not sufficient to meet.12

This report argues that based on the above findings from both jurisdictions, borrowers are
indeed likely to become immersed in a cycle of borrowing to repay. This use of payday loans
to pay monthly household bills in lieu of monthly wages ensures payday loans are utilised on
a long-term basis, and not a short-term basis as they are advertised. In turn, this increases the
likelihood of roll-over i.e. extension of the original loan or additional loans to pay the
original loan. Subsequently, the hyper-inflated interest rates of the companies are triggered,
resulting in an increase of monies and interest owed. As the above is liable to happen to the
average borrower on a lower monthly income, it is submitted that payday loans can exploit
these vulnerable borrowers. Furthermore, it is argued that this is known by payday loan
companies in both the US and the UK: that vulnerable borrowers are taking out loans they are

10 Morran, C. The Average Payday Loan Borrower Spends More Than Half The
Year In Debt To Lender (26/04/2013) http://consumerist.com/2013/04/26/theaverage-payday-loan-borrower-spends-more-than-half-the-year-in-debt-to-lender/
(last accessed 15/06/2015)
11 Ibid, see also n7
12 N8, 1.14, 1.19
7

unable to pay back in the short-term, and that payday lenders actually rely on this revolving
door format13 to secure their revenue in a competitive lending market.
The operation of such payday loans and the governing legislation of each jurisdiction shall
now be examined.
The US situation
The payday loan structure first emerged during the 1990s to cater to unfulfilled demand for
very small, short-term consumer loans. Payday lending is legal in 27 states, with 9 others
allowing some form of short term storefront lending with restrictions. The remaining 14 and
the District of Columbia forbid the practice. Payday lending is regulated at both state and
federal level.14 Legislation regarding payday loans varies widely between different states.
Typically, the state payday regulations exempt payday advances from usury or interest rate
ceilings in exchange for establishing maximum fees and rollover limits. Payday advances are
consumer loans and, therefore, are subject to the federal Truth in Lending Act. Federal
regulation against payday loans is primarily due to several reasons:
Significantly higher rates of bankruptcy amongst those who use loans (due to interest rates
as high as 1000%),
Unfair and illegal debt collection practices, and
Loans with automatic rollovers which further increase debt owed to lenders.
As for federal regulation, the DoddFrank Wall Street Reform and Consumer Protection Act
gave the Consumer Financial Protection Bureau (CFPB) specific authority to regulate all
payday lenders, regardless of their size and scope of operations. In addition, there is specific
legislation in relation to the US military: the Military Lending Act imposes a 36% rate cap on

13 Morran, C. The Average Payday Loan Borrower Spends More Than Half The
Year In Debt To Lender (26/04/2013) http://consumerist.com/2013/04/26/theaverage-payday-loan-borrower-spends-more-than-half-the-year-in-debt-to-lender/
(last accessed 15/06/2015)
14 Credit Research Center, Georgetown Universitys McDonough School of
Business, Payday Advance Credit In America: An Analysis Of Customer Demand
(April 2001) http://www.cfsaa.com/Portals/0/analysis_customer_demand.pdf (last
accessed 14/06/2015) pg8, 14
8

