Submission Managing borrowing and dealing with debt Contact: Team : Lizzie Clifford Neighbourhoods Tel: 020 7067 1074 Email: lizzie.clifford@housing.org.uk Date: December 2010 Reference: NS.FI.2010.SB.03 Registered office address National Housing Federation, Lion Court, 25 Procter Street, London WC1V 6NY Page 1
Submission from the National Housing Federation The National Housing Federation represents 1200 independent, not for profit social housing providers in England. The Federation's members own and/or manage more than 2 million homes provided for affordable rent, supported housing and low cost home ownership, and offer an increasingly diverse range of community and regeneration services. 1.0 Executive summary The Federation welcomes the opportunity to submit our views to BIS/HM Treasury on this Consumer Credit and Personal Insolvency Review. In summary: The role of housing associations extends far beyond the homes that they build, own and manage. Financial exclusion is a critical challenge for our sector and many housing associations are already helping to tackle the issue and are keen to do more. We believe that the existing consumer credit provision is not sufficient to provide responsible loans at reasonable prices for many consumers. Lowincome consumers often pay unfair rates of interest, or are at risk of predation from illegal loan sharks. It is clear that more is needed in the way of targeted financial guidance and clear information at the point of making a decision to borrow. The Federation believes that an environment that both allows effective third sector lenders to flourish, and protects vulnerable consumers from the effects of poverty and financial exclusion, is vital for helping people cope financially as the nation emerges from recession. More large-scale and sustainable third-sector lenders are needed to provide affordable credit for more vulnerable, higher-risk consumers. More effective face-to-face support and debt advice is needed to enable those struggling to repay to be helped back onto a sure financial footing. Page 2
2.0 The role of housing associations in helping consumers with borrowing and debt Housing associations have a valuable role to play in tackling financial exclusion which is a critical challenge for our sector. Our members core customer group is facing the brunt of financial exclusion; 121,125 living in housing associations (6.2%) have no bank or post office account. 1 Unable to access banking services, tenants often turn to sub-prime doorstep lenders who charge extremely high interest rates. Such people are also often targets for illegal loan sharks, who have been found to charge interest rates varying between 8,000% and 117,000%. 2 Many of our members have run traditional forms of financial support for years, including the provision of cheap, safe white goods and furniture, expert advice on welfare benefit claims, rent deposit schemes, reduced household insurance, and money advice. In addition, housing associations offer a wide variety of programmes aimed at delivering financial advice and improving financial capability. In 2006/07 housing associations delivered 984 financial exclusion services benefiting around 368,000 people. 3 Members have also funded and otherwise supported a number of Credit Unions and CDFIs, including My Home Finance, a new affordable credit provider in the West Midlands, launched by the National Housing Federation earlier in the year. We firmly believe that housing associations are well positioned in the community to use their capacity to assist Government in addressing financial exclusion. Often they are the strongest not-for-profit organisations working in deprived neighbourhoods and they can provide a critical role as intermediaries in signposting to information, advice and suitable financial products. Our consultation response focuses on the questions which we consider relevant to our members outlined in the consultation document. Our responses are based on both the successful track record of housing associations working to combat poverty amongst their tenants, and from the evidence gathered in the development of My Home Finance. 1 National Housing Federation research 2010, based on Family Resources Survey 2008/09 2 http://stoploansharks.direct.gov.uk/common-myths.html 3 National Housing Federation, Winning with money: housing associations contribution to financial inclusion, 2008 Page 3
3.0 The decision to borrow While credit is often a vital source of funds for low-income families to cover emergency expenditure such as a new washing machine, or urgent repairs, many of the poorest families are also dependent on cycles of high-cost credit simply to make ends meet. 4 We are concerned that the proposed changes to the benefits system in the coming years will push many households further into hardship and debt. Federation research, for example, shows that under the new proposed overall benefit caps of 26,000 a family in a four-bed housing association property in West Berkshire could find themselves 161 per week short of the minimum income standard expected for a family of that size. 5 The same family would be 34 per week below the poverty threshold, and could be expected therefore to be dependent on borrowing from family, friends, payday lenders, pawnshops, or illegal loan sharks, just to pay for everyday supplies such as food and clothing. Likewise, under the Government s proposals to reduce housing benefit by 10% for those who have been on Jobseeker s Allowance for 12 months, many of the unemployed may no longer be able to cover their basic living costs, and may end up at risk from exploitative lenders. Federation research has shown that the average single claimant over 25 years of age would be left with just 55.25 to live on per week if they have to make up 10% of their rent from their JSA entitlement. 