An innovative new data service has been launched to improve the lending decisions made by payday lenders. The information sharing service, launched by the credit reference agency Callcredit, will provide lenders with a more accurate picture of a consumer’s borrowing habits, helping them to determine whether prospective borrowers can maintain loan repayments.
There is already a long line of payday firms that have signed up for the real-time data service, including recognisable names such as Wonga. The service, called Moda, has been developed to provide payday lenders with the most up to date picture of a consumer’s financial circumstances when they apply for a loan. This will allow lenders to make more informed lending decisions and reduce the number of people who access short term loans without being able to afford the repayments.
Moda in action
The new system was released for testing in April, and the leading lenders have been sharing information updates on a daily basis ever since. At its peak, Moda will allow lenders to share information about prospective borrowers every 15 minutes, which will be a vast improvement on the previous information sharing process.
Before Moda was introduced, a 30-day time lag existed before any information was shared between lenders. This proved ineffective in improving lending decisions, as the average duration of a payday loan is only 22 days.
Moda will report and share all the relevant changes to a consumer’s credit file, including any new account openings, as well as changes to existing accounts, such as overdue payments, credit extensions, rollovers and accounts that have rectified or settled. This information will help all lenders develop a clearer picture of the individuals borrowing habits. Ultimately, the Moda system should help to reduce the number of people who end up with debts they can no longer manage.
Supporting responsible lending
One of the main criticisms of payday lenders has been their willingness to lend money to consumers who are in no position to access a loan, and are very unlikely to repay the full amount. The Business, Innovation and Skills (BIS) Committee has long been calling for a better method of information sharing between lenders, which can prevent consumers’ taking out multiple loans from different lenders; in effect, robbing Peter to pay Paul. This is a sure-fire route to debt problems further down the line.
So far the Moda system has been snapped up by payday lenders; however, it is also hoped the system will be implemented by a wide range of other lenders too.
Increasing regulatory scrutiny
On 1st April 2014, the Financial Conduct Authority (FCA) took over the regulation of the payday loans industry from the Office of Fair Trading (OFT). Since then, the City regulator has placed the industry under ever-increasing scrutiny. Now, the emphasis on responsible lending has never been greater.
A spokesperson for Callcredit, said: “The short term lending market has come under increased pressure from its regulator to lend more responsibly. Moda supports responsible lending by providing lenders with an up to date view of significant events on consumers’ credit files on which they can base more accurate and responsible lending decisions.”
The FCA has also introduced new rules for payday lenders which come into effect on 1st July. The new rules stipulate that all print and television advertising will have to include warnings. Payday loan companies will no longer be able to roll over loans more than twice, and they will also be forbidden from making more than two unsuccessful attempts to recover money from a borrower’s account using a recurring payment. In the future, there may also be a cap on the overall cost of a payday loan, although the FCA will discuss this matter over the summer.
Do you think real-time credit checks will help? Will payday lenders act on the information they receive and refuse to grant loans? We’ll have to wait and see, but in the meantime we’d love to hear from you, so please leave your thoughts in the comments section below.