tax refund loans and certain payday loans made to active duty armed forces members and
their covered dependents, and prohibits certain terms in such loans.
The rates of these loans were formerly restricted in most states by the Uniform Small Loan
Laws (USLL) with 36%-40% APR being the generally accepted norm. Yet the relatively high
finance charge and APR of payday loans has attracted the attention of consumer advocates,
politicians and regulators and has led to several concerns15:
1) The price of payday advance credit is simply too high.
2) Borrowers may not be fully aware of the complete price of payday loans. This is
important for this information is necessary to make an economically rational
decision. The Truth in Lending Act requires disclosure of the finance charge and
annual percentage rate; disclosure alone does not ensure borrowers are aware of the
information.
3) The high price of payday loans inflicts a financial burden on borrowers, making it
difficult for them to pay-off the debt. Best Practices regulations, whether at state or
federal level cannot and do not prevent customers from taking out a loan at one
company to repay a loan from another.
4) The price of payday advances also reflects the high risk of these transactions. These
borrowers, as previously discussed, have a high probability of repayment problems,
which subject them to the collection process.
It is evident that although there is a plethora of regulatory legislation governing the operation
of payday loan companies, the legal ramification is that of a labyrinth, in which federal
legislation offers the most clear and concise instruction whilst state legislation can push the
federal restrictions to the extremes. Consequently, borrowers may engage in Russian roulette:
a borrower in one state may face a higher APR for a smaller loan than a borrower in another
state all within federal regulatory requirements16. This Russian roulette may be illustrated
with the following categorisation.
Pew17 has identified three categories of state payday loan legislation:
15 Ibid, pg18
16 Center for Responsible Lending http://www.responsiblelending.org/paydaylending/ (last accessed 17/06/2015)
17 N7 pg15-16
9

1) 28 Permissive states are the least regulated and allow initial fees of 15 percent of the
borrowed principal or higher; APRs usually in the range of 391 to 521%.
2) 8 Hybrid states with relatively more exacting requirements than Permissive states,
with at least one of the following three forms of regulation:
i) rate caps, usually around 10% of the borrowed principal, yet still permit loans to be
issued with triple-digit APRs;
ii) restrictions on the number of loans per borrower; or
iii) allowing borrowers multiple pay periods to repay loans.
3) 14 states and the District of Columba - Restrictive states which either do not permit
payday lending or have price caps low enough to eliminate payday lending in the
state.
Conversely, states which have prohibited payday lending have reported lower rates of
bankruptcy, a smaller volume of complaints regarding collection tactics, and the development
of new lending services from banks and credit unions. 18

Investigatory Conclusions:
As previously discussed, investigations carried out by regulatory bodies have highlighted the
flaws in the current practice and confirm this reports argument regarding the risk of
vulnerable borrowers suffering from exploitation. The CFPB published a white paper in 2013
following investigatory research into payday lending nationally.
The CFPB determined that the median amount borrowed by consumers is approximately
$350. Loan amounts are often limited by state law, with a common maximum loan size of
$500, though some states have lower or higher limits. Individual lender credit models may
also influence loan amounts offered. The mean loan size was $392, highlighting that there are
more borrowers with loan sizes substantially above the median than substantially below. In
addition, the CFPB found that the APR will vary significantly depending on the duration of a
particular advance balance episode and the fee charged by an individual institution.19
18 Silver- Greenberg, J. Consumer Protection Agency Seeks Limits on Payday
Lenders The New York Times (08/06/2015)
19 Consumer Financial Protection Bureau, Payday Loans and Deposit Advance
Products (24/04/2013) http://files.consumerfinance.gov/f/201304_cfpb_paydaydap-whitepaper.pdf (last accessed 13/06/2015) 3.1.1, 3.2.1
10

CFPB concluded that it is unclear whether consumers understand the costs, benefits, and
risks of using these products. Borrowers may not appreciate the substantial probability of
being indebted for longer than anticipated20 and the accumulated costs of such sustained use.
To the extent these products are marketed as a short-term obligation, borrowers may
misunderstand these costs and associated risks, particularly those associated with repeated
borrowing. Furthermore, the CFPB states that it does not appear that lenders attempt to
determine whether a borrower meets this profile before extending a loan. Indeed, lenders
may instead rely on their relative priority position in the repayment hierarchy21 to extend
credit without regard to whether the consumer can afford the loan. Consequently, this position
trumps the borrowers ability to organise and prioritise payment of debts. Considering how
the average borrower is of low income and is more likely to acquire a loan above the median,
this suggests vulnerable borrowers are liable to be exploited by payday loan companies
seeking to protect their revenue.

