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- Summary of The Annual Bulletin
- Analysis of Changes in Characteristics of Current Consumer Loan Borrowers Part3
Analysis of Changes in Characteristics of Current Consumer Loan Borrowers Part3
Hiroshi Domoto
Tokyo University Information Science
Osamu Uchida
Tokyo University Information Science
According to the seven major consumer loan companies, the balance of outstanding consumer loans has contracted by about 50 percent from its peak to 4.5 trillion yen. Behind this decline is the December 2006 revision of the three principal statutes on money lending (the Money Lending Business Law, the Interest Rate Restriction Law, and the Law Concerning the Regulation of Receiving of Capital Subscription) intended to protect borrowers plagued by crushing debt. With interest rate ceilings for loans lowered from 29.2 percent to 20.0 percent in June 2010, money lenders have tightened their lending criteria. Moreover, in the January 2006 judgment[1] the Supreme Court effectively rejected the so-called gray-zone 20.0-29.2 percent p.a. interest band between the ceiling rates prescribed by the Interest Rate Restriction Law, and the Law Concerning the Regulation of Receiving of Capital Subscription. After this revision, which renders the gray-zone interest band entirely unlawful, claims for refunds of overpaid interest (kabarai[2]) have surged. As a result, since the revision of the three principal statutes on money lending, tightened lending criteria have lowered the ratio of new loan approvals to applications from previously close to 55 percent to 28 percent. By contrast, refunds of overpaid interest remain on a rising trend, since the January 2006 court decision, to an industry-total of about 2.3 trillion yen. The surge in claims for refunds of overpaid interest has effectively led to the failure of money lenders’ lending function.
The tightened regulations for the consumer loan market have affected also other types of lending. For instance, our survey shows the balance of consumer loan users’ current consumer loans, bank card loans, and loans from relatives and friends. According to our survey, borrowers’ average outstanding balance from consumer loan companies has declined from 1.16 million yen in 2007 to 0.98 million yen in 2009. Bank card loans on the other hand have climbed from 0.72 million yen in 2007 to 0.88 million yen in 2009. And loans from relatives and friends have increased from 1.84 million yen in 2007 to 2.15 million yen in 2009. The ceiling for the total debt balance[3] introduced by the revised Money Lending Business Law in order to curb the number of so-called multiple borrowers[4] puts significant constraints on consumer loan companies’ lending. In spite of these measures, judging by the borrowing behavior of users, the tightening of consumer loan market regulations bears the signs of a zero-sum game inasmuch as it addresses symptoms rather than root causes.
[1] Case number 2004 No. 1518, Case to seek repayment of loan (the Supreme Court).
[2] The category of interventions by lawyers and public agencies typically covers instances in which debtors are disinclined to file for personal bankruptcy and instead seek the assistance of an attorney-at-law (bengoshi) or judicial scrivener (shiho-shoshi, a legal expert in wills, divorces, and other areas) in seeking a reduction in, or exemption from, the loan principal or interest. Overpayment claims on the grounds that past interest payments were made at excessive rates in the gray-zone interest band has risen to particular prominence. Such legal moves seek redress from money-lending firms by demanding not just that the excess amount claimed is either deducted from the loan principal, , but that the lender be made to pay additional compensation in cases in which the excess exceeds the principal that the entire debt is erased. They are collectively referred to as refunds of overpaid interest (kabarai).
[3] Loans by finance companies as a rule are limited to one-third of the borrower’s annual income. Excluded are loans from banks and loans from relatives and friends. Scheduled to take effect in June 2010.
[4] The term “multiple borrower” has no clear definition. For example, the definitions for “multiple borrower” used by the Financial Services Agency and the Japan Federation of Bar Associations are at variance.