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Thursday, May 18, 2006

Consumer lenders' dirty but open secret

Ads, sky-high rates prey on borrowers' desperation, willful ignorance

Staff writers

A salaried worker in Ehime Prefecture took out a 500,000 yen loan at over 20 percent interest from major consumer finance firm Aiful Corp. in early 1999 because he needed to borrow money "for living expenses" without his wife finding out.

News photo
Signs for consumer loan companies adorn buildings in front of JR Kinshicho Station in Sumida Ward, Tokyo.

The man, in his 40s, earns 7 million yen a year to support his wife, their two children and his parents.

He borrowed an additional 1.5 million yen within six months to pay his mortgage and bills.

Suddenly, he was 2 million yen in debt. His repayments reached 72,000 yen a month, but Aiful said he could pay just the monthly interest charge of 40,000 yen if he couldn't manage the full amount.

That, lawyers say, is a common tactic consumer finance companies use to increase profits by making people borrow over a longer period of time.

"I had to borrow more money from other consumer loan firms to repay the (Aiful) debts and cover other expenses," the man said, asking that his name not be used.

By the time he finally sought help from a lawyer in November 2004, his debts from eight consumer loan firms, including Aiful, totaled around 8 million yen, and his repayments reached 200,000 yen a month.

"All the lenders called my company and both my home and mobile phones, but Aiful was most persistent," he said.

Aiful employees phoned him several times a day, asked to talk to his wife or his mother and visited his home while he was away.

The company's aggressive collection tactics drew the attention of the Financial Services Agency, which on April 14 ordered it to suspend most operations for up to 25 days. On Tuesday, Aiful reported a 13.1 percent drop in consolidated net profit in the year that ended March 31 and predicted a further fall in profits in the current business year as a result of the government punishment.

The Money Lending Business Law prohibits coercive debt collection, including repeatedly calling borrowers at work without a valid reason and demanding that relatives pay back the money.

Lawyers and consumers say this is not enough. They are clamoring for lower interest rates on unsecured consumer loans and stricter regulations on lending and collection tactics.

The debate on interest rates arises from a muddled legal system that currently sets two different caps. The Interest Regulation Law gives the maximum interest rate chargeable on loans as 15 percent to 20 percent, but the Capital Subscription Law puts the upper cap at 29.2 percent.

Consumer loan firms usually set interest between the rates prescribed by the two laws, an area often called the "gray zone."

Industry officials maintain that these rates reflect the risk consumer finance companies take by extending loans to individuals deemed a high risk by more traditional lenders, including banks. Consumer finance companies add that lowering interest rates would not resolve the rising number of personal bankruptcies.

Instead, they argue that lower interest rates would drive more cash-strapped people to illegal lenders whose practices are not regulated.

"People who need money will do what they must to get their hands on some cash," said Hiromasa Tamai, spokesman for lender Promise Co. "We cannot provide that money unless the interest rates match the risk of the loans."

The consumer lending business has grown by providing loans without collateral or a guarantor to people sorely in need of money, said Tomoaki Sakano, a professor at Waseda University's faculty of commerce.

If interests rates are lowered, he said, the current market -- with customers who borrow money at high rates -- will disappear.

"Over the past few decades, regulators have lowered interest rates, but the number of personal bankruptcies has not decreased," he said.

Meanwhile, an official at a major consumer finance company who asked not to be named said lower interest rates would drive many small and medium-size consumer lenders out of business.

"For many (such) lenders, lower rates will not pay," he said.

But lawyer Kenji Utsunomiya said lowering the rates would force lenders to be more careful when screening customers and make doubly sure of borrowers' ability to honor the loans.

"(First-time) loan applicants can borrow (up to 500,000 yen) at unmanned screening machines (set up by consumer loan firms on streets) by showing their identification, such as a driver's license or a public health insurance card," he said. "This means lenders do not check their income levels carefully."

With lower interest rates, lenders' profits would decrease. If the number of irrecoverable loans increases, that would further hurt profits, he said.

Utsunomiya would also like to see stricter rules on the amount that consumer finance businesses can lend to each customer.

The Money Lending Business Law prohibits giving out excessive loans, and an FSA guideline for lenders states that unsecured loans should be no more than 500,000 yen per borrower, or 10 percent of borrower's annual income.

There are no penalties for violators.

"Without penalties, no consumer loan company will follow the rules," the lawyer said.

Millions of people now struggle under the weight of unsecured loans, observers say, while data issued by the consumer lending industry show that the average interest rate stood at 23 percent as of last July.

At the same time, the top five companies -- Takefuji Co., Acom Co., Promise Co., Aiful and Sanyo Shinpan Finance Co. -- together wrote off 521.8 billion yen in irrecoverable loans in the year ending in March, up 1.3 percent from the year before.

Consumers need to learn how the interest mechanism works and the regulations regarding consumer loans before borrowing money, according to Utsunomiya.

"Many who borrow from consumer loan firms don't think about how high the interest rates are, and lenders do not give sufficient explanations," he said, adding borrowers do not have to pay interest charges that are higher than the level set by the Interest Regulation Law.

If borrowers have trouble with consumer loan firms, they can go to consultation windows set up by lawyers and judicial clerks nationwide to help heavy debtors, he added.

An employee at one of the big five consumer finance companies working the phones in a Chuo Ward, Tokyo, office to collect on delinquent borrowers said at least some of the blame for the rising number of personal bankruptcies rests with borrowers.

"I really believe more people now borrow without the intention of ever paying the money back -- they plan to file for bankruptcy," he said, asking not to be named out of fear his comments would damage his firm's image.

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