Evasion and loopholes:

Payday lenders have made effective use of the unique sovereign status of Native American
reservations, often forming partnerships with members of a tribe to offer loans over the
internet which evade state law.22
The Federal Trade Commission has however become aware of the exploiting of such legal
loopholes and thus has begun aggressively to monitor these lenders as well. Whilst some
tribal lenders are operated by Native Americans, there is evidence to suggest that many are

20 Ibid, pg 44
21 Ibid
22 Nehamas, N. The Tribe That Said No Aljazeera America (18/06/2014)
http://projects.aljazeera.com/2014/payday-nation/sioux-tribe-payday.html (last
accessed 10/06/2015)
11

simply a creation of so-called rent-a-tribe schemes,23 where a non-Native company sets up

operations on tribal land. For example, a South Dakota-based payday lending company was
ordered to pay $967,740 to the U.S. Treasury as part of a settlement resolving FTC charges. It
was ruled that they used unfair and deceptive tactics to collect on payday loans and forced
debt-burdened borrowers to travel to South Dakota and appear before a tribal court that did
not have jurisdiction over their cases.24
Response to investigatory complaints:
This can be viewed at both state and federal level as follows:

Operation Sunset in the state of Arizona: the states usury law prohibits lending
institutions to charge greater than 36% annual interest on a loan.25 On the 1st July
2010, a law exempting payday loan companies from the 36% cap expired. The State
Attorney General, Terry Goddard, initiated Operation Sunset, which seeks to
aggressively pursue payday loan lenders who violate the lending cap. The expiration
of the law caused many payday loan companies to shut down their Arizona operations

e.g. Advance America.

Operation Choke Point - an initiative of the United States Department of Justice,
announced in 2013.26 It seeks to investigate banks in the United States and their
business with payment processors, payday lenders, and other companies believed to

23 Webb, T. Alleged 'rent-a-tribe' lender temporarily barred from new business in

Minnesota Twin Cities (09/09/2013)
http://www.twincities.com/ci_24052878/alleged-rent-tribe-lender-temporarilybarred-from-new (last accessed 09/06/2015)
24 Federal Trade Commission (FTC) Payday Lenders That Used Tribal Affiliation to
Illegally Garnish Wages Settle with FTC (11/04/2014) http://www.ftc.gov/newsevents/press-releases/2014/04/payday-lenders-used-tribal-affiliation-illegallygarnish-wages (last accessed 11/06/2015)
25 Arizona Attorney Generals website https://www.azag.gov/operation-sunset
(last accessed 16/06/2015)
26 United States Department of Justice, Financial Fraud Enforcement Task Force
Executive DirectorMichael J. Bresnickat the Exchequer Club of Washington, D.C.
(20/03/2013) http://www.justice.gov/opa/speech/financial-fraud-enforcementtask-force-executive-director-michael-j-bresnick-exchequer (last accessed
09/06/2015)
12

be at higher risk for fraud and money laundering.27 In an ironic twist, the operation
itself is now being investigated, having been criticised for allegedly bypassing due
process in that the United States government has not shown that the targeted

companies are violating the law.

The CFPB, using authority granted to it via the Dodd-Frank Act will propose new
governing regulations intended to reduce the likelihood of borrowers being caught in
the cycle of debt by preventing lenders from making loans that cannot be repaid,
whether short-term or long-term.28

