The government must limit the interest rates charged by approved lenders despite concerns previously raised by Finance Minister Paschal Donohoe that such a move could exclude some lenders from the market.
The government announced Monday that 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 money lending.
The legislation will introduce a cap on the interest rate that a lender can charge on a loan. The cap can be adjusted in the future by ministerial order under the bill, which also prohibits pawn shops from charging for door-to-door collection services.
The legislation proposes two rate ceilings, one for cash loans and one for current accounts.
For cash loans, a simple interest rate of 1 percent per week up to a maximum of 48 percent per year on the borrowed amount is offered. The cash loans will also be subject to a maximum term of 12 months.
For loans granted on the basis of a checking account, a nominal interest of 2.83 percent per month on the outstanding balance will be allowed.
Currently, approved lenders can charge interest of 187 percent per annum, or 288 percent when collection costs are included.
The bill also contains a series of measures to “modernize and rationalize” the sector, including allowing online reimbursement books to be kept and the issuance of five-year licenses rather than the current annual renewal requirement.
The bill will further remove the requirement for money lenders to register for a particular area of the district court in favor of statewide registration.
Finally, it will change the term “pawnshop” to “high cost credit provider”. The government says it is about differentiating between approved and unlicensed lenders.
The legislation follows a review of the cash lending sector undertaken by the Ministry of Finance and the proposals take into account comments received from the Ministry’s public consultation on the matter.
The Oireachtas’ finance committee has spent several meetings in recent months reviewing separate consumer credit legislation originally proposed in 2018 by Sinn Féin spokesman Pearse Doherty.
Its main proposal was to cap lender interest rates at 36% per annum.
Addressing one of those committee hearings, Donohoe said he did not support the proposal as it could cause a “revenue shock” to the money-lending industry, which could result in the withdrawal of companies from the market and the use of illegal operators by certain households.
“A sudden income shock of this magnitude would be extremely difficult in any industry and sector and could lead to exits,” he said at the time. “If the offer was considerably reduced, the customers. . . will either have to do without credit or seek it elsewhere, including family and friends. A small proportion may turn to illegal pawn shops.
Provident, the largest pawnshop in the market, announced in May that it was shutting down its home loan business in Ireland. Another high-risk lender, Amigo, has also stopped issuing Irish loans as it seeks to restructure its business.
Along with the general outline of the new legislation, Mr. Donohoe publishes a report on credit sector reform.
“This bill will seek to ensure fairness for consumers in terms of the rates charged by lenders, while also allowing lenders to continue to operate where this service is needed,” Donohoe said.
“By simplifying and reducing the rate charged and taking steps to modernize the industry, we can better protect those who benefit from these services in the short term. “
Kevin Johnson, CEO of the Credit Union Development Association, which represents more than 50 credit unions, said the new law was welcome. But he added that the new maximum interest rate of 1 percent per week “is still four times the maximum a credit union would charge the same person for the same risk.”
“We believe that lower interest rates on pawn shops will improve outcomes for consumers, which will translate into lower borrowing costs and lower default rates,” he said.
The European Commission proposed new rules earlier this month that would introduce a cap on interest rates for consumers and curb the cost of credit charged by pawn shops.