New law seeks to bring loan sharks into line

The Govt resists demands to ban high interest rates. Photo / NZ Herald

The Government is taking power to ban "loan sharks" who breach a new responsible lending code, but has resisted calls to outlaw high interest rates directly.

Draft legislation issued yesterday was welcomed by Consumer NZ chief executive Sue Chetwin and Family Budgeting Services Federation head Raewyn Fox as providing "all the stuff we've been asking for".

It would give the Commerce Commission power to ban people from lending if they breach any provision of the new law, including a proposed "responsible lending code", more than once.

But the Labour Party, unions and Mangere budgeter Darryl Evans, who leads an Auckland-based breakaway group of budgeters, are still calling for a legal ban on high interest rates similar to an Australian bill outlawing interest rates above 48 per cent.

Research last year found some payday lenders and pawnbrokers were charging interest rates for one-week loans equivalent to 550 per cent a year.

"We think interest charges should be looked at," Mr Evans said. "Other than that, it's everything we were asking for."

Outgoing Consumer Affairs Minister Chris Tremain, who lost the portfolio to Tauranga MP Simon Bridges yesterday, said ministers were still open to submissions on the issue but felt a strict interest limit would have unintended consequences.

"Say we arbitrarily said 50 per cent. If someone wants a $1000 loan for a week, that's 1 per cent a week. Who would lend someone $1000 for a week to get $1010 back? Given the risk profile, not many people," he said.

"So the unintended consequence of these arbitrary caps is that you totally push those sorts of loans out of the market or push people to the black market."

He said the proposed law would "create downward pressure on interest rates" by other means.

The proposed new code would require a lender to be satisfied, on the basis of "reasonable inquiries", that a loan is "appropriate" for the borrower's objectives and that the borrower "can reasonably be expected to make the repayments under the agreement without suffering substantial hardship".

Lenders would have to disclose full loan details, including the annual interest rate, before the contract is signed, and borrowers would have five working days to cancel if they get cold feet. Surprisingly, the existing law only requires disclosure of the details by five working days after signing, and gives borrowers only three working days in which to change their minds.

Borrowers would be able to renegotiate loans if they have been in default for up to two months because of unforeseen hardship. At present they can invoke a hardship clause only if they have met all payments to date.

Most importantly, borrowers would not have to pay any interest or fees at all if the lender is not a registered financial service provider.

A survey last July found that 35 per cent of "fringe lenders" were not registered. Most, including pawnbrokers Cash Converters and mobile shop firm Lync, have since registered, but some pawnbrokers, including the Dollar Dealers chain, have still not registered as financial service providers on the grounds that they are registered under a separate Secondhand Dealers and Pawnbrokers Act.

Mr Tremain said all money lenders, including pawnbrokers, would need to register as financial service providers.

"If they don't, and there is a complaint about them with a loan, they will not be able to enforce interest rates or fees on their loan," he said.

The draft law is open for public submissions until May 11.

ON THE WEB

www.consumeraffairs.govt.nz/legislation-policy/policy-development/credit-review