Summary:
After examining the US situation, this report states the legal labyrinth of state vs federal,
consequent Russian roulette of state v state and CFPB reporting collectively suggest that
vulnerable borrowers can be exploited by payday loan companies. This is aided by the
exportation of legal loopholes by payday loan companies, such as using the sovereign status
of Native American tribes to evade state and federal regulations.
The UK structure will now be examined.
The UK situation
The UK situation, as will be discussed, draws a parallel with the US situation. Whilst the state
vs federal/state vs state confliction is not present, there is still legal confusion. This is due to
numerous independent bodies attempting to strike a balance between encouraging
competition between lending companies to assist in economic growth, and protecting
borrowers from exploitation.
Payday loans fall within the high-cost credit sector in the UK. This is a significant and
valuable sector in the economy with loans to consumers totalling 7.5 billion in 2008.29 There
27 N18
28 Kieler, A. Can New Payday Loan Rules Keep Borrowers From Falling Into Debt
Traps? (26/03/2015) http://consumerist.com/2015/03/26/proposed-rules-wouldchange-the-face-of-payday-loans-add-protections-for-borrowers/ (last accessed
20/06/2015)
29 Review of High-Cost Credit: Final Report (June 2010)
http://webarchive.nationalarchives.gov.uk/20140402142426/http://www.oft.gov.u
k/shared_oft/reports/consumer_credit/High-cost-credit-review/OFT1232.pdf (last
13

are no official statistics on the payday lending sector in the UK but it has grown significantly
since 2008, when OFT estimated it to be worth around 900 million. It is estimated that there
are approximately 240 payday loan lenders in the UK.30 There is no single payday business
model: lenders use a number of different models, with the most obvious differences being
between those operating exclusively online and others who operate primarily on the high
street. The massive expansion of payday lending in the UK is attributed to the recession.31
The Consumer Credit Act 1974 which ensured that credit lenders must have full licenses
from the Office of Fair Trading, (OFT) which may be suspended or revoked in the event of
irregularities combined with the amending 2006 Act (which increased OFTs powers) is the
governing legislation for payday lending. This report submits that reform would be ideal; an
amendment to reflect further growing consumer reliance on lenders and the need to address
growing debt is paramount to prevent the exploitation of vulnerable borrowers.
Investigatory Conclusions:
As previously discussed, investigations carried out by regulatory bodies have highlighted the
flaws in the current practice and confirm this reports argument regarding the risk of
vulnerable borrowers suffering from exploitation.
The OFT published the Review of High-Cost Credit: Final Report in June 2010 following
investigating high-cost credit companies, including payday loans nationwide. Whilst
commenting that borrowers often found APRs a confusing measure of cost and lacked
understanding of measures of long-term cost,32 OFT seemingly considered payday loan
companies to be a helping hand to those consumers lacking access to financial services,
stating that for these consumers, high-cost credit can sometimes represent the only form of
accessed 20/06/2015) pg1
30 (OFT) Payday lending compliance review (20/11/2012)
http://webarchive.nationalarchives.gov.uk/20140402142426/http://www.oft.gov.u
k/OFTwork/credit/payday-lenders-compliance-review/ (last accessed 12/06/2015)
3.1 -3.4
31 Walker, P US payday loan firms plan rapid expansion in cash-strapped Britain
The Guardian (11/01/2011) http://www.theguardian.com/money/2011/feb/11/uspayday-loan-firms-expansion (last accessed 20/06/2015)
32 N29 2.23, 3.22
14

borrowing available to them.33 It also ruled out the need to cap interest rates levied by
payday loan companies, stating it could reduce competition amongst lenders and the increase
in charges billed to borrowers for late payment and default.34
However, the Public Accounts Committee (PAC) roundly criticised OFTs Review, arguing it
had been too passive and submitting that35:

OFT lacked the sufficient information on lenders needed to regulate them effectively,
it lacked a thorough understanding of how different people use consumer credit and
the potentially significant harm faced by borrowers if firms did not comply with the

regulations, and
Effective consumer protection is hampered by a lack of clear information and low
levels of financial understanding.

