Social fund Crisis Loans to charge 27% interest

[Amethyst]

The Government are considering handing over Crisis Loans (those given to people in the direst of circumstances to get them by usually until benefits start up) to Credit Unions to manage and to allowe them to charge 2% A MONTH interest. The Crisis Loans are currently interest free, repayable at something like £1 a week and are an absolute lifeline to some.

Basically from what I can make out the government want to introduce loans to low income families at a more affordable rate than loan sharks, so the government can benefit commercially ?

CURRENT REPORT - http://www.dwp.gov.uk/consultations/...w-approach.pdf



Social fund research by Local goverment - http://www.lga.gov.uk/lga/aio/21731

Helping those in financial hardship: the running of the Social Fund; report by the Comptroller and Auditor General in 2005 - report removed from NAO sites.


Helping Those in Financial Hardship: The Running of the Social Fund
No related links













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Poor families' loan interest fear


The proposals would see credit unions taking control of crisis lending

Low-income households applying for emergency loans from the state could face interest rates of up to 26.8%.
Ministers are considering reforms to the social fund, which extends £500m a year in interest-free loans to some 1.2 million benefit claimants.
The Tories said they were acting like "loan sharks" by suggesting credit unions take over the lending facility and charge up to 2% per month interest.
The government said it wanted to make the fund more widely available.
A Department for Work and Pensions spokeswoman said: "The social fund provides affordable credit for people who need it.
"We are now exploring how we can make it more widely available to people in work as well as on benefits.
"We want to make sure people in need do not turn to illegal loan sharks who can charge interest of 1,000%."
[This] would have people in dire financial circumstances facing an annual APR which is more than twice the current rate of a subprime mortgage


Jenny Willott
Liberal Democrats

No decisions had been made and the government would do nothing to create difficulties for low-income families, she added.
The social fund was set up to help needy people, many of them elderly or disabled, meet the costs of items such as cookers, cots and funerals.
Details of the proposed changes were released in a consultation document.
It sets out how the new interest rate would see the average budgeting loan, of £433.30, incurring interest totalling £47.80.
This would take an additional four weeks to pay off, at the average loan repayment rate of £10.54 a week.
'Simply outrageous'
Shadow work and pensions secretary Chris Grayling said: "These proposals are simply outrageous.
"Thousands of people are losing their jobs every week, and it is nothing short of extraordinary that the Government's answer is to propose abandoning interest-free emergency loans, and start charging 27% a year instead.
"Gordon Brown and James Purnell are behaving like loan sharks."
Liberal Democrat work and pensions spokeswoman Jenny Willott said the proposal was "totally unacceptable".
"What the Government is proposing would have people in dire financial circumstances facing an annual APR which is more than twice the current rate of a sub-prime mortgage.
"Providing advice and information about savings and money management is all well and good but when people are so desperate that they need a crisis loan, it's just not the right time."

[Amethyst]

Re: Social fund Crisis Loans to charge 27% interest

From the governments report November 2008 Consultation Document

The Social Fund protects many against the very high interest charges they might have to pay if they obtained a loan from the commercial sector or worse still from falling into the hands of loan sharks.

The Social Fund Reform Feasibility Study - undertaken earlier this year by KPMG Financial Services (final report is now available on the DWP website) - concluded there was no suitable national partner in the current economic climate.

2.3 The social fund provides credit free of interest charges; credit unions typically charge interest at rates varying from 12.68% to 26.8% APR; while home credit companies can charge interest as high as 246.5% APR. We would like to expand access to affordable loans. As explained in section one, there are several initiatives in hand to do this. However, we would also like to build on the social fund as a further step in this direction.

we are already building capacity in the third sector and we are interested in how we might work more closely with Credit Unions, CDFIs or other providers - either individually or in partnership - to deliver the financial services and advice our customers need. This part of the financial sector is very experienced in helping people on low incomes and has proved successful in giving them a sound financial basis upon which to progress.

3.3 We are therefore seeking views on the merits of taking legislative powers to allow some credit unions, and similar organisations from the third sector, to take over the provision of credit to social fund customers in their areas. As well as offering affordable loans, our new partners could also offer a range of other services, such as savings accounts and financial advice, under contract to DWP. To fund the cost of these extra services, we are proposing that the credit offered under these arrangements could attract an interest charge of 1 - 2% per month - the same criterion which applies to Credit Unions.

