Times have never been better for loan sharks. Unemployment is at record levels. More of our young people are out of a job and more families are struggling to make ends meet. For most the economic recovery has yet to find its way to their pockets. The reality of the recession for many is that losing a job coupled to rising food costs can often leave a loan shark as the only alternative.
These loan sharks lend out money at obscene rates, without checking to see whether the borrower will be able to meet the repayment requirements. Increasing numbers of people are pawning items just to be able to pay the bills. In some cases people are borrowing to pay off interest and then incurring much higher interest as a result, leaving them in more trouble than they were in the first place. For those unfortunate enough to be trapped in this ever restricting spiral of debt, the consequences can be severe.
These predatory lenders target groups like Maori and Pacific Island communities, and recent reports have pointed to them targeting students. Loan shark rates are known to exceed 1000% pa and require little paper work. In some instances loan sharks launch 'name and shame' campaigns in community newspapers. Along with a photo and the name of the lender, the 'advertisement' includes the amount lent and the reason for the loan.
This is unacceptable behaviour. It is time for action.
Credit Reform (Responsible Lending) Bill ‐ Simple Explanation
This Bill prevents lenders (loan sharks) from charging excessive interest rates and will ensure that they are more responsible when lending money.
There is currently no specific limit to the interest rate lenders (loan sharks) can charge. We need to get these interest rates under control, because a pay day loan charged at three and four figure interest rates is outrageous.
Lenders (Loan sharks) that advertise 8 percent per week "payday loans" are in fact charging rates that often compound well into four figures annually ‐ a point that the advertising fails to mention. People should have a better idea of what they are getting themselves into. Lenders should make proper inquiries and get a statement of the financial position of the borrower to see if the borrower is in fact capable of repaying the loan.
What does this Bill do?
The Bill allows for maximum interest rates to be set; a power that doesn't currently exist in New Zealand law. It also requires the lender to reasonably believe the borrrower will be able to repay the loan and limits the ability of loan sharks to recover more than they initially lent in the event of a default.
Finally, it allows registered pawnbrokers to charge administration fees, thereby removing the need for higher interest rates.
How widespread is the problem?
A survey reported by the Ministry of Consumer Affairs found that 15% of families borrow once a year to pay for the basics like food or power. We know that loan sharks target Maori and Pacific Island communities and in some of these communities, for example Mangere and Porirua, it has been estimated that the figure could be between 70‐80% of families. The effect on these communities and families can be devastating.
Why do we need to change the rules?
There are no specific restrictions on the interest rates loan sharks can charge. Current requirements on loan sharks to check whether the borrower can meet the repayments are inadequate. There are no protections for those with a mountain of debt and no way to pay. This Bill addresses these problems.
It is clear that loan sharks target communities where they can prey on strained circumstances and a lack of financial literacy. In many instances the financial implications of the loan are not fully disclosed. Borrowers simply aren’t told that they could end up repaying twice the amount they borrowed.
In many cases people borrow because there is no alternative. For many new immigrants or low‐paid workers, mainstream banks won't lend them money. To access credit for clothes or to pay the power bill they are forced to turn to a loan shark. In the current economic environment this has only become more serious.
What are the consequences of defaulting on a loan from a loan shark?
From loan sharks to repo agents, a whole industry exists to exploit those in vulnerable financial positions, trapping them inside a never ending cycle of borrowing and debt with little chance of getting out. Some repo agents have been known to enter a borrowers property and take whatever assets they find, whether the borrower owns them or not.
Lenders charge exorbitant rates and often claim items with a value greater than the loan when the borrower can't meet the repayments. This bill will only allow the loan shark to recover the principal sum borrowed along with reasonable fees and rates of interest, making the industry less attractive for loan sharks.
Are other countries moving in this direction?
In recent months many countries have either put in place restrictions on the maximum interest rate or are moving in that direction. New Zealand is now among just a few countries in the western world that is allowing this practice to continue. Britain is currently exploring the possibility of reintroducing interest rate restrictions. In Australia there are a number of states that are capping their rates at 48%. President Obama is in the process of capping interest rates at 36% across the US. In Canada, Japan, across South America, Africa and Asian governments have either put in place restrictions or are moving to do so. There is no good reason why New Zealand cannot also do the same.
In fact in many of these places the interest rates are not as punitive as they are in New Zealand. In Canada for instance concerns have centred around payday loans of up to 800 per cent. In New Zealand the rates changed by loan sharks can be as much as 2 or 3 times this amount.
Won't capping interest rates drive loan shark lending underground?
We will need to make sure that enforcement is properly resourced. However, under the current law lenders have wide‐ranging powers to retrieve property. Underground lending would become illegal lending, denying lenders the current legal protections they enjoy.
Won't setting a cap push everyone to the default interest rate?
When interest rates are already, in some cases over 1000% (interest rates in 3 or 4 figures are not uncommon) it is difficult to see how a cap set at, for example 48 per cent, can be a problem. It is also important to note that this won't affect mainstream interest rates.
Who would set the interest rate?
The interest rate should be under the oversight of the Reserve Bank Governor who can analyse factors such as risk and cost of supply to set a more reasonable rate.
Isn't the Government already working on this?
The Government is currently conducting a review of the Credit Contracts and Consumer Finance Act (CCCFA).
This review includes a discussion of "fringe lending practices and ways to address negative aspects of these practices". We are asking the Government to vote to send this Bill to select committee where it can be considered in full and as part of any other measures the Government is considering.
We are more than happy to work on alternative measures to support the victims of loan sharks, but it is clear that doing nothing is no longer an option.
In early 2009 John Key and Bill English rightly pointed out that the major banks were "taking advantage of their customers" who used credit cards with high interest rates. If they believe that credit card interest rates of 21 or 22 per cent is unacceptable then surely they agree that interest rates of around 2000 ‐ 3000 per cent deserve action.
Why now?
The onset of the worst recession in the last 50 years and the resulting effects calls greater attention to the problem of loan sharks.
In the past, taking action was ruled out on the basis of insufficient overseas evidence. This is no longer the case. Most of the major western countries have either put in place restrictions or are moving in that direction.
Further, the Credit Contracts Consumer Finance Act 2003 left the door open for the courts to step in where fees were unreasonable. This has not happened and as a consequence further action is needed.
What else needs to be done?
This Bill is a necessary but not complete fix. To get to the root of the problem we need to ensure that the public is better educated about budgeting and financial matters. We need to address the inadequacy of incomes by making sure that the minimum wage provides you enough to live on. We need to find a way for those people turned away by the mainstream banks to access credit when they need it.
CHILD POVERTY ACTION GROUP
CPAG totally supports Carol Beaumont’s bill to regulate fringe lenders. (The Credit Finances (Responsible Lending) Bill).
Loan sharks’ charging outrageous interest rates is one of the cruelest aspects of an unregulated lending sector. Loan sharks are expert at preying on vulnerable families. As the ongoing effects of the recession continue to bite and households struggle to meet every day bills, these sharks are enjoying a feeding frenzy!
“Capping interest rates at a reasonable level and ensuring lenders follow ethical lending practices would be significant steps in halting this widespread problem. Currently, legally, loan sharks are charging 60% to 600% interest and more. These obscene practices impact hugely on our poorest children. “Said Dr Claire Dale CPAG’s Economics spokesperson.
“New Zealand lags way behind other countries in setting in place regulations to deal with these loan sharks. Parliament now has a real opportunity to step up and provide real protection for borrowers who are forced into these unsustainable loans. Child Poverty Action Group urges every MP to support this Bill.”
