Doorstep Lenders Trap Desperate Borrowers

A year or two ago, I remember writing an article about doorstep lending, in which I suggested that while doorstep lenders might provide you with credit at a time of need, the interest they charge can be scary.

What I didn’t imagine was that, quite apart from the heavy charges themselves, the doorstep lenders’ own debt collection tactics might also be terrifying.
Yet, for clients of Kim Cornfield and his wife Lynne, scary meant exactly that – and more.

Cornfield, aged 52, was recently jailed for two years after admitting blackmail and illegal money lending. His wife Lynne, 43, received a 12-month community rehabilitation order. The Cornfields lent fairly small amounts of cash, £50 to £5,000, sometimes known as tide-you-by money. However, they charged extortionate interest rates, in one case 15,000%, on their debt.

Moreover, their typical strategy of persuading clients – mostly vulnerable single mothers in Redditch, Worcestershire – to pay up included threatening to beat them up and burn down their homes.

In one case, Worcester crown court was told, Kim Cornfield grabbed a heavily pregnant woman round the throat. In a number of other cases, he sent abusive text messages, including one saying: “Ur going to have the crap beaten out of u”.

Alternatively, Cornfield would demand sexual favours as payment in kind from female debtors.

Is this kind of violence typical?

Certainly not typical of the mainstream lending industry, or of doorstep lenders either, for that matter – although there are plenty of other examples where similar violence is meted out on hapless borrowers.

The Department of Trade and Industry is carrying out a nationwide study to map the extent of loan sharking, and already has in to try to stamp it out. More than 100 suspected loan sharks in both Glasgow and Birmingham are under investigation from pilot units set up by the DTI.

Indeed, it was the Birmingham unit which investigated the Cornfields and brought them to justice. The problem, however is one which affects a massive number of people across the UK. And the reason only a handful of cases get to court is because witnesses are often too scared to testify – although it is understood that they were queuing up to dob on the Cornfields.

The scale of the problem

Official statistics suggest one in five UK borrowers is refused mainstream credit.
Those unable to borrow from official sources are forced to go to illegal money lenders.

According to the National Consumer Council (NCC), which has made an extensive study of the problem, the doorstep loans industry is huge, with an annual £2 billion turnover, catering for 3 million people.
The NCC study, some 18 months ago, found that:

* Just over half of current or recent home credit customers had annual incomes
below £9,500 and two-thirds earn less than £13,500.
* Two-thirds of borrowers are semi-skilled or manual workers, even though they make up fewer than three in 10 of the population as a whole.
* Almost a third of customers were people who stay at home to look after their families, three times more than their proportion within the UK’s general population.

The problem for borrowers is that they don’t really understand what is happening to them:

* In 8 out of 10 cases, those who borrow the money have no idea of the annual percentage rate (APR) of interest they are paying.
* Three in 10 don’t know how much they will have repaid, in total, at the end of the loan.
* Three in 20 don’t actually know the term of their loan.

The result was that:

* Some borrowers were being charged interest rates of up to 900%, with average interest charges by doorstep lenders averaging a whopping 177%.
* Home credit companies use a variety of techniques to entangle their borrowers in further debt, including roll-overs where money already owed, plus the interest payable, is added to a new loan, which generates even more debt.

In September 2004, the NCC made use of its powers to make a super-complaint to the Office of Fair Trading, the credit watchdog.

Under the recent Enterprise Act, the NCC is one of a number of bodies entitled to make super-complaints to the Office of Fair Trading if an aspect of the market is harming consumers.

The OFT decided there were aspects of the market that required further investigation and an inquiry has been launched. It is expected to report later this year.

What are the key issues?

Aside from the heavy charges, one of them is the uncompetitive nature of the home loans market.

* The UK’s four main lenders in this area control a 70% market share, compared with 60% five years ago.
* Moreover, the NCC argues, borrowers often stay with a given lender because of the psychological ties they develop with their collector, whom they get to know well in the course of numerous visits.

* Details of the NCC report can be found here:

What does the National Consumer Council want?

* More encouragement for non-commercial alternatives such as credit unions, community-based networks of savers and borrowers where loans can cost as little as 1% a month, or 12.7% APR a year.

* More effective use of the government’s Social Fund Budgeting Loan scheme – currently available to people on certain state benefits.

How does the home loans industry defend itself?

The home credit industry – as opposed to doorstep lending – is grouped into the Consumer Credit Association.
The CCA says it provides a social service to people who have very specific needs that are not easily met elsewhere.

* It gives customers access to credit in a way that suits them.
* What you see is what you get: there are no hidden or extra charges whatsoever - even if people are late in repaying their loans. There are rarely penalties for deferred or delayed payments.
* The industry is not a monopoly: more than 140 new organisations have joined the market in the past five years, ranging from locally-based sole traders to large French banks.
* The stereotype of hard-faced foot-in-door merchants is simply not true: the overwhelming majority of the 28,000 or so doorstep collectors are women. They are willing to accept reduced payments in times of difficulty.

It also says that doorstep loans are cheap – or so the CCA says.
A typical £200 loan from a CCA member over six months might cost £280 including interest payments, an effective APR of 258%.

But a bank overdraft at an APR of 19.5%, in which only £10 a week is paid off, would entail total payments of £273 over the same period.

Of course, that ignores the fact that, even if only £10 was repaid each week, actual charges would be far smaller because a person’s income would have been paid into the account, effectively reducing the overdraft for part of that month.

By Nic Cicutti, MSN Money Special Correspondent