Warning on easy credit granting practices
Banco de Portugal has become aware of a number of situations in which natural or legal persons offer unsolicited credit, and require, in return, to receive post-dated cheques or property rights over immovable or movable assets, such as cars.
These entities claim to grant credit quickly, discreetly and waiving complex formalities, to anyone, even those individuals who are not able to borrow from the financial system.
Among other features, such credit offers have the following characteristics:
- Contact with customers is usually established online, by advertising credit offers to individuals that urgently need ‘cash’, most notably via social networks, or by advertising credit offers in major nationwide newspaper ads;
- At times, such credit lending is not directly offered by the lender and, instead, an intermediary entity, after allegedly seeking out credit solutions with the financial system, informs customers that this was impossible due to their credit standing and suggests, as an alternative, that they should borrow from ‘private individuals’;
- This alternative is presented to customers as a serious and simple proposal, in complete accordance with the law, and the intermediary often prepares the necessary documentation to close and conduct the deal;
- In the case of lending collateralised by real estate assets, immediate cash is promised, provided that customers transfer ownership of said asset to the lender – in person, by signing a public deed, or by authorising a representative to do so. 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;
- This option to repurchase the real estate asset is often provided for in the lease agreement, or in the preliminary contract of sale. In the event of non-payment of the monthly instalments – as is often the case for customers with few financial resources –, the repurchase option expires and customers lose their right to get back or use the property;
- In the case of lending collateralised by cheques, customers are informed that these operations are intended for individuals that need to address urgent cash problems, that cheques are drawn for a date in the future and, as advertised, they 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. If the bank account has insufficient balance to cover the payment, customers default on their obligations to the drawee bank and are obliged to pay fees on the overdraft;
- Often, this lending entails that customers sign an admission of debt, which includes not only the borrowed principal but also the interest to be paid on each loan. Consequently, customers never receive the entirety of the amount entered into the admission of debt and find it difficult to determine which interest rate applies to their credit;
- Moreover, when customers default, even if only temporarily, lenders often pursue aggressive debt collection;
- The fact that, in some cases, lenders do not have a fixed establishment or, if so, are constantly on the move makes it extremely difficult for customers to subsequently contact lenders.
These credit offers are often an attempt by unauthorised lenders to derive illegitimate benefit in a deceitful manner by taking advantage of individuals experiencing financial needs. These offers are only aimed at obtaining an upfront payment, plus interest rates which account for as much as 70% of the principal, or at permanently acquiring ownership of movable and immovable assets, for significantly less than their market price.
In addition to the loss, often irrecoverable, of the interest paid to these entities, individuals 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 bank to repay the advance payments made by these institutions.
In this regard, Banco de Portugal issues the following explanations and warnings:
- In Portugal, the activity of granting credit, whatever its type, provided for in Article 4 (1) (b) of the Legal Framework of Credit Institutions and Financial Companies (Regime Geral das Instituições de Crédito e Sociedades Financeiras – RGICSF), approved by Decree-Law No 298/92, of 31 December 1992, may only be carried out by authorised entities, as laid down in Article 10 of the RGICSF;
- 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, namely the granting of credit, pursuant to Article 65 (1) of the RGICSF.
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 fund providers, namely by consulting on Banco de Portugal’s website the list of institutions registered and therefore authorised to carry out financial activities in Portugal.