A wage earner needed funds urgently but was already at her credit limit with her bank, so accessed a "pay day" loan for $500. She struggled to meet the repayments and accessed a different online loan to help pay the first loan. Within a month she had four online loans and was scrambling to borrow from Peter to pay Paul. The total amount borrowed was $1700, the amount still owing after six weeks was $2713 and she had already paid $800 in that time. It was decided she would stop payments altogether and file for an insolvency procedure. This case study from the Taupō Budget Advisory Service is just one situation a new Government bill aims to prevent.
Budget services in Rotorua and Taupō helping clients manage tens of millions of dollars in debt are hoping new legislation will restrain loan sharks.
In the 11 months to the end of June, the Rotorua Budget Advisory Service helped 362 new household clients with just under $12 million worth of debt - an average of $33,000 debt each.
In the same period, the Taupō Budget Advisory Service helped more than 350 households with an average debt of $30,000, coming to a total of more than $10.5m.
The Credit Contracts Legislation Amendment Bill aims to protect vulnerable Kiwis by tightening the rules on who lenders can lend to, putting a cap on interest and fees for high-interest loans and upping penalties for lenders who don't comply.
The bill passed its first reading in Parliament in April, was open for submissions last month and is now the subject of a Finance and Expenditure Select Committee report due in October.
Rotorua Budget Advisory Service manager Pakanui Tuhura told the Rotorua Daily Post he supported the bill's requirements for tighter affordability assessments before lending.
"A free-to-use centralised checking facility should be established to replace the multi-agency credit checking facilities currently in place."
Credit Contracts Legislation Amendment Bill - Hearing of evidence (26 June 2019)
Hearing of submissions on the Credit Contracts Legislation Amendment Bill (26 June 2019). This bill seeks to address ongoing issues in the credit market and significant harms being done to vulnerable consumers with problem debt (that is, a level of debt they can't manage). The bill would do this by limiting the maximum amount that creditors may recover on high-interest loans. It would also place stricter requirements on people who offer loans for personal and household purposes to ensure that borrowers can afford to pay the loan back, and strengthen the penalties if they do not follow those requirements. Read more: http://bit.ly/2vulsn0Posted by Finance and Expenditure Committee on Wednesday, 26 June 2019
Tuhura said the $12m of debt from new Rotorua clients to June did not include the debt held by 168 existing clients carried over from the year before.
"There was $5m of mortgage debt, $2m of finance company loans and $1m of personal bank loans and credit cards, with $2m owing to government departments like Work and Income and the Justice courts."
Lucky escape as car smashes through Rotorua shop window
In that same time period, the Rotorua service helped clients resolve about $439,000 of debt and $47,000 was resolved through insolvency solutions.
Tuhura said 65 per cent of clients were beneficiaries and