In 2012 OFT commenced a Compliance Review, following from the repeated calls of concern
that borrowers were being taken advantage of. This Review was exhaustive and more critical
than the 2010 Review; it would eventually lead to the creation of the CFA Lending Code.
OFT were concerned about the extent to which advertising appeared to target those in
financial difficulty and encourage rolling over of loans. For example, around one third of
payday loan websites included statements such as no credit checks, loan extension
guaranteed and extend loans up to 4 or 5 times.36 OFT deemed this to be irresponsible
lending and criticised the repeated failure to carry out adequate checks on affordability. The
Review found that borrowers were not always be given balanced information about the costs
and risks of loans and that the information given may not be explained adequately. In some
cases, key information seemed to be hidden away or downplayed.37

33 Ibid, 1.14
34 Bachelor, L. Doorstep and payday loan lenders escape interest rate cap The
Guardian (15/06/2010)
35 Public Accounts Committee (PAC) Eight Report: Regulating Consumer Credit
(20/05/2013)
http://www.publications.parliament.uk/pa/cm201314/cmselect/cmpubacc/165/16
502.htm (last accessed 20/06/2015)
36 N30, 4.17
15

This report submits that the above findings demonstrate how vulnerable borrowers can easily
be subject to exploitation from payday loan companies.

The exploiters broker:

Vulnerable borrowers in the UK are subject to further exploitation in the form of the payday
loan brokers. They are websites which claim to assist in finding payday loans, but are not
lenders. These websites will frequently pass on borrowers bank details to other lenders and
brokers, which then seek to extract fees even if they have not supplied a loan to the
borrower.
This is due to small print, a clause buried within the website which permits the broker to
charge a commission fee for the borrower to search for a payday loan, in addition to an high
annual interest charge reportedly as high as 3,000%.38
Response to investigatory complaints:
The response has been to introduce new regulations and safeguards, as follows:

Consumer Finance Association (CFA) Lending Code: the Lending Code was
introduced in 2012 to ensure the guarantee of borrower safeguards. The Code urges
lenders to ensure borrowers can repay loans and limits borrowers to three roll-overs
to prevent financial difficulty. Interest charges are to be frozen after 60 days of non-

payment.39
Financial Conduct Authority (FCA) overruled the OFT decision to reject capping
interest rates; introducing such caps in 2015. Payday loan rates are now capped at
0.8% per day of the amount borrowed, and no-one will have to pay back more than
twice the amount they borrowed. This aims to prevent vulnerable borrowers who lack

37 Ibid, 4.18
38 Collinson, P. Payday loan brokers regularly raid bank accounts of poor
customers The Guardian (28/10/2014)
39 CFA Lending Code for Small Cash Advances November 2012 as cited in
Milligan, B. Payday lenders bite back: Dont call us loan sharks BBC News
(22/09/2013)
16

funds to repay from securing a loan in the first place. The FCA's research suggests
that 70,000 people who were able to secure a payday loan under the previous
regulations would be unable to do so under the new, stricter rules, thus preventing

them from being caught in the debt cycle.40

OFT legislative recommendations the June 2010 report commented that future
legislation and regulations for consumer credit should take into account the needs,

preferences, abilities and behaviour of borrowers of high-cost credit.41

Competition and Markets Authority (CMA) has also made recommendations to the
FCA to take steps to reduce the vulnerability of borrowers. Such steps include:
i) improving the disclosure of late fees and other additional charges,
ii) helping customers to shop around for the most circumstances-appropriate loan,
iii)ensuring that lead generators websites which sell potential borrowers details to
lenders and through which 40% of first-time online borrowers access their loans
adequately explain how they operate much more clearly to customers, and
iv) providing existing customers with a summary of their cost of borrowing.42

Summary:
After examining the UK situation, this report states that the conflicting legal labyrinth of the
US is not an issue, yet there is room for improvement regarding clarity and updated reform
within UK law. The OFT and CMA reporting collectively suggest that vulnerable borrowers
can be exploited by payday loan companies. This is aided by the systemic practice of payday
loan brokers raiding bank accounts of borrowers, and the presence of influential payday
companies such as Wonga.
Report Conclusion:
40 Peachey, K. Payday loan charges cap takes effect BBC News (02/01/2015)
http://www.bbc.co.uk/news/business-30641877 (last accessed 12/06/2015)
41 OFT Review of High-Cost Credit: Final Report (June 2010)
http://webarchive.nationalarchives.gov.uk/20140402142426/http://www.oft.gov.u
k/shared_oft/reports/consumer_credit/High-cost-credit-review/OFT1232.pdf (last
accessed 20/06/2015) pg7
42 Competition and Markets Authority (CMA) CMA finalises proposals to lower
payday loan costs (24/02/2015) https://www.gov.uk/government/news/cmafinalises-proposals-to-lower-payday-loan-costs (last accessed 22/06/2015)
17

