Loan shark bill stokes interest rate cap fears

Consumer Affairs Minister Kris Faafoi will introduce a bill aimed at curbing the worst abuses of payday lenders next month, but critics are concerned it doesn’t include a cap on interest rates, which they say will limit the law’s effectiveness. 

Faafoi and Prime Minister Jacinda Ardern announced they were drafting legislation in October, after consulting on the issue earlier. They promised the law would crack down on loan sharks. Newsroom understands legislation is nearing completion and will be introduced in the next sitting block, which begins on April 2. 

But the legislation will not include a provision to cap interest rates on the loan, opting instead for a total cap on fees and interest of 100 percent of the loan. This would mean someone borrowing $500 will not have to pay back more than $1000 in total.

This option was chosen and announced in October after three proposals were put out to consultation last year. 

However, budgeting service, Fincap, and the Salvation Army say the changes do not go far enough, and Fincap continued to lobby the Government during the bill’s drafting to get an interest rate cap into the legislation. 

Fincap had been trying to get the Government to shift its position from what it announced in October. Its chief executive, former Labour MP Tim Barnett, said he was surprised by the Government’s move.

“For years, Kris and Labour had been seeing interest rate caps were part of the solution,” Barnett said.

“The cap on the total cost of credit which has got similarities but it’s much more limited and we don’t think it will work,” he said. 

Lenders had been arguing hard against the change. Faafoi accepted the argument that punitive interest rate caps would push certain lenders out of the market, forcing people who needed loans to the black market. 

Moola, a fast-growing new lender, submitted on the proposals last year. It said that an interest rate cap of 30-40 percent would have driven it out of the market. However, Australia has capped mid-term payday loans at 48 percent interest and capped short-term loans at even lower rates.  

But Faafoi appears to have accepted this position. 

“The Government didn’t propose an interest rate cap in addition to a total interest and fee cap as we don’t think there are enough safe credit lenders in the sector to meet the immediate needs of some consumers who unfortunately do need access to credit quickly,” he said. 

He said the changes addressed the debt spirals from high-cost loans and ability for irresponsible lenders to earn most of their revenue from defaults, which was the biggest issue identified by the review of credit law. 

“We will not sit by as people get dragged into debt spirals, where a small loan grows into large debt due to accumulating interest and fees,” he said. 

A cabinet paper summarising the review said interest rate caps would “significantly restrict access to credit without regard to individual affordability, and would create distortionary impacts on the credit market”.

“Limiting interest rates would likely result in the closure of many high-cost lenders, and a significant tightening of lending criteria by those who remain,” it said.

Barnett said the changes could still lead to predatory lending. 

“The risk is you pay a massive interest rate, but because it is capped at no more than twice what you borrow it feels reasonable, but in fact it’s very punitive,” he said. 

While he did support some of the changes, he said they were hamstrung without interest rate caps, which were “fundamental” to the law’s effectiveness. 

“There is some virtue in it, but without the interest rate you enable people to be paying massive amounts of effective massive interest rates, which will be disguised because people will see them as part of the overall deal where you won’t pay more than twice what you borrowed,” he said.  

Salvation Army social policy analyst Ronji Tanielu told Newsroom he rejected the Government’s claim that it would force lenders onto the black market.

“There are safer alternatives out there,” Tanielu said. 

He cited the work of Good Shepherd, Ngā Tangata Microfinance, and some of the Salvation Army’s own schemes as examples of alternatives to payday lending. 

“Interest rate caps are something the minister himself had argued for in the lead-up to the election, and all of a sudden they have backed away from that,” he said.

“We’re a bit concerned about why they’re not taking this brave but simple action,” he said. 

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