Impact of charging interest
In 2007-08 the average initial budgeting loan award was £433.30. The estimated average loan repayment for all loans was £10.54 a week. If interest were charged at 2% a month it would take 46 weeks instead of 42 to repay such a loan at such a repayment rate with a total interest paid of £47.80.

[Amethyst]

Re: Social fund Crisis Loans to charge 27% interest

SOME GOOD NEWS too

The Government are looking at advance payment of benefits rather than arrears. this would mean you can start receiving as soon as you apply and if the relevant checks show your ewntitlement would be different or lower you would then repay that amount.

We are looking at alternative ways of helping people at this point and are considering the possibility of introducing a new system of advance payments of benefits, whereby those at risk of hardship could receive 75% of their normal benefit immediately. The advance would then be recovered in 6 instalments once continuing benefit payments had started. Some advance payments would be available before all the normal checks to verify benefit entitlement had been completed but would not replace the need for these checks.

[Amethyst]

Re: Social fund Crisis Loans to charge 27% interest

• Home
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• Social Fund reform feasibility study

Social Fund reform feasibility study

"No one Written off: reforming welfare to reward responsibility" explained the intention to explore the scope for the Social Fund budgeting loans scheme to provide more effective help to allow more people to overcome financial exclusion. Read more about this in
Chapter 6 (264KB) of the “No one written off” consultation document.
Following the announcement in the Financial Inclusion Action Plan published by HM Treasury in December 2007, DWP commissioned KPMG to undertake a financial practical feasibility study into whether the private and third sectors can be brought into partnership with the Government in delivering a reformed Social Fund budgeting loans scheme. The study explored possible models for an alternative loans scheme which would also help people on low income access a range of other financial services such as financial advice.
The findings from the feasibility study are published in the report below.

• Social Fund Reform – Feasibility Study (517KB)
• Social Fund Reform – Feasibility Study Appendices (198KB)

bearing and the target consumer market is expanded beyond those on benefits with the collection of payments in the control of the DWP. To enable this expanded model to work additional distribution, administration and collection capacity needs to be added to the current Budgeting Loan Scheme. This infrastructure would include:
• A call / internet contact centre to act as an additional distribution route and customer contact centre;
• Enhanced credit scoring / lending decision policies to help reduce bad debt;
• Third party outsourced loan administration;
• Third party collection mechanisms for those unable to make repayments by way of direct debit (‘DD’) payments;
• Third party debt collection mechanisms for the recovery of bad debt; and
• Crucially, additional funding from the private sector and structures in place to accommodate this.
Figure 5(a) shows a diagrammatic overview of the business model. For the remainder of this report, this will be referred to as the Privately Funded model (‘PF model’) or entity (‘PF entity’).

5.6.1 Charging of interest and fees
Most market participants understood, and indeed agreed with, the concept of charging both interest on the loans and potentially late payment fees. There was, however, considerable debate around how this could be perceived by the general public.
As the loans are currently interest and fee free, a number of the market participants felt that there would be a significant reputational risk in moving to an interest bearing scheme as it could be seen as financially disadvantaging a section of society that is felt to be vulnerable. Whilst this is a significant risk predominantly to the Government, it was felt that being associated with any bad press surrounding the scheme would act as a disincentive to being involved.

5.6.4 Collection strategies
The current PF model assumes that where bad debt reaches a certain age, it will be sold to a debt collection agent. The DWP’s own collection department currently outsources some of its collection activity to debt collection agencies and so the practice of using these is not new.
However, a number of the market participants again expressed some concern over the reputational risk of using DCA’s to collect from the financially disadvantaged. To overcome this issue, were DCA’s to be used, the service level agreements would need to be drafted in such a way that the collection techniques used could not lead to reputational damage.

[Amethyst]

Re: Social fund Crisis Loans to charge 27% interest

Another sensible idea ...

8.4.1 Communication with customers
As part of the collection process, the model assumes that borrowers will be sent a text message two days prior to their payment being due. Additionally, where a payment is missed, the borrower will be phoned that evening to determine if this was an oversight or a genuine issue around repayment of the debt.
To be able to maintain contact with borrowers in this way, it will need to be written into the loan documentation that these forms of communication, and any others felt appropriate, are permitted to be used.

[natweststaffmember]

Re: Social fund Crisis Loans to charge 27% interest

Are NINO's included in the study?
If they do go down the route of Credit Unions and they charge 24%(worst case scenario) are they credit scored?
Are social fund loans processed using the same methodology as Credit Unions?
If it ain't broke, why is it being fixed?

