On Jan. 13, the Supreme Court found in favor of an individual who had sued a consumer credit company for charging too much interest. By doing so, the court rejected the controversial “gray zone” that such companies take advantage of in their business.
According to the Interest Rate Restriction Law (IRRL), creditors cannot charge more than 20 percent annual interest on a loan, even though the law does not stipulate penalties for violations. However, the Investment Report and Interest Rate Law, which allows interest rates of up to 29.2 percent under certain conditions, does have penalties attached.
The gray zone is this area between 20 and 29.2 percent, and consumer credit companies regularly impose interest in this zone by getting borrowers to sign contracts that permit the companies to charge higher interest under certain circumstances. For example, when a debtor is late in his payments and must pay a lump sum, he can be charged higher interest on the lump sum.
In the period of nine months prior to the ruling, the four largest consumer credit companies — Takefuji, Aiful, Acom and Promise — had already refunded about 36 billion yen to borrowers who objected to the exorbitant interest rates. Nevertheless, they are still taking advantage of the gray zone, despite the fact that the Supreme Court’s recent decision would seem to make it illegal.
Consumer credit companies understand that the image associated with loan sharks impacts negatively on them. When the number of TV commercials for consumer credit companies increased sharply in 2000, citizens groups complained. The companies said that they would voluntarily stop running ads between 5 and 9 p.m. because it was believed that young people were more likely to be watching TV at this time.
This self-imposed limitation was pointless. According to the television ratings research company Video Research Ltd., TV-viewing for the 13- to 19-year-old demographic actually peaks between 10 and 11 p.m. The move was simply a public relations stunt to make it seem as if the companies were thinking about their responsibility.
Now they are at it again, saying they will not buy time in the evening until 10 p.m. This self-imposed restraint does not harm the consumer credit companies at all. The parties that will suffer are the TV stations that sell them the air time. A single TV station could lose hundreds of millions of yen in revenue when the new policy goes into effect next month.
Without a doubt, consumer credit companies are beholden to TV for their success. In January, the Financial Services Agency, the government body that regulates the finance industry, conducted a survey that found 61 percent of borrowers learned about consumer credit companies through television commercials. The credit industry spends 70 billion yen a year on advertising, 50 billion of which goes to broadcasters.
As far back as May 2004, the Japan Bar Association warned TV stations not to air commercials for consumer credit companies who violated the IRRL by charging more than 20 percent interest. The vast majority ignored the warning. Following the Supreme Court decision the lawyers group made the same warning and were again ignored.
The main defense of credit industry practices is along the lines of “let the buyer beware.” If people get into debt, it is their own fault. Consequently, consumer credit companies have boosted their show of responsibility by urging “balance” in customers’ use of credit, sometimes in humorous but ultimately meaningless ways. In Aiful’s commercials, a hapless middle-aged man is constantly overdoing whatever task he undertakes, but one requires a huge leap of imagination to equate his getting a sunburn at the beach with falling into personal bankruptcy. In the Promise ads, sexy idol Waka Inoue is always messing up some project because she didn’t “plan” or “check” properly, thus conveying the idea that before you borrow you should have a strategy for paying back.
In his 2002 book, “Consumer Finance,” attorney Kenji Utsunomiya showed that most people who borrow from consumer credit companies are lower income earners who need money for everyday expenses, and that they continue borrowing simply to pay off higher than expected debt. Credit companies benefit from this situation, which is what the gray zone is all about, and it’s difficult to expect the industry to abandon this system as long as there is no legislation to prevent them from exploiting it. There are 15 million accounts registered with consumer credit companies, equivalent to one-fourth of Japan’s working population.
As the lawyers association has pointed out, when a TV station runs a commercial for a consumer credit company that charges more than 20 percent, it is abetting an unethical and probably illegal act. But the real media-related problem is that mainstream news organizations won’t touch this story, since it could jeopardize ad revenues for their corporate overseers. Much of the data for this column was gleaned from the muckraking weekly Shukan Kinyobi, and the Japan Communist Party organ Akahata, neither of which accepts corporate advertising.
The government has indicated it may set limits on the amount of money an individual can borrow at one time. The natural response to the Supreme Court decision would be to erase the gray zone by adding penalties to the IRRL, but Parliamentary Secretary of the Cabinet Office Masazumi Gotoda has said that the government may do away with the law altogether, thus making 29.2 percent the official interest ceiling. Business people are saying the ceiling should be increased, and Japanese banks have already formed partnerships with consumer credit companies, who are more ingenious at collecting debts than they are.
This is what liberalizing the financial sector is all about. Last year, in a Forbes magazine article about Japan’s 40 richest people, three of the top five were presidents or former presidents of consumer credit companies. Why should they have all the fun?