6 In our view, these changes would leave people with barely any money to live on after the costs of eating and heating their homes. 7 While a review of borrowing and debt is welcome, therefore, any reforms with regard to access to credit need to go hand in hand with a concerted effort to raise income standards for the poorest in society, so they are less dependent on high-cost credit. 3.1 Access to credit and the high cost credit sector A high level of financial exclusion manifests itself in high levels of home credit borrowing, lack of access to financial services and sometimes a lack of financial literacy. 2008/09 data shows that 13.3% housing association tenants are unbanked (excluding POCA account). 8 The Federation therefore calls for a Universal Service Obligation to ensure that a bank account is made available to every household, regardless of their income or postcode, which would contribute to the Government s wider objective of empowering consumers. 4 Marie Burton, Consumer Focus, Keeping the plates spinning: perceptions of payday loans in Great Britain, 2010 5 National Housing Federation research 2010, based on RSR average rents at 31 March 2010 and Joseph Rowntree Foundation, A minimum income standard for the UK in 2010, 2010 6 National Housing Federation analysis, August 2010, based on JSA rates and DWP, Impacts of housing benefit proposals: changes to the local housing allowance to be introduced in 2011-12, July 2010 7 See Joseph Rowntree Foundation, A minimum income standard for the UK in 2010, 2010 8 National Housing Federation research 2010, based on Family Resources Survey 2007/08 Page 4
Given the levels of financial exclusion among social tenants it is not surprising that the majority of home credit customers are thought to be social housing tenants. 9 Research carried out for the National Housing Federation found that around 1.6m social tenants borrow from home collected credit. 10 It is clear that mainstream provision does not meet the needs of those on low incomes or who are financially excluded, when they need to access credit rapidly to cover an emergency expenditure. Those who have little or no savings or credit history can be excluded from mainstream financial services, and many are forced to turn to door-step lenders with interest rates of between 180% and 500% APR. 11 Some become victims of illegal loan sharks. Our report Credit where credit s due recommended that housing association tenants should be offered a range of suitable financial products and services through existing third sector lending organisations such as Credit Unions and Community Development Finance Institutions (CDFIs). The Federation s recent launch of My Home Finance, supported by numerous housing associations and with the backing of DWP, marks a significant step forward in the provision of responsible credit for higher-risk consumers. My Home Finance has launched as a chain of shops, initially in ten locations throughout the West Midlands, offering affordable credit, money advice, bank accounts and linked savings accounts to low income and financially excluded customers. Credit unions are another vital source of affordable credit and effective savings for many low-income customers, but for some borrowers regular saving is not a realistic possibility, and in a moment of crisis such people still need to be able to access funds with little notice. It is vital that other third sector lenders such as CDFIs are supported to offer affordable personal credit, particularly for small amounts, without requiring a long time-frame for application processing. 12 Evidence suggests that CDFIs lend more to the demographic of the housing associations tenant by percentage of their lending, as they are priced for higher risk and can therefore lend more easily to the financially excluded. 13 The early signs from the My Home Finance pilot suggest that over three quarters of customers are social tenants. 9 Joseph Rowntree Foundation, Locked in, kept out: the extent of competition within the UK home credit industry, 2005 10 Niall Alexander for the National Housing Federation, Credit where credit s due, 2007 11 New Local Government Network, Circling the loan sharks: Predatory lending in the recession and the emerging role for local government, 2009 12 Niall Alexander for the National Housing Federation, Credit where credit s due, 2007 13 See Niall Alexander for the National Housing Federation, Credit where credit s due, 2007 Page 5