[Amethyst]

Re: Social fund Crisis Loans to charge 27% interest

Interesting

Where a payment is missed without prior agreement, a charge will be made against the account by way of contribution towards the costs involved with chasing that payment. 50
This will be kept to a minimum amount (currently assumed to be £5 in the financial model compared to the industry norm of £12) to ensure it remains within OFT guidelines.

Which OFT Guidelines - its not a credit card. I don't beleive their are actually OFT Guidelines for late payment charges on loans. ALSO a little earlier in the report they have stated a Direct Debit collection costs 2 pence, a text reminder costs 3 to 5 p and then phone call cost.


This is the GOVERNMENT and LOANS to the most vulnerable members of society.

So 26.8% PA Interest rates, late payment fees, direct debits, default notices, collections agents, making sure the government have no section 75 liabilities.....oh the joy of being vulnerable in this country.

They need to keep CRISIS loans seperate - Home Budgeting Loans for low income families - yes a sensible idea - keeps them away from Loan sharks and lenders like Provident, Kensington etc and others - but should the government be profitting from it ?

[Amethyst]

Re: Social fund Crisis Loans to charge 27% interest

The KMPG report concludes there is no current partner suitable, the government consultation appears to be hedging towards Credit unions, which are being perceived as morally acceptable - however this has big problems with lack of access.

It also appears the Post Office would be interested in distributing the scheme alongside the POCA which makes much more sense to me, but it appears at higher cost.


The KMPG report does state theres not much of a problem with bad debt under the current scheme. the current loans are only available to people on benefits and payments are subtracted at source and they have very few write offs or bad debts.

They seem to be changing it to a commercial venture....to make money, though the model put forward seems to be a loss making model of some £600 million.

Interesting report to read (the KMPG one that is not the government consultation)

[Amethyst]

Re: Social fund Crisis Loans to charge 27% interest

Credit Scoring & CRA checks are page 40 onwards. Para 8.2.1



My vote would be for running it through the post office.

Credit unions need a lot more infrastructure setting up with regards to systems and availability.



Profit and Loss forecasts in appendix - http://www.dwp.gov.uk/resourcecentre...report-app.pdf

[righty]

Re: Social fund Crisis Loans to charge 27% interest

This government really is a blood disgrace trying to take advantage of people already in difficulty & using the argument that their charges will be less than loan sharks. It beggars belief

Also the social fund is a bit of a sham in that even when a claimant qualifies they are often refused on spurious grounds because of internal targets

& I know this having spoken to a senior civil servant responsible for deciding who gets one who I might continues to award them if the criteria is met much to the annoyance of his superiors

[Amethyst]

Re: Social fund Crisis Loans to charge 27% interest

Aye theres parts in the previous reports about the social fund, their isn't enough enough budget to meet demand so areas were using up there quota in first six months then having to turn people down.

Now I THINK this is only relating to BUDGETING LOANS and not CRISIS LOANS which are all part of the social find - alongside community care grants etc. http://www.jobcentreplus.gov.uk/JCP/...dev_015606.pdf is the current leaflet of information.

[righty]

Re: Social fund Crisis Loans to charge 27% interest

Sorry AME but my understanding is it applies to ALL the loans.

The officer I refer to is facing disciplinary action because he refuses, as instructed, to deny loans to those who qualify particularly for crisis loans

[Amethyst]

Re: Social fund Crisis Loans to charge 27% interest

Mmmmm needs clarifying. Think in the KMPG report it said it excludes crisis loans but in the government report it doesn't mention that exclusion.

http://www.dwp.gov.uk/resourcecentre...-doc-nov08.pdf = KPMG report

3.1 The issue
The DWP currently provides significant numbers of loans to those on benefits through both the Budgeting Loan Scheme (which made just under 1.3 million loans during the 2006/07 financial year with a total value of approximately £590 million), and the Crisis Loan Scheme (which is outside the scope of this study). However, the Budgeting Loans scheme is cash limited and demand on it is high. The DWP has asked that the study should be based on an assumption that no additional resources would be made available.

is that what it means?

