Loan sharks - the time has come
'It’s time to finish the job' should be the theme for this year’s drive to put loan sharks out of business.
The phrase was used by Commerce and Consumer Affairs Minister Kris Faafoi on June 27 when talking about what changes need to be made. He is right: successive governments have repeatedly proclaimed they would deal to loan sharks, but so far all of them have failed to act decisively.
We know exactly what needs to be done. It is a matter of a government actually doing it, rather than implementing reforms which in practice turn out to be meaningless. New Zealand has a long-term problem with unscrupulous lenders preying on our most vulnerable citizens, and the only way to stop this it to make their conduct illegal and enforce the law stringently.
We have had plenty of reports and summits and soft law reforms. The fact that a government is yet again talking about the same issues shows the ineffectiveness of what has been done to date.
Faafoi has released a discussion document reviewing consumer credit regulation and the impact of the last round of credit law changes made in 2015. Unsurprisingly, the paper finds that the reforms have not dealt to loan sharks. It recommends more changes, and public submissions are open until August 1.
The Minister said it was plain that the 2015 amendments had not gone far enough and “it is time now to finish the job and protect the most vulnerable consumers”.
I am encouraged that, finally, a minister is talking about two key reforms which previous governments have refused to countenance: capping interest rates and restricting loan fees. Until those two issues are decisively tackled, the law will continue to provide inadequate protection from unscrupulous lenders.
At present, there are no limits on the amount of interest lenders can charge. The more financially-disadvantaged a borrower is, the higher the interest rate that person will be charged. Media stories over many years have revealed shocking details of sky-high interest rates, ranging up to 803 percent.
The need for interest rate caps has been well-documented in research over more than a decade, including in the following reports:
* Fringe Lenders in New Zealand: Desk Research Project (July 2006)
* Pacific Consumers’ Behaviour and Experience in Credit Markets, with Particular Reference to the “Fringe Lending” Market: Research Findings (July 2007)
* Background Statistics for Considering Credit Issues (2011)
* Third-tier Lender Desk-based Research (2011)
* Using a third tier lender: experiences of NZ borrowers (2011)
*New Zealand’s debt society and child poverty (2014)
* Lender website review 2017/2018.
The 2011 research showed just how toothless the credit law changes which took effect in 2005 have been, revealing that between 2006 and 2011 there was a 60 percent growth in the number of third-tier lending outlets and up to 40 percent of them were flouting the law by not registering as financial service providers.
New Zealand is lagging well behind other countries in failing to cap interest rates. Canada, Mexico, Japan, Singapore, most South American countries, most African countries, and most European countries have interest rate caps. Finland in 2013 introduced a law providing that the interest to be paid on one-month loans of one hundred euros was four percent. Japan a decade ago lowered its maximum interest rate for consumer lending to 20 percent, while South Africa acted in 2007 to limit the monthly interest rate for short-term loans to a maximum of five percent.
In July 2013, a new law took effect in Australia limiting interest rates to a maximum of 48 percent. In the United States, most states have laws capping interest rates. The lending of small sums of between $100 and $4000 for short terms at high interest rates is regulated in 37 states. In South Carolina, for example, the maximum consumer interest rate is 18 percent, while in Washington state it is 25 percent. Payday lending is either illegal or impractical in 13 other states.
However, it is crucial to legislate for caps on loan fees at the same time as restricting interest rates. If that is not done, lenders will simply load excessive fees onto contracts to make up for receiving lower interest.
Middle class New Zealanders borrowing from banks pay no, or few, loan fees. By contrast, those in the most precarious financial situations find themselves signed up to pay numerous different fees which can add up to staggering totals. Fees imposed can include establishment fees, administration fees, dishonour fees, cancellation fees, account maintenance fees, field visit fees and other charges.
Previous law changes aimed at limiting loan fees have failed to curb excessive charges. It is now time to write into law specific and detailed limits on fees.
In addition, credit contracts continue to be complicated and many borrowers simply don’t understand what they have signed up to. The documents need to be simplified. The front page of the contract should contain only a single figure and the statement that this is the full amount borrowers will pay under their contracts. Page two should set out only two things: the cash price of the goods and the total borrowers will pay in interest and loan fees.
This is because low-income borrowers tend to know only the weekly amount they are required to pay on their loans. The complex documents mean they are not clear about the total amount they will be required to repay if they enter into the contract.
Further and tougher action against mobile truck shops is also needed. It is only in recent years that the Commerce Commission has finally started taking enforcement action.
The full weight of the law needs to be brought to bear on all breaches by mobile truck shops and the Government should do its part by banning the trucks from selling food, preventing them from cold calling and licensing them.
And there is also another side to the equation. Predatory lenders can be reined in by effective laws and enforcement.
But the Government could also put them out of business overnight by making affordable loans available to people on low incomes. Schemes providing loans to economically-disadvantaged people at no or low interest rates and no fees have started up in a small way in Aotearoa over the past decade.
Governments have now started to back them, with the previous government providing some funding and the current Government announcing in April that the Community Finance Initiative would be broadened. However, the scale is still very small.
The Government should make far greater use of Kiwibank to make affordable loans available on a widespread scale. This would get rid of predatory lenders in one fell swoop.
In a similar vein, mobile truck shops would be less successful in peddling their wares if people were able to obtain necessities elsewhere. Countdown’s General Manager of Corporate Affairs, Kiri Hannifin, in April said the supermarket chain was willing to consider how it could help in this regard.
Work needs to be done on a scheme involving supermarkets supplying and delivering food. I haven’t yet been able to figure out exactly how it would work, but surely a group of people could come up with a workable scheme that would let people buy food without ending up in horrendous debt.
How to protect yourself from loan sharks
1. Don't sign the papers
When you are buying something and thinking about borrowing money, never sign the papers on the spot. Take them away and read through them with your family and friends so you understand them. If you don’t have your own lawyer, take the papers to your local Community Law Centre or Citizens’ Advice Bureau so they can explain them to you. Once you have signed the papers, it is too late.
2. Don't take out a loan at the car yard
Loans through a car yard are very expensive. The interest rates and other fees are high. Go to your bank and get a loan there. If you can’t get a loan from your bank, wait until you can before you buy the item.
3. Never be a guarantor
This sounds very harsh and many people act as guarantors to help family members. But the guarantor is just as liable in law for the loan as the borrower. You can lose your house or end up with very high debts if you become a guarantor.
4. Total amount of the loan
When you take out a loan, don’t just look at how much you will repay each week or each month. The most important figure to look for is the total amount you will repay. This can often be many times more than the value of the item you are buying. If you only look at the weekly repayments, you will not know how much you will pay altogether.
5. Complain to the Commerce Commission
If you think there is something not right about your loan, you can complain to the Commerce Commission or Consumer Protection at the Ministry of Business Innovation and Employment and ask them to investigate. They can take action against the lender. It doesn’t cost anything to complain to them.