In Focus Consumer Credit
Taking the correct approach to fees and charges
Fees and charges can effectively stimulate action from customers, but how can you get the balance right?
Emma Ryan Director, the ASTL, and head of redemptions, Amicus Finance
Emma.Ryan@amicusplc.co.uk
In terms of loan administration in the short- term mortgage sector, how should we deal with customers who either cannot or will not meet their financial obligations? Clearly the concepts of ‘can’t pay’ and
‘won’t pay’ – along with treating customers fairly – are at the forefront of all collections teams’ minds. How do you balance a desire to work with your customers and provide solutions when they struggle to repay their debt, and, at the same time, ensure ultimate repayment? Especially when you believe the client is actually a ‘won’t pay’, rather than a ‘can’t pay’, borrower?
A stimulus to action Default interest or extension fees are now commonly charged in the short-term finance space and are sometimes used as a stimulus to action for clients who are simply not committed to repaying their loans in a timely fashion. However, for clients that are genuinely
finding repayment on time a difficulty, is it fair to put them in more trouble by increasing the interest rate that they are paying, or by adding additional fees to their account? Suddenly they could find the refinance
they applied for – which through no fault of their own is not being concluded in sufficient time to meet their obligations – is no longer enough to enable them to redeem their short-term loan. In such cases, prudent lenders will work
with borrowers to assist in the exit of the loan. After all, a small concession at the outset is also likely to gain much better results commercially, benefiting both lender and borrower.
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A major decision Applying default charges, or extension fees, is a decision facing every short-term lender. What is clearly unfair is the back-charging of default interest rates. The ASTL recently amended its Code
of Conduct and Membership Rules to specifically outlaw the back-charging of default interest. That is, the practice of
less scrupulous lenders which, if a client defaults on their loan at a certain point – for example by non-payment of monthly serviced interest – would back-charge default interest to the loan inception date. To apply an increased rate in this way is
a penalty, not justifiable, and certainly not treating your customers fairly. Short-term loans require more detailed
Applying default charges, or extension fees, is a decision facing every short-term lender. What is clearly unfair is the back-charging of default interest rates
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monitoring than standard long-term loans. Lenders should keep in contact with borrowers so any problems arising during the term of the loans can be addressed. Lenders should be able to ensure borrowers
deal with issues, rather than adopt a ‘head in the sand’ position, which is not in the interest of the lender or the borrower. Astute loan administrators should assess
situations as they arrive and try and be as flexible and helpful as possible whilst maintaining commercial realism. CCR
September 2017
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