Government moves to cap moneylender interest rates

The Government is to limit the interest rates charged by licensed moneylenders despite concerns previously raised by Minister for Finance Paschal Donohoe that such a move could drive some lenders out of the market.

The Government said on Monday it has approved the drafting of the Consumer Credit (Amendment) Bill 2021, the main purpose of which is to restrict the total cost of credit on moneylending loans.

The legislation will introduce a cap on the interest rate a moneylender can charge on a loan. The cap can be adjusted in future by ministerial order under the Bill, which also prohibits moneylenders from charging for home collection services.

The legislation proposes two rate caps, one for cash loans, and one for running accounts.

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For cash loans, a simple interest rate of 1 per cent per week to a maximum of 48 per cent per annum on the amount borrowed is proposed. Cash loans will also be subject to a maximum duration of 12 months.

For loans provided on a running account basis, nominal interest of 2.83 per cent per month on the outstanding balance will be allowed.

Currently, licensed moneylenders can charge interest of 187 per cent per annum, or 288 per cent when collection charges are included.

Modernise

The Bill also contains a range of measures to “modernise and streamline” the sector, including allowing repayment books to be maintained online, and the issuing of five-year licences rather than the current requirement for annual renewals.

The Bill furthermore will remove the requirement for moneylenders to register for a particular district court area in favour of State-wide registration.

Finally, it will change the term “licensed moneylender” to “high cost credit provider”. The Government says that this is to differentiate between licensed and unlicensed moneylenders.

The legislation follows a review of the moneylending sector undertaken by the Department of Finance and the proposals take into account the submissions received from the public consultation held by the Department in respect of the issue.

The Oireachtas Finance Committee has spent several meetings in recent months examining separate consumer credit legislation put forward originally in 2018 by Sinn Féin finance spokesman Pearse Doherty.

Its key proposal was to cap moneylender interest rates at 36 per cent per annum.

Addressing one of those committee hearings, Mr Donohoe said he did not support the proposal as it could lead to a “revenue shock” for the moneylending industry which could result in firms withdrawing from the market, and some households turning to illegal operators.

“A sudden revenue shock of this magnitude would be extremely difficult in any industry and sector and could lead to exits,” he said at the time. “If supply were reduced significantly, then customers . . . would have to either do without credit or seek it elsewhere including from family and friends. A small proportion may turn to illegal moneylenders.”

Provident, the largest moneylender in the market, announced in May that it was shutting down its doorstep lending business in Ireland. Another high risk lender, Amigo, has also stopped issuing Irish loans as it struggles to restructure its business.

Report on reform

Alongside the general scheme of the new legislation, Mr Donohoe is publishing a report on reform of the moneylending sector.

“This Bill will seeks to ensure fairness for consumers in terms of the rate charged by moneylenders, while also allowing for moneylenders to continue to operate where that service is needed,” said Mr Donohoe.

“By simplifying and reducing the rate that is being charged and taking steps to modernise the sector, we can better protect those who avail of these short-term services.”

Kevin Johnson, CEO of the Credit Union Development Association, when represents over 50 credit unions, said the new law was welcome. But he added that the new maximum interest rate of 1 per cent per week "is still four times more than the maximum that a credit union would charge the same person for the same risk".

“We believe that lower interest rate caps on moneylenders will improve outcomes for consumers, resulting in a lower cost of borrowing and default rates,” he said.

The European Commission proposed new rules earlier this month that would introduce a cap on interest rates for consumers and restrict the cost of credit charged by moneylenders.