Key Points:

Both major parties are signalling a possible tougher line on loan sharks offering so-called "payday loans" in the wake of the world financial crisis.

A Labour list MP who chairs Parliament's finance and expenditure committee, Charles Chauvel, has drawn up a private member's bill to stop lenders recovering any interest if a borrower defaults, unless the lender can show that before granting the loan it investigated the borrower's ability to repay.

Consumer Affairs Minister Judith Tizard said the proposal was "useful" because the consumer credit law was being reviewed. An officials' report is due in December.

National Party commerce spokesman Simon Power said he had not seen the proposal but consumer loans now needed to be seen in the context of the wider financial crisis.

"With the collapse of so many finance companies we will see some recourse to loan sharks," he said. "That means some type of oversight or regulation would need to be looked at carefully."

The Labour Government has previously ruled out regulating interest rates as in three Australian states and the Australian Capital Territory, which have all capped effective annual interest rates at 48 per cent.

"Payday" lenders typically charge 8 to 15 per cent a week for short-term, small-sized loans. The effective annual interest rates are between 416 and 780 per cent.

But Ms Tizard said New Zealand's policy was to move towards harmonisation with Australia, which is harmonising its state-level regulations into a federal code by 2010.

"We are imagining that an overarching standard law, rather than prescribing every aspect of every area, is probably better," she said. "Everything is under review and nothing has been ruled out, but at this stage nothing has been ruled in either."

She said the courts had not backed up some cases brought by the Commerce Commission alleging "unreasonable" loan fees under the current Credit Contracts and Consumer Finance Act.

Mr Chauvel said other legislation, passed just before Parliament adjourned for the election, would help by requiring all financial providers to be registered and to belong to an approved industry dispute resolution scheme. But it could take 18 months to develop such schemes and codes of practice.

Raewyn Fox of the Federation of Budgeting Services said some payday lenders had gone out of business in the financial crunch, but others were still advertising heavily.

Consumers Institute deputy chief executive David Naulls said New Zealand had Australian-style interest rate caps under the old Moneylenders Act of 1908, but they had been removed in the 1970s.

"If you could show that the lender didn't make any effort to check out the borrower's ability to repay, the borrower could walk away from paying the interest. "

* Payday loans are typically under $100, at interest rates of 8 to 15 per cent a week until the next pay day or up to a few months.
* Payday lending is illegal in 13 US states.
* Effective annual interest rates are capped by law in many other US states, plus Canada, Japan, Germany and Ireland.
* Annual caps of 48 per cent have been imposed in New South Wales, Victoria, Queensland and Canberra.
* The Australian federal government is taking over consumer credit regulation from all Australian states, with interest rate caps due to be reviewed by mid-2010.
* New Zealand has a policy of harmonising credit regulations with Australia. A report on our current law is due in December.