The report has reiterated the importance and the necessity of governmental regulation of
payday loan companies in both the US and the UK, having highlighted the similarity in both
jurisdictions in terms of:
Borrower misunderstanding of loan terms, use of short-term loans for long-term solutions
and lack of understanding the ramifications of the costs and risk accrued by this practice,
Lender failure to ensure borrowers understand their terms and the consequents of rollingover loans and accumulated interest, and
Subsequent exploitation of vulnerable borrowers by payday loan companies seeking to
maintain their competitive edge over rivals in a competitive, growing market.
It now emphasises that payday loan companies must continue to be subject to close scrutiny
by financial conduct authorities in both jurisdictions to ensure the protection of vulnerable
borrowers.

18

Appendix One: Bibliography

Primary
Legislation
USA
Dodd Frank Wall Street Reform Act and Consumer Protection Act 2010 Pub. L. 111-20,
H.R. 4173
Military Lending Act 2007
The Truth in Lending Act 1968 Pub. L. 90-321, 82 Stat. 146
Uniform Small Loan Laws
UK
Consumer Credit Act 1974
Consumer Credit Act 2006
Consumer Credit (Advertisements) Regulations 2004
Secondary
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16/06/2015)
BBC News Business online, Problem debt costs the UK economy 8.3bn, charity warns
(08/10/2014) http://www.bbc.co.uk/news/business-29524628 (last accessed 23/06/2015)
19

- Payday lenders told to improve by OFT (06/03/2013) http://www.bbc.com/news/business21683739 (last accessed 20/02/2015)
Bachelor, L. Doorstep and payday loan lenders escape interest rate cap The Guardian
(15/06/2010)
Burton, M Keep the plates spinning: Perceptions of Payday Loans in Great Britain
Consumer Focus (August 2014)
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accessed 17/06/2015)
Collinson, P. Payday loan brokers regularly raid bank accounts of poor customers The
Guardian (28/10/2014)
Competition and Markets Authority (CMA) CMA finalises proposals to lower payday loan
costs (24/02/2015) https://www.gov.uk/government/news/cma-finalises-proposals-to-lowerpayday-loan-costs (last accessed 22/06/2015)
Consumer Finance Association http://www.cfa-uk.co.uk/payday-explained/payday-mythsexploded.html (last accessed 15/06/2015)
- Lending Code for Small Cash Advances November 2012
Consumer Financial Protection Bureau, Payday Loans and Deposit Advance Products
(24/04/2013) http://files.consumerfinance.gov/f/201304_cfpb_payday-dap-whitepaper.pdf
(last accessed 13/06/2015)
Credit Research Center, Georgetown Universitys McDonough School of Business, Payday
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Daily Mail online, More than 100 MPs sign motion to end 'legal loan sharking' (21/09/2010)
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government and banks The Washington Post (16/04/2014)
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20

Federal Deposit Insurance Corporation (FDIC)

