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Banco de Portugal issues warning on easy lending practices

Today, Banco de Portugal has issued a warning on easy lending practices

By doing this, Banco de Portugal aims to raise the general public’s awareness to a number of situations reported to the Bank in which natural or legal persons offered unsolicited credit and required, in return, to receive post-dated cheques or property rights over immovable or movable assets, such as cars. 

Such offers are often an attempt by unauthorised lenders to derive illegitimate benefit. Often made in a deceitful manner by taking advantage of individuals experiencing financial needs, these entities’ sole purpose is to receive the amount borrowed, charging annual interest rates amounting to over 300% at times, or to permanently acquire ownership of movable and immovable assets, for significantly less than their market price. Entities who do so may be charged with administrative offences – lending without Banco de Portugal’s authorisation as required by law – and criminal offences, for committing crimes such as usury, theft, tax fraud, threatening behaviour and extortion.

People who borrow such loans risk losing, often irretrievably, the interest paid to the lenders. In addition, they may be left without the assets provided as collateral for the loan and, in the case of post-dated cheques, may be obliged to negotiate payment arrangements with the drawee banks to repay the payments made by these institutions in advance if the account has insufficient funds. 

Moreover, borrowers have reported aggressive debt collection methods in case of default.

These entities typically offer this type of loans to individuals that urgently need ‘cash’ by posting advertisements in newspapers, social networks, or directly in people’s mailboxes. They promise to grant credit quickly, discreetly and waiving complex formalities, to anyone, even those individuals who are not able to borrow from the financial system.

Such lenders do not negotiate. They decide, unilaterally, the loan amount, payment dates, interest rates, fees and collaterals the borrower must supply. 

People entering into this type of loans are often required to provide immovable property (houses) or movable property subject to registration (such as cars) as collateral, always below market value or even below their tax value (which in Portugal is usually much lower than the market value). In such cases, the lender will promise to provide the cash immediately, provided that customers transfer ownership of the asset to the lender. Customers are informed that they may continue to live in the said property (often as a lessee) and keep the option to repurchase it after the loan capital and interest have been repaid, within the specified time limit. However, if a borrower defaults on paying the monthly instalments – as is often the case for customers with few financial resources –, the repurchase option expires and the customer loses the right to get back or use the property.

In the case of lending collateralised by post-dated cheques, customers are informed that these cheques can only be cashed on the respective dates for payment. However, for the most part, these lenders cash customer cheques in bulk, prior to the scheduled date. In addition, even if the bank account has insufficient funds, banks  cash cheques of up to €150, so customers default on their obligations to the drawee bank and are obliged to pay fees on the overdraft.

Taking into account the situations reported, Banco de Portugal warns that:

  1. In Portugal, lending, whatever its type, may only be carried out by authorised entities, as laid down in the Legal Framework of Credit Institutions and Financial Companies (Regime Geral das Instituições de Crédito e Sociedades Financeiras – RGICSF);
  2. Registration of these entities with Banco de Portugal’s Special Registration of Institutions is a pre-condition for the exercise in Portugal of financial activities subject to the Bank’s supervision, namely credit granting, pursuant to the RGICSF.

Thus, before entering into loan agreements or presenting any assets or post-dated cheques as collateral, potentially interested parties should carefully check the legitimacy of the lenders. They can do so by consulting the list of institutions registered and therefore authorised to carry out financial activities in Portugal on Banco de Portugal’s website. When in doubt, customers should contact Banco de Portugal.