The payday loan industry has been warned to improve the way it lends money and collects debts, or face fines or closures.

The Office of Fair Trading (OFT), in an interim report, says most of the 50 big firms it has been inspecting do not operate fully by its rules.

The OFT says it is worried by reckless lending and aggressive debt collection.   It has now begun formal investigations into several payday lenders over aggressive debt collection practices.   The OFT will publish its full report next year, when it has ended an investigation which it started in February 2012.

The OFT is worried about the “poor practices” which its enquiries have been uncovering, and which chime closely with many of the criticisms that consumer groups have been making of payday lenders.

Among the OFT’s concerns are that: Lenders do not check properly if their borrowers can afford to repay the money they have borrowed •Too many loans are not repaid on time •The loans are then extended too often •Lenders are too aggressive when borrowers fail to repay promptly

The regulator has become especially worried about the way payday loan firms use a type of repayment agreement, called a continuous payment authority (CPA), to ensure they are repaid automatically.   The OFT has updated its rules for the industry to make it clear that if borrowers sign up for a CPA, it must be with their explicit agreement.

Borrowers must be told how a CPA works and how they can bring one to an end.

Lenders must not keep on trying to drain cash from their borrowers’ accounts if there is not enough money available to meet the debt.

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