Office of Fair Trading - Credit Brokerage Guidance
Credit unions and credit brokerage
ABCUL credit unions first contacted us with concerns about the activities of credit brokers in 2008, reporting very similar stories across the country. Consumers would phone or call into the credit union to arrange the collection of their loan. In the majority of cases they were under the impression that a loan had been prearranged.
In all these cases, for a fee, the consumer had been given contact details of a credit union and often had to be disappointed when, for a variety of reasons, the credit union was unable to grant them a loan. These referrals had cost the customer up to, and sometimes more than, £50. For this, they were provided with the contact details of their local credit union and, in most cases, the false impression that a loan is waiting for them. No approach has ever been made to a credit union nor to ABCUL prior to referrals beginning – no credit union has ever made an referral agreement with a credit broker.
In many instances, especially smaller, credit unions require members to save for a period of time before borrowing and all credit unions have common bond criteria which dictate who can and who can’t join. More often than not, due to one or both of these factors (or because of a poor credit history) the consumer is unable to access the credit union’s borrowing facilities.
Our members also report that the vast majority of consumers referred to the credit union, on learning that they are unfortunately ineligible to join and access the credit union’s lending facilities, then struggle to reclaim the referral charge – minus £5 for administration – that they have a right to under the Consumer Credit Act. Indeed, the vast majority are unaware, that they are entitled to claim the fee back.
The information that credit brokers provided to potential credit union members is freely available via local advertising, local agencies such as local authorities, housing providers or via ABCUL and the credit union search site www.findyourcreditunion.co.uk, in addition, most credit unions have websites which publicise their operating details.
At the maximum credit union rate of interest (2% a month on the reducing balance, or 26.8% APR), if someone borrowed £200 over 6 months they would pay £14.23 total interest. This is the nature of many credit union loans – small amounts over a relatively short term.
The addition of a £50 referral fee increases the cost of the loan by more than 351%. An £85 cost-of-credit on such a loan converts the APR from 26.8% to 168.8%; considerably raising the cost of an affordable credit union loan and damaging the best efforts of the credit union to make affordable credit available in its community.
When our members necessarily have to turn down many referees can become very distressed and disappointed – this damages the reputation of the credit union and the emotional and financial well-being of the consumer. This has led some credit unions to refuse all referrals from credit brokers, regardless of eligibility to join the credit union or ability to repay.
The full response is available to download on the right hand side of the screen.