My Home Finance offers credit that does not require a savings history with the lender. The service offers a personal face-to-face advisor who is therefore able to apply a personalised assessment of the borrower s capacity to pay, relying less on automated credit checking processes. Such services offer a vital stop-gap loan for people at a moment of crisis, without resorting to charging the high prices of payday lenders. Regulation for third-sector lenders must be designed so as to avoid adding extra burdens that would slow down the time-scale for accessing such credit. Despite the very high rates of interest charged, low income customers are currently attracted to doorstep lenders, partly because of the convenience and flexibility they offer. Payment holiday options and ease of access within third sector lenders can therefore be crucial in attracting people away from doorstep lenders and towards fairer credit. Banks and other lenders should be encouraged to build flexibility into their repayment terms, in order to avoid penalising people whose incomes are most limited. The model of My Home Finance allows a reasonable amount of flexibility such as allowing an occasional missed weekly payment without extra charges, provided the borrower alerts the lender to their situation in good time. Those most financially excluded rarely have an opportunity to build up their credit rating to put them in a good position to borrow from mainstream lenders. Mainstream lenders should be more transparent about their credit scoring methods, which can be opaque and over-schematic. 14 Not-for-profit lenders such as My Home Finance could potentially have a role in helping people to build up a credit history by lending small amounts. As it currently stands, a lack of credit history is interpreted as a poor credit history, so banks could look to use records such as good payment history for bills to help low income consumers build up a credit history. The Federation calls for a wider-reaching review of credit provision for financially excluded and low-income consumers, with the objective of driving out illegal money-lenders and exploring ways to support affordable and responsible alternatives. 14 New Economics Foundation, Doorstep robbery: why the UK needs a fair lending law, 2009 Page 6
4.0 The life of the loan Our report Credit where credit s due showed that in 2005, 7.8m people paid out over 553m in penalty fees, mostly on credit card late fees. Such fees will hit hardest on those at the lower end of the income scale. Research for the Federation found that a 38 charge for an unpaid direct debit represents 17.5% of the weekly income of the typical housing association tenant on 216 per week. In terms of impact, this is the equivalent of being charged 103.60 for an unpaid direct debit, for a typical owner occupier on 592 weekly wage. 15 We support the Government s objective to end unfair bank charges. We are concerned that the high prices for credit are most damaging for lowincome consumers, who can often find themselves paying as much as 1200% APR on interest for payday loans. 16 The market for payday loans is largely demand-driven and not very price sensitive. 17 The Federation therefore supports the idea of adapting advertising regulations so that advertised costs are transparent and comparable in a way that is easily understood. A total cost of credit amount to compare, as advocated by the New Economics Foundation for example, as opposed to an APR, would make more sense to consumers and allow a fairer comparison. 18 It is important, however, that thirdsector lenders, many of whom are small and all of which are already aiming to act in the interests of consumers, are not inhibited by any further regulation. While interest rates caps may have a role to play in reducing fees amongst the commercial sub-prime sector, the Federation believes that on their own, caps may be too blunt an instrument to improve access to credit for some poorer consumers. There is a market for the financially excluded between credit union rates which by law cannot be above 27% APR and the rates charged by doorstep lenders, typically between 180 and 500%, according to the New Local Government Network. 19 Because of the costs involved in lending small amounts to those with a high risk of default, evidence suggests 20 that restrictive interest caps could squeeze out those are not serviced by banks and credit unions, and possibly drive them to illegal lenders. 15 Niall Alexander for the National Housing Federation, Credit where credit s due, 2007 16 Debt on our doorstep, Payday lending in UK: a background note, 2008 17 New Economics Foundation, Doorstep Robbery: why the UK needs a fair lending law, 2009 18 New Economics Foundation, Doorstep Robbery: why the UK needs a fair lending law, 2009 19 New Local Government Network, Circling the Loan Sharks: Predatory lending in the recession and the emerging role for local government, 2009 20 Sharon Collard and Elaine Kempson for the Joseph Rowntree Foundation, Affordable credit: the way forward, 2005 Page 7
Access to affordable credit can be an important way of empowering lowincome households to manage their incomes sustainably. However there is an estimated unmet demand nationally for small-scale affordable credit of around 1.2bn per annum. 21 The Federation believes that an effective means of limiting high prices and ensuring that consumers get a fair deal is to invest in third sector credit providers such as credit unions and CDFIs so that they can achieve the scale to be realistically sustainable. DWP Growth Fund investment of 100m in the last decade has been vital in supporting such enterprises, and we urge the Government to recommit continued Growth Fund support in the next spending round. We also recommend that the Government investigate the possibility of alternative means of channelling investment into social initiatives such as Social Investment Bonds, or making use of the Big Society Bank for supporting third sector financial inclusion initiatives to be able to scale up to achieve wider sustainability. A levy on banks could also be used to fund financial inclusion work in the local area such as that carried out by housing associations, providing debt advice and financial capability support to help local people who are struggling financially. In the interests of greater transparency and accountability, we suggest that the Government investigate the possibility of a community reinvestment act similar to that in place in the US, requiring regulated financial institutions to meet the needs of all borrowers in their local area. 22 Regulation is needed to ensure the disclosure of lending practices by mainstream financial institutions, to make it easier to discern the extent of financial exclusion, and to assist third-sector providers to target their services to where they are most needed. 