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New Act – Loans or Cheaper

At the end of August 2015, the President of the Republic of Poland signed an amendment to the act on financial market supervision. The said amendment introduces, among other important changes regarding the non-bank loans market.

Companies that offer ” loans” and longer loans will have to come to terms with the cost limit.

The new regulations also introduce other requirements for lenders (e.g. regarding the legal form of companies). From the point of view of loan companies’ clients, the changes are certainly positive …

Non-bank companies have six months to reduce the cost of loans

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The Act introducing changes to the rules of operation of loan companies was published on September 10, 2015. Most of its provisions will come into force on October 11, 2015.

So short, however, the deadline for making changes will not apply to restrictions on the cost of loans. The regulations governing this issue will begin to apply after six months. The semi-annual transition period is a necessity because cost limits force some lenders to change their offer, tighten criteria for customer assessment or withdraw from the market.

For many lending companies, it can be a major problem to reduce non-interest costs (e.g. commissions and additional fees). It is worth remembering that it is commissions and fees, not interest, that provide lending companies with the vast majority of profits. Pursuant to the new regulations, the following mathematical formula will determine the maximum amount of costs other than interest.

MPKK ≤ (K � 25%) + (K x (n / R) x 30%)

Symbols:
MPKK – the maximum amount of non-interest loan costs
K – total loan amount
n – repayment period expressed in days
R – the number of days in a year

As you can see, the maximum level of non-interest costs will be the sum of 25% of the loan value and an additional factor (30% of the loan value), calculated in proportion to the repayment period. For the annual loan, the non-interest cost limit will be 55% of the amount paid. For a mature loan, the corresponding limit is 40% (25% + (183 days / 365 days) x 30%).

If we consider the moment for 30 days, it turns out that the limit of non-interest costs is 27.47% of the borrowed amount. The table below presents the number of cost restrictions on the example of specific loans.

Presentation of the non-interest cost limit for selected loans

Presentation of the non-interest cost limit for selected loans

It is worth noting that the new law introduces an additional cost limitation. The maximum level of non-interest costs may not be higher than 100% of the borrowed amount (irrespective of the length of the repayment period). Costs that exceed this limit simply should not be due to the loan company.

The lender will not be able to charge non-interest costs higher than the limit set by the above formula. The interest rate on loans will still be subject to the current limitation from the Civil Code (maximum interest per annum is 400% of the GFI Lombard rate).

It is also significant that the non-interest cost limit also applies to amounts charged for extending the repayment date for the first 120 days. Such regulation should limit the profits associated with “rolling” loans.

The new limit of 600% of the GFI reference rate (currently: 600% x 2.50%) will also apply to fees and interest charged for overdue payments. However, the side effect of the introduced cost restrictions may be the end of the promotion. It is possible that in six months the free “moments” for new customers will disappear from the market offer.

Smaller companies will have to withdraw from the market or raise capital

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Before new regulations come into force, lenders will not only have to adapt their price lists. The Act, which the President recently signed, also introduces requirements regarding the legal form of loan companies. In seven months in the non-banking sector, funds can only be borrowed by enterprises operating as joint-stock companies or limited liability companies.

In addition, each lender will have to own at least USD 200,000 in equity. These funds should not come from the credit, loans, bond issues or undocumented sources.

For loan market leaders such as Good Finance or Honest Bank, new requirements will not be a problem. Less known lending companies, however, face a serious dilemma. Some of them in six to seven months can simply quit.

Such a change will result in the professionalization of the loan market and a further increase in the importance of companies that already have the most clients.

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