In July this year, the Straits Times reported a case involving a woman who was pressured by a licensed moneylender to renew her loan 16 times, obliging her to repay far more than what she owes.
Using the woman’s case as an example, we discuss the ‘refinancing’ tactic used by more opportunistic moneylenders to overcharge their borrowers and how borrowers in a similar plight can seek legal recourse.
A licensed moneylender’s refinancing scheme binds a borrower to repay more than twice of what she actually owes
Since January 2015, a businesswoman has been taking loans from Resource Credit Pte Ltd, a licensed moneylender. She was also imposed with a refinancing scheme introduced by Resource Credit which included a 10% administrative fee for every loan refinancing arrangement.
On 5 October 2015, Resource Credit persuaded her to take up a loan for the principal sum of S$50,000, repayable the next day. When she was unable to meet her payment obligations, the moneylender again persuaded her to refinance her loan by paying a 10% administrative fee. Just like this, she renewed her loan 16 times and paid more than $211,856 in repayment though she had only borrowed $128,000.
Furthermore, Resource Credit claimed a sum of $135,000 which she allegedly owed by way of a statutory demand.
Resource Credit’s (moneylender) refinancing transactions under scrutiny for excessive interest and for being substantially unfair
The court decided to set aside the moneylender’s statutory demand and examine the merits of the refinancing transactions given that:
- The interest charged in respect of the loan is excessive
- The transaction is unconscionable or substantially unfair
Excessive interest disguised as an “administrative fee”
Under the prevailing moneylenders’ rules, a moneylender could impose the following for each loan agreement:
- 10% administrative fee
- 4% per month interest
- 4% per month late interest
- $60 late payment fee
Yet, the court found that the administrative fee in Resource Credit’s loan refinancing transactions is not a “permitted fee” under Section 2 of the Moneylenders Act, due to it being nothing afresh for the moneylender to administer and its purpose in enticing the borrower to continue paying a relatively small amount. Simply put, the 10% fee is a form of additional interest disguised as “administrative fee”.
In addition, the court found that the 18 loans were documented as separate contracts which aggregate to $1,558,000 on paper.
Multiple refinancing loans used to impose once-off administrative fees more than once per month
This particular moneylender’s conduct is no doubt opportunistic as although the administrative fee was meant to be once off, they circumvented this and imposed administrative fees not just once, but more than once per month through the multiple refinancing loans. As stated in the Advisory Committee on Moneylending in its Final Report in 2015, a once-off administrative fee is meant to defray some of the costs of loan defaults.
After looking past the label of “refinancing” cleverly employed to justify the legitimacy of the loan, the court audited the substance of the transactions to find that they were unconscionable and substantially unfair to the borrower.
Legal recourse for borrowers from licensed moneylenders
Borrowers can commence further legal proceedings against licensed moneylenders to seek a return of the monies that have been overpaid. Under section 23(3) of the Moneylenders Act, the court can:
- Order the moneylender to repay any excess payment by borrower;
- Set aside wither wholly or in part, or revise or alter, any guarantee given or the contract for the loan;
- If the moneylender has disposed of the security, order the moneylender to indemnify the borrower or other person sued for the loss of the security.
‘Refinancing’ has become a phenomenon in the moneylending industry
Mr Lee Ee Yang, who acted for the borrower in the proceedings against Resource Credit in the High Court, commented that the court’s decision would set a precedent for future cases. He said, “It is common knowledge that in the moneylending industry, this refinancing tactic has become a phenomenon, which resulted in the issuance of the Registrar’s Direction No. 1 of 2016 and Registrar’s Direction No. 1 of 2017. This judgment would provide guidance on how the court would examine the transactions between moneylender and borrower, with substance over form, should future cases be before the courts.”
Licensed moneylenders can work with voluntary welfare organizations and the Ministry of Law to protect borrowers
Nonetheless, Resource Credit’s conduct is not representative of the rest of the moneylending industry. “There are black sheep in every industry, so we cannot classify all moneylenders as the same,” comments Mr. Wong Kee Soon, head of Adullam Life Counselling with 30 years of experience in helping people with debt issues.
An advantage of working with licensed moneylenders is their capacity to work closely with voluntary welfare organizations (VWO) and the Insolvency & Public Trustee’s Office (IPTO) under the Ministry of Law to protect borrowers. According to Mr Wong, all three parties (IPTO, VWO and the moneylender) need to co-operate and work out a win-win situation in order to prevent borrowers from turning to loan sharks. VWOs can assist borrowers in negotiating with licensed moneylenders, but not with loan sharks.
“Loan sharks may not keep their word,” says Mr Wong. “For example, they may say to a borrower who has already paid that they didn’t receive the money or that the money was paid to an invalid account.”
Know your rights when borrowing from licensed moneylenders
You can read our previous article on borrowing from licensed moneylenders or talk to a lawyer by booking a Quick Consult. When you get an AsiaLawNetwork Quick Consult, a lawyer will call you back within 1-2 days for a transparent, flat fee at S$49 to answer your questions and give you practical legal guidance on your potential next steps.