Negatives of borrowers charged by loan facilitators

By Guang Zhenming, Joint-Win Partners
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A case involves company G, which is a financial institution, and company F, a loan-facilitating institution, with Xia and Liu as the borrowers. On 5 January 2017, borrowers Xia and Liu signed a loan contract with company G, stipulating that they borrowed RMB800,000 (USD111,000) from company G for a term of five years with repayment in instalments comprising equal principal and interest.

After receiving the loan, Xia immediately transferred RMB72,933 to Bao, an employee of company F, including the first instalment of principal and interest (RMB23,333) and other expenses (RMB49,600). Subsequently, Xia and Liu, starting from February 2019, defaulted on the loan. Company G then filed a lawsuit in court, seeking an order for Xia and Liu to repay the principal amount of the loan, which amounted to RMB566,675, along with late fees and legal expenses.

The court found that company G and company F had signed a co-operation agreement, stating that company F would assist company G in sourcing eligible potential borrowers within regions covered by the partnership. Company F was not allowed to charge the borrower any fees in any name on top of the loan principal and interest, overdue penalty interest, liquidated damages and other fees that the borrower should pay in accordance with the loan contract. Company F had to provide the services agreed upon under this agreement and was entitled to charge its partners fixed service fees.

Behaviour analysis

Guang Zhenming, Joint-Win Partners
Guang Zhenming
Senior Partner
Joint-Win Partners

According to prevailing regulations, company G committed the following violations in the case.

“Cut interest” collection. On the day Xia received the loan, he transferred RMB72,933 to Bao, an employee of company F, including the first instalment of the principal and interest of RMB23,333. Company G would have violated the Measures for the Administration of Consumer Rights Protection of Banking and Insurance Institutions and infringed on consumers’ rights to fair trading if the transfer was required by company G, who would bear corresponding administrative liabilities.

Furthermore, in accordance with the Civil Code and the Provisions of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Trial of Private Lending Cases and other provisions, it would have been contrary to substantive fairness and increased the borrower’s debt burden if the repayment of the first instalment of principal and interest was required just on the day of borrowing. Hence, the actual loan amount should be regarded as the principal, and the court finally determined that the RMB23,333 should be deducted as the “cut interest”.

Inadequate supervision and administration on loan facilitators. In this case, company G failed to fully supervise and administer the behaviour of company F, its loan-facilitating institution. The co-operation agreement signed between company G and company F clearly stipulated that company F was not entitled to charge any fees to the borrower in any name. In practice, company G entrusted company F to contact borrowers and sign the contract.

During the entire loan process, company F was responsible for communication and negotiation with borrowers, with the first instalment of principal and interest collected by company F as well, which ultimately led the court to determine that Xia and Liu had reasons to believe that the RMB49,600 collected by company F should be considered as “cut interest” and should be deducted accordingly.

Insight into negative impacts

There may be the following negative impacts on financial institutions if loan-facilitating institutions charge fees directly to borrowers.

Consumer complaints. Based on the model in which loan facilitators charge borrowers directly, disputes may arise between these facilitators and borrowers. In a lending model with loan facilitators levying charges directly on borrowers, conflicts can emerge between these facilitators and borrowers.

In reality, borrowers often struggle to distinguish between loan facilitators and traditional financial institutions due to limited financial knowledge. This confusion leads to misunderstandings and direct grievances filed by borrowers against the financial institutions involved. Consequently, financial institutions face mounting pressure to safeguard consumer interests.

Administrative penalties. According to the Notice on Regulating and Rectifying the “Cash Loan” Business, when banking and financial institutions collaborate with third-party entities to conduct loan activities, they must demand and ensure that these third-party entities refrain from charging borrowers any interest or fees.

In practice, some loan-facilitating institutions still impose charges on consumers under different pretexts beyond interest and fees. Currently, there are no explicit provisions to address and validate the effectiveness of such actions by these loan-facilitating institutions, and no direct regulations are imposing more specific requirements on financial institutions regarding this matter. Such actions of loan-facilitating institutions undeniably pose a risk of non-compliance for financial institutions, leaving them susceptible to potential penalties from regulatory authorities at any time.

With regard to the case in this article, the court holds that a negative evaluation should be made since a financial institution and a loan-facilitating institution have agreed that the loan facilitator is prohibited from charging fees to borrowers, yet the loan-facilitating institution still charges fees in the name of broker fees, service fees and more, which increases the funding costs of borrowers.

For fees charged by loan facilitators without applicable legal provisions or contractual basis, the relevant principal and interest should be deducted from the borrower’s repayment to regulate the loan facilitation and reduce the funding costs of borrowers. Financial institutions may suffer financial losses when the principal and interest are deducted from the fees charged by loan facilitators.

When adopting the loan facilitation model, financial institutions should, in accordance with the notice and other regulatory regulations, specify in the co-operation agreement signed by both parties that the financial institution should directly collect all fees from the borrower. Additionally, financial institutions should tighten their supervision over loan facilitators to prevent them from charging fees to borrowers privately.

Guan Zhenming is a senior partner at Joint-Win Partners

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