23 5.0 What happens when things go wrong? There has long been a recognised gap in the availability of impartial financial advice for people on low incomes. The financial services industry tends to package advice with product sales, or offers it at commercial rates through financial advisors, unaffordable to many on low incomes or in receipt of welfare benefits. Citizens Advice Bureaux are key providers of free money advice for those on lower incomes, yet waiting lists for appointments can cause significant delays for people accessing help. 21 Financial Inclusion Taskforce Working Group, Towards a step-change in 3rd sector lending coverage and capacity, 2008 22 See Financial Inclusion Centre, A Financial inclusion manifesto, 2010 23 See New Economics Foundation, Full disclosure: why bank transparency matters, 2006 Page 8
Evidence points to the value of third sector financial advice provision for those on low incomes rather than commercial financial advisers. Research from the Centre for Financial Inclusion has found that a borrower with 15,000 debt could be charged nearly 3,000 by a commercial debt management company. 24 It is clear that it is not in the consumer s interest to add further debt to their existing burden, and it is therefore imperative that not for profit debt advice agencies are supported and funded. The FSA baseline survey identified people who live in social housing as amongst the least capable of choosing suitable financial products and planning ahead. 25 Whilst many individuals on low incomes can be very astute with their money, more needs to be done to increase access to free, accessible, impartial face-to-face financial advice for this group. The demand for free debt advice is likely to grow as families come under increasing financial pressure from public spending cuts. Housing associations are well placed to provide or signpost to financial advice as part of their day-to-day work managing rent accounts. Housing officers can be key in encouraging people to seek early support, and many associations actively signpost new tenants to debt and money advice at the start of a tenancy. In 2006/7 housing associations together provided advice on money and debt benefitting around 57,000 people. 26 Case study: Trident Inclusion Trident Housing Group operates in the Midlands, and has recently developed the charity Trident Inclusion in order to help tackle financial exclusion amongst its customers, of which over two thirds earn less than 200 per week. Some 70% are in receipt of welfare benefits. Trident s income management team has been replaced by a dedicated Financial Support and Recovery team designed to support residents who are struggling financially, alongside the association s standard income management functions. The team includes money advice workers, employment advice and staff who have experience of working with a broad range of vulnerable clients. 24 Financial Inclusion Centre, A Financial inclusion manifesto, 2010 25 Financial Services Authority, Financial capability in the UK: establishing a baseline, 2006 26 National Housing Federation, Winning with money: housing associations contribution to financial inclusion, 2008 Page 9
As part of their approach, Trident runs a money advice service to assist customers with their finances, providing advice on debts and budgeting, financial capability, finding cheaper utility suppliers, and accessing affordable credit. In the year to March 2010, Trident found that their money advice service alone maximised tenants' income by 312,147 in welfare benefits, resulted in 30,644 worth of grants and other financial support, and dealt with 802,159 worth of other debts. Nevertheless, providing such assistance can be very resource intensive. In 2006/7 housing associations invested over 30m of their own resources in financial inclusion services. 27 It is therefore crucial that this valuable work is sufficiently funded and that other providers of debt and money advice work closely with housing associations, so that tenants can be referred easily. Finally, it is important that initiatives to provide money and debt guidance are targeted towards those who are most financially excluded and therefore most in need of free, impartial, and face-to-face advice. The Consumer Financial Education Body provision of financial advice is a welcome step towards increasing financial capability, but as a generic service it will not always be able to target those who are the most financially excluded. It is vital that more funding is made available for housing associations and other organisations who are best placed to provide debt and advice services for the most vulnerable in society. 27 National Housing Federation, Winning with money: housing associations contribution to financial inclusion, 2008 Page 10