As of December 31, 2019, there were over 2,300 approved lenders in Hong Kong. Approved lenders, outside the banking system, are an alternative source of financing for individuals and businesses. They are currently regulated by the Money Lenders Ordinance (“MLO”) in Hong Kong. The existing MLO was enacted in 1980 with the aim of addressing the social problems created by loan sharks. It provides a framework for the approval of money lenders, the control of money lending transactions and the prohibition on charging excessive interest rates. Almost 40 years have passed, the practices and technology of consumer loans have evolved. However, no major reform on the MLO has been carried out. It is sometimes difficult for approved lenders to adapt their current business models to relatively old legislation. It is also not uncommon for borrowers to raise technical arguments about the validity and enforceability of a loan agreement, i.e. whether a money lender has complied with all the provisions. relevant to the MLO in granting the loan. In 2019, there were already more than 30 court cases on the MLO.
Some notable requirements under the MLO
Among other requirements, a licensed money lender is required: –
- Not to carry out activity as a money lender at a location other than the premises specified in this license (article 7, MLO)
- Have a written note or memorandum, which contains certain mandatory information, personally signed by the borrower within 7 days of entering into a loan agreement (Article 18, MLO)
- Allow early repayment and / or repayment in installments of a loan (articles 21 and 22, MLO)
- Do not charge default interest at a rate higher than the original effective interest rate (article 22, MLO)
- Not to charge interest at an effective interest rate higher than 60% per year (article 24, MLO). Lenders should also keep in mind that a loan with an effective interest rate above 48% is presumed to be exorbitant (Article 25 MLO)
- Not to charge any incidental or related costs to the negotiations or to the granting of the loan or the loan proposed (article 27, MLO).
We will discuss some of the above questions with reference to some recent cases.
Article 18 (remark)
As summarized above, Section 18 (1) of the MLO requires that a note that meets the minimum content requirements under Section 18 (2) be personally signed by a borrower within 7 days of the conclusion of a loan agreement, failing which the loan agreement will be inapplicable. If subsections 18 (1) and (2) are not complied with in accordance with subsection 18 (3), then the onus is on the moneylender to satisfy the court that, in all the circumstances, it would be unfair to deny the money. ‘execution. Section 18 (3) gives the court a very wide range of discretionary powers, allowing it to rewrite the loan agreement on terms it deems fair. This ranges from canceling the loan contract on one side to fulfilling the contract in its entirety on the other. If, in all the circumstances, it would be unfair not to allow performance of such agreement or guarantee, the court has absolute discretion to order performance to the extent and subject to modification. or exceptions that it deems fair.
The Court of First Instance considered the effect of Article 18 in the case of Fast Billion Holdings Ltd v Sun Pui Yuk (2019). In the case of Quick Billion, the lender charged an additional HK $ 60,000 in “initial interest”, without this being mentioned in the note to Article 18, which increased the effective interest rate from 30% per annum to almost 42 % per year. The court didn’t like the way the lender hid this and the fact that the lender’s representative seemed to distort the truth in his affidavit. The court therefore decided that it would not be unfair to maintain the bad loan.
This case highlights the importance not only of complying with Article 18 and the rest of the MLO, but also of having an understandable set of documents that cannot be considered misleading. Money lenders should therefore keep in mind that courts do not always enforce a non-conforming loan by allowing recovery of the principal and a market rate of interest. The court expects approved lenders to have documents and practices in place that allow borrowers to understand what they are agreeing to. It is therefore important that licensed money lenders write clear, straightforward loan documents that comply with the MLO.
Articles 22 (default interest), 24 (excessive interest rate) and 27 (irrecoverable costs)
These three questions were considered in detail by the Court of Appeal in the case Easy Fortune Property Limited v Yung Chun Him (2019). We should start with item 24 (interest rate) first.
