Banks twice as likely to charge for early loan repayment

The Fair Trading Commission (FTC), in an expanded study published this month, found that commercial banks were at times twice as likely to charge customers for early repayment of loans, compared with other lending institutions.

The banks, however, always told customers of the charges prior to engaging in lending, but that was not always the case with other institutions, especially microfinance lenders, the FTC found in its study titled Early Repayment of Personal Loans: Policy of Banks, Credit Unions, and Microfinance Institutions.

Early repayment entails repaying a loan in full prior to the maturity date. Persons do this to save on the total cost of the loan, which increases over time with monthly interest charges. The FTC found that some customers were charged the full cost of the loan or additional fees, regardless of the repayment schedule.

“Based on complaints received by the FTC regarding the early repayment of personal loans from MFIs, some consumers were being charged the complete interest on the loan and, in some instances, paid a penalty for early repayment,” said the report authored by Kristina Barrett-Harrison.

FTC report added that the discrepancy between consumers’ expectations and their actual experiences with MFIs – which are alternatively referred to as microlenders, microfins or payday lenders — suggests that consumers are not fully aware of the policy on the early repayment of loans.

The FTC said 14 per cent of the banks, 7.0 per cent of the microfinance institutions and 5.0 per cent of credit unions stated in its survey that a penalty might be applied based on the type of personal loan or the terms of the loan contract.

Despite the banks being twice as likely to charge for early payment, the Bank of Jamaica, which regulates the banking system, indicated that the disclosure is in keeping with expectations.

“Banks are supposed to notify customers up front of all options, charges and possible penalties, in simple terms. Failure to do so would be a breach,” said Tony Morrison, BOJ director of public relations, in response to Financial Gleaner queries.

Regarding microlenders, the FTC recommends customers ask direct questions prior to signing loan agreements. New legislation was passed in January, the Microcredit Act, that is expected to provide protections for small borrowers against predatory lending practices.

Barrett-Harrison said that the law, once enacted, will require microfins to provide consumers with the terms and conditions for early repayment of loans before they sign the loan agreement.

“Therefore, this legislative change will reduce, if not eliminate, incidences of information asymmetry in the microfinance sector,” her report noted.

Between January and March 2021, the FTC examined the websites of all eight commercial banks, 22 credit unions, and 13 members of the Jamaica Association for Micro Financing, known as JAMFin, to check for information on their policy regarding the early repayment of personal loans. The FTC said a few of the commercial banks and credit unions disclosed information on their websites; however, none of the microlenders in the study had information on their websites regarding their policy on the early repayment of personal loans.

The FTC then followed up its review with telephone enquiries to various financial institutions on whether there was a penalty for early repayment and whether the information was communicated to consumers at the start of the loan process. The results of the telephone survey showed that 95 per cent of credit unions, 93 per cent of MFIs, and 71 per cent of commercial banks responded that no penalties were applied.

steven.jackson@gleanerjm.com