[Amethyst]

Re: Social fund Crisis Loans to charge 27% interest

Mmmmm think you are right....they sound like they want to replace crisis loans with the budgeting loans and the advance payment of benefits . the theory being that faster payment of benefits will negate the crisis loan need somewhat.

http://www.dwp.gov.uk/consultations/...w-approach.pdf

Instead of allowing customers to receive budgeting loans after they have been on benefit for six months, or crisis loans in an emergency, we are suggesting a single credit facility which people can turn to as soon as they claim benefit. A single loans system could also cater for some of the needs now met by community care grants. We want to look at how community care grants might be focused more clearly on our vulnerable customers.

[Amethyst]

Re: Social fund Crisis Loans to charge 27% interest

Kitty Ushers denying it all was ever intended to happen (rather a waste of tax payers commissioning the KMPG report me thinks)

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Series: Hard times: Public services and the financial crisis

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Minister's U-turn on interest charges for social fund after 'loan sharks' jibe

• Nicholas Watt
• The Guardian, Monday 22 December 2008
• Article history

The government was yesterday forced to perform a rapid U-turn over plans to charge high-street levels of interest on loans to some of the poorest people in Britain who rely on a social fund when they experience financial difficulties.
Hours after the government was accused of acting like "loan sharks", the welfare minister, Kitty Ussher, took to the airwaves to deny that interest charges of up to 27% would be imposed on vulnerable people using the fund for vital items such as cookers and beds.
The row erupted after the Mail on Sunday published details of a government consultation paper which proposed reforms to the social fund. Described by the government as a "lifeline" for people on low incomes, the fund last year made 1.2 million free loans worth £500m.
The paper proposed expanding the scheme by teaming up with credit unions which charge interest. It said: "Interest would be charged in return for these services but this would be at affordable rates compared to those charged by commercial lenders in the same market. We propose to set it at the maximum charged by credit unions of 2% per month (26.8% apr)."
This was seized on by the Tories as "simply outrageous". The shadow work and pensions secretary, Chris Grayling, said: "Gordon Brown and James Purnell are behaving like loan sharks. If they press ahead with these plans, there will be a huge row in parliament, and rightly so."
Lord Kinnock, the former Labour leader, tore into the plan on the BBC's Andrew Marr Show. "I don't know where the idea of imposing any form of interest on repayment of social fund loans comes from, but I know where it is going to, and that is absolutely nowhere. There is no point in doing it, let alone no justice."
The government initially confirmed that the plan to charge interest was under consideration. An hour after Kinnock's appearance on BBC1, the defence secretary, John Hutton, indicated on Sky News that the proposal was still out for consultation. Hutton, a former work and pensions secretary, dismissed the Tory "loan shark" attack, but added: "What we do need to do - and I think it is a reasonable consultation to start - is to see if there are ways we can improve the way the social fund works by involving the credit unions, and when it comes to the detail of what people pay or don't pay, we can look at that."
Just over an hour later, Ussher embarked on a round of television interviews to deny that the government would impose interest charges on people using the social fund. "We are absolutely not proposing to charge interest on social fund loans," she told the BBC News Channel. "I think that would be the wrong thing to do."
Ussher confirmed that the government wanted to work with credit unions, but it would not allow interest to be charged. "We do propose expanding the way that crisis loans work, to make them more available to more people, but we are not proposing charging interest. I think the confusion has arisen because one of the things we do want to do is explore partnership working with great organisations which in local communities do give affordable credit, such as credit unions."
Ussher said the government was looking at ways to work with credit unions to steer people away from real loan sharks, who charge up to 1,000% interest. One option is to lift the restrictions on the type of spending the loans can be used for, potentially allowing state money to be used for Christmas presents.
"We want to stop having a situation where some people are being encouraged to lie to us, because they are forced to prove they need loans for things like their boiler breaking down, when actually they quite legitimately want to perhaps buy Christmas presents for their kids," she said. "I don't want them to have to go to loan sharks to do those things that all families have to do, so we are talking about removing some of the restrictions, as long as people can afford to pay it back. But they will not be charged interest."
Social lifeline

The social fund is available mainly to people who receive pension credit and benefits, though it is open to others who are unable to meet "immediate, urgent needs". There are three types of payments:
• Community care grants, paid mainly to disabled people and lone parents to help them lead independent lives;
• Interest-free budgeting loans for people who have been on a qualifying loan for at least 26 weeks, to help with routine lump sum expenses such as replacing a cooker or a bed;
• Interest-free crisis loans to help people after an emergency or disaster. The government has also been looking at ways of involving credit unions, which charge interest, to try to expand the scheme.