What is the difference between the “real rate” and the “assumed rate” of interest for the purpose of testing whether the effective interest rate exceeds the absolute bar of 60% pa? The court in Easy fortune confirmed that, when an actual rate was specified in the note to Article 18, Annex 2 of the MLO, which contained a formula for calculating a “deemed interest rate” in certain situations, does not ‘did not apply. The “real rate” designates a single and constant rate applied to the entire loan and does not admit of a rate varying from time to time. As such, it cannot be applied to agreements where the repayments include elements of both principal and interest. In these deals, even if the borrower makes the same monthly repayment at the same interest rate, the truth is that (since the principal decreases steadily) there is a hidden increase in the interest rate. There is no single constant interest rate and the wording “real rate” does not apply. In these situations, then regulatory calculations should be applied. Repayments must be split between principal and interest to arrive at a true “statutory average” rate of interest. The calculations in Schedule 2 are then relevant to produce a “deemed rate”. The court confirmed that in situations where the wording “actual rate” applied, where the context required that the “effective rate” be used under section 24, it always meant the “actual rate” but not the “actual rate”. “Deemed rate”.
The court clarified that when we sought to analyze whether section 24 had been violated, we did not analyze a default scenario. We could just look at the agreed interest rate and compare it to the legal maximum of 60% per year. If a higher interest rate is charged due to default, it becomes a potential problem under section 22 but not under section 24. Under section 22, simple interest can be charged. charged on the overdue amount at a default interest rate not exceeding the contractual interest. provided that it does not make the effective rate greater than 60% per annum payable on account of the principal apart from any default in payment.
Regarding article 27, the court made a distinction between establishment costs and collection costs. Article 27 prohibits “costs, charges or expenses … for or in connection with or preliminary to the obtaining, negotiation or obtaining of any loan granted or guaranteeing or guaranteeing the repayment thereof”. Since the collection costs in the Easy fortune the matter included the fees and expenses incurred by the money lender in demanding payment of the overdue amount, it was not about obtaining, negotiating or securing the loan in question. There was no violation of section 27. The collection charge was arguably a violation of section 22 (1) (c) as it would have increased the interest rate in the event of default, but the court confirmed the applicability of the loan agreement to a certain extent. .
Article 7 (approved premises)
In the case of Tong Bo Finance Company Limited v Veronica Ella (2019), the Respondent sought to argue that the Applicant violated Section 7 of the MLO by engaging in money lending activity outside of the specified premises. The court took into account that the defendant (a) did not attend the plaintiff’s office himself and (b) concluded the transaction at the offices of the law firm in question where the documents were explained to the defendant and her husband and signed by them, but considered that such a fact was not sufficient to establish that the plaintiff was carrying on business in a place other than its own premises, as specified in the license.
Although the court gave no guidance as to where a moneylender is considered to be carrying on a business, we suggest, based on this and other decisions of “carrying on a business” This is where the credit decisions are made by the money lender. , even if the borrower is physically elsewhere when he commits to borrow.
The Consumers Council released a report titled “Money Lending – Reforming Law and Business Practices for Consumer Protection” in September 2019. The report makes some recommendations for government, approved lenders and businesses. other players in the money lending market. One of the recommendations is to change the existing legislation. The four proposed changes include (i) the creation of a sector regulator to oversee the money lending industry; (ii) impose the obligation to conduct a prudent credit assessment; (iii) adjust the interest limit to a maximum of 48% and (iv) have additional requirements on advertising practices.
When the MLO was first enacted, consumers were expected to go to a physical store, fill out application forms, and sign all documents by hand. As consumer lending practices and technology have evolved, online lending and crowdfunding (also known as P2P lending) have become hot topics. While the situation in the Tong Bo’s Finances The case is relatively straightforward, the question of whether a money lending business is carried on at licensed premises can be complicated when looking at online money lending platforms. Besides the on-site question under Article 7, online money lenders should also carefully consider how they should structure their platform so that an Article 18 note can be “signed off.” personally ”by each borrower. Reference should be made to the Ordinance on Electronic Transactions. This can become difficult when online money lenders have to incorporate their new business models into legislation drafted decades ago, so it will certainly benefit market players if MLO is modernized.
We have a long history of providing legal and compliance advice to Approved Lenders. Please contact us if you would like to discuss any of the above points further.