Yesterday the government announced that it was dropping the proposed new logbook loan legislation. This is a very disappointing move, the bill would have had all-party support.
I agree with these comments on Twitter:
Strange one – never spoken to anyone who didn’t think it was a good idea and the current legislation causes huge problems for some people. Joe Lane.
Pretty odd decision. These types of credit regularly cause huge consumer detriment. The need for reform seemed overwhelming. Nick Pearson.
This article is looking at how the legal and regulatory framework for logbook loans needs to be changed. If you currently have a logbook loan which is unaffordable, read Refunds of interest from large high cost loans as that may help.
Not quaint but dangerous
Two weeks ago, speaking at an event on the future of high-cost credit, the FCA’s CEO, Andrew Bailey, referred to logbook loans as quaint, because of the antiquated legislation they are based on. At that time it was expected the new Goods Mortgages bill would have replaced the 1878 and 1882 statutes which govern Bills of Sale.
Now that legislation isn’t going to come to the rescue, quaint doesn’t seem the right term anymore. FCA needs to act speedily to reduce the detriment being caused by logbook loans.
Logbook loans are not a large part of the high-cost credit market. In 2016 there were 30,000. But they are used by a very vulnerable group of people. Citizens Advice research found that people coming to them for debt help who had logbook loans had on average more than twice as many debts as other Citizens Advice debt clients.
And, unlike any other sort of lending, they can harm people who were not party to the loan at all. Someone can buy a car and have no idea it is subject to a logbook loan and that the seller doesn’t legally own the car. The car can then be repossessed by the logbook lender with no compensation for the innocent buyer.
What should the FCA do
I suggest there are four areas the FCA needs to take action as soon as possible.
Cap the cost of logbook loans
Most logbook loans exceed the interest rate cap that has been imposed on payday loans, so people are paying more in interest and charges than the amount they borrowed. A couple of examples:
Applying the payday loan cap to logbook loans would be simple and would reduce the harm they cause.
Ban top-up loans and refinancing
Although the interest cap was the measure that caught the headlines, a major gain from the payday lending reforms came from the restriction on rollovers. A version of this is even more important for logbook loans because of the size and duration of the loans – for someone to refinance just once prolongs the time in expensive debt considerably.
This is a very common issue with logbook loans. A couple of examples from readers in the last month:
I currently have a logbook loan with about 18 months left to pay off. I am up to date with the payments at present. I have rolled this over 4 times now and paid about £2500 in interest so far on a £1000 loan.
I have had a logbook loan on my old vehicle and rolled the loan over / renewed loan and additional borrowing about 5 times my car then had to be scrapped so I had to transfer the debt to a personal loan with loans2go.
So I suggest a logbook lender should:
- not be allowed to offer top-ups or refinancing during the term of a loan;
- not be allowed to offer a second loan until at least six months after the previous loan has completed.
Enforce better affordability checks
People taking out logbook loans usually have other debts and are desperate. The lenders should, therefore, conduct detailed affordability assessments, including looking at the applicant’s bank statements and credit records – they cannot just rely on an application form and assumptions about standard levels of expenses.
Check for irresponsible advertising
Logbook loans are serious, expensive, long-term secured loans. Adverts such as this one from Mobile Money on Facebook are irresponsible:
Logbook loans should not be advertised as quick and simple sources of immediate cash. “Try out a loan” makes it sounds like test driving a car!
There should be a standard statement such as Warning: your car is at risk if you do not keep up payments on a logbook loan on every advert, including social media, and included in sponsored articles or anywhere where the lenders pay for links.
The problem of cars with logbook loans being sold
I don’t know if the FCA feels it can prevent logbook lenders exercising their rights to repossess their car when it has been sold to someone not aware of the logbook loan. That comes more under the heading of treating the public fairly than treating customers fairly!
But making the four changes I have suggested above should go a long way to reducing this problem. If there are proper affordability checks, which is likely to mean fewer logbook loans which are also smaller in size and at a lower interest rate, then more borrowers will feel they can repay the loan and keep their car, rather than try to sell it.
Over to the FCA then
In deciding to shelve the proposed legal reforms, the government said:
The government will continue to work with the FCA as they carry out their high-cost credit review, and then further consider government action on alternatives to high-cost credit in light of the FCA’s review.
The FCA has considerable powers to reform the logbook loans market and it needs to use them as soon as possible.
But what about the problem of people buying a car used for a logbook loan?
The FCA can do a lot to protect people from being given unaffordable logbook loans, for example by introducing a price cap and by preventing loans from being topped up.
But it will be more of a challenge for the FCA to introduce new rules that will halt the problem of someone who had bought a car with a logbook loan on it having it repossessed. On 12 June 2018, Yvonne Fovargue, MP, challenged a Treasury minister on this in Parliament, saying:
Could the Minister explicitly say what powers the FCA has to protect innocent consumers who buy cars in good faith, who cannot check anywhere whether they are subject to a logbook loan, and yet who can still have them repossessed?
the minister didn’t give any clear answer.