https://www.fdic.gov/bank/analytical/fyi/2003/012903fyi.html (last accessed 17/06/2015)
Federal Trade Commission (FTC) Payday Lenders That Used Tribal Affiliation to Illegally
Garnish Wages Settle with FTC (11/04/2014) http://www.ftc.gov/news-events/pressreleases/2014/04/payday-lenders-used-tribal-affiliation-illegally-garnish-wages (last accessed
11/06/2015)
Gibbs, T. Newcastle United's Wonga sponsorship speaks volumes about football, and Mike
Ashley The Telegraph (09/10/2012)
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Kieler, A. Can New Payday Loan Rules Keep Borrowers From Falling Into Debt Traps?
(26/03/2015) http://consumerist.com/2015/03/26/proposed-rules-would-change-the-face-ofpayday-loans-add-protections-for-borrowers/ (last accessed 20/06/2015)
Milligan, B. Payday lenders bite back: Dont call us loan sharks BBC News (22/09/2013)
Morran, C. The Average Payday Loan Borrower Spends More Than Half The Year In Debt
To Lender (26/04/2013) http://consumerist.com/2013/04/26/the-average-payday-loanborrower-spends-more-than-half-the-year-in-debt-to-lender/ (last accessed 15/06/2015)
Nance-Nash, S. How Online Payday Loans Can Get You Into Trouble Daily Finance
(10/08/2011) https://www.dailyfinance.com/2011/08/10/how-online-payday-loans-can-getyou-in-trouble/ (last accessed 12/06/2015)
Nehamas, N. The Tribe That Said No Aljazeera America (18/06/2014)
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Office of Fair Trading (OFT) Payday lending compliance review (20/11/2012)
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credit/payday-lenders-compliance-review/ (last accessed 12/06/2015)
- Review of High-Cost Credit: Final Report (June 2010)
http://webarchive.nationalarchives.gov.uk/20140402142426/http://www.oft.gov.uk/shared_oft
/reports/consumer_credit/High-cost-credit-review/OFT1232.pdf (last accessed 20/06/2015)
21

Paletta, D. and Lucchetti, A. Law Remakes US Financial Landscape Wall Street Journal
(16/07/2010)
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Peachey, K. Payday loan charges cap takes effect BBC News (02/01/2015)
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Pew Charitable Trusts Payday Lending in America: Who Borrows, Where They Borrow, and
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Public Accounts Committee (PAC) Eight Report: Regulating Consumer Credit (20/05/2013)
http://www.publications.parliament.uk/pa/cm201314/cmselect/cmpubacc/165/16502.htm (last
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Read, S. Payday loans firms raided by watchdog The Independent (08/10/2012)
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Silver- Greenberg, J. Consumer Protection Agency Seeks Limits on Payday Lenders The
New York Times (08/06/2015)
- Justice Department Inquiry Takes Aim at Banks Business With Payday Lenders The New
York Times (26/01/2014) http://dealbook.nytimes.com/2014/01/26/justice-dept-inquiry-takesaim-at-banks-business-with-payday-lenders/?_php=true&_type=blogs&_r=0 (last accessed
15/06/2015)
Sweet, W. Dodd-Frank Act Becomes Law The Harvard Law School Forum on Corporate
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United States Department of Justice, Financial Fraud Enforcement Task Force Executive
DirectorMichael J. Bresnickat the Exchequer Club of Washington, D.C. (20/03/2013)
http://www.justice.gov/opa/speech/financial-fraud-enforcement-task-force-executivedirector-michael-j-bresnick-exchequer (last accessed 09/06/2015)
22

Walker, P US payday loan firms plan rapid expansion in cash-strapped Britain The
Guardian (11/01/2011) http://www.theguardian.com/money/2011/feb/11/us-payday-loanfirms-expansion (last accessed 20/06/2015)
Webb, T. Alleged 'rent-a-tribe' lender temporarily barred from new business in Minnesota
Twin Cities (09/09/2013) http://www.twincities.com/ci_24052878/alleged-rent-tribe-lendertemporarily-barred-from-new (last accessed 09/06/2015)
Wisconsin Department of Financial Institutions http://www.wdfi.org/fi/lfs/pdl/ (last accessed
06/06/2015)
Zibel, A. and Kendall, B. Probe Turns Up Heat on Banks Wall Street Journal (07/08/2013)
http://www.wsj.com/news/articles/SB10001424127887323838204578654411043000772 (last
accessed 10/06/2015)

23