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Interest rate restrictions: Demands for caps on variable rates in Ireland and update in other countries

Irish news:

As posted elsewhere on the ECRC website, (Irish Times , or Trinity College press release), the recent report by Trinity College’s policy institute (Understanding and Combating Financial Exclusion and Overindebtedness in Ireland: A European Perspective) said that the financial crisis offered an opportunity to rebuild the banks to make them more inclusive of all sectors of Irish society, including those experiencing poverty and social exclusion. Funded by the Department of Social Protection, the report –said Ireland has the lowest level of access to current accounts in Western Europe and some people relied solely on moneylenders to access credit.

The Keane report on mortgage indebtedness (Review of the Report of the Inter-Departmental Working Group on Mortgage Arrears) has also been published and debated in Parliament with the message from the Finance Minister Mr Noonan being that “There is an onus on the banks to recognise the economic fact that bankruptcy settlement will often not be in the interest of any of the parties and that alternative solutions such as those advocated in the report and others need to be developed”.

The issue of capping the changes in variable rate credit is topical in Ireland, where the head of financial regulation recently warned that the banks would face legislative restrictions on their ability to raise variable mortgage rates if their actions were seen to exacerbate arrears. handling of mortgage arrears and that if they persisted in raising standard variable interest rates, they risked a cap on rates being introduced. The banks have raised variable rates on their loss-making mortgage books, in some cases outside of any moves by the European Central Bank on its rates, to account for the higher cost of raising deposits and market funding. One argument used to justify the unhelpful rate increases is that Irish mortgage rates remain competitively priced compared with bank offers in Europe.

The current economic environment and the troubled times affecting banks means that they are distracted from untertaking their original purpose for which the economy has created them. This intermediation and lending role is instead being carried out by expensive lenders who are either legal or illegally operating.

In the UK:

It's boom time for payday lenders and cheque cashers in the UK at the current time, but with APRs of 1000+%, pressure for regulation is growing. In the UK, payday loans companies have been reported to the OFT as poor practice in the market was revealed from investigation by Which? Suggesting some lenders were making money from other people's misfortune without even having a licence or disclosing the APR.

In fact the Government ministry BIS will conduct a further study of the high cost credit sector (that lent £7.5bn in the UK in 2010 and includes pawnbroking, payday loan, home credit and rent-to-buy firms). The study will specifically look at the effects of a variable interest rate ceiling on the sector and will be based on research including an empirical survey of the providers and the user group concerned). While payday loans may be a good solution for people whose money won't stretch to the end of the month, they are seen by the Consumer Association Which? as an absolute last resort.

The sector not only need to justify the high cost of their lending and demonstrate that they perform a useful social function in a society where support from the state is being reduced, but some short-term lenders also need to respond to criticism that they are making irresponsible lending decisions (such as extending additional loans).

The trend would follow that in other EU countries such as the Netherlands, and especially other Anglo-Saxon countries e.g. US lending regulations have become more stringent (interest rate caps in 13 states, loans to military personnel capped at a maximum of 36% APR), 2 Australian states (48% APR maximum, including fees and brokerage), and Canada where some provinces cap interest at 23%.

In other EU countries:

Additional recent European legal reform in October 2011 relating to usury is the tightening criminal sanctions for illegal money lending in both Romania and Hungary.

In Hungary: Parliament has voted amendments to the penal code by deciding that loan sharks committing the crime of usury even on a single occasion may face a prison term of up to three years. Repeated usury may entail five years in prison. However, those reporting their involvement in such malpractices before being arrested may be fully exempted from penal consequences. The Budapest Times reported on 21 October 2011 that “Small villages, rural areas and Gypsy communities have been especially prey to pervasive usurious practices that often fell outside the scope of the law. Lack of ready cash and a limited choice of local retailers in the absence of reliable or cheap public transport are among the reasons that have pushed poorer people to turn to usurers for loans that are often unsecured as well as having high interest.”

In Romania, the parliament has adopted a bill banning usury by adopting a bill whereby usury is considered a crime punishable by six months to five years in prison, with the money and goods resulting from usury to be confiscated. The normative act was approved with 168 to 98 votes and ten abstentions, after having been rejected by the Senate previously.

ID: 47772
Publication date: 30/10/11

Created: 02/11/11. Last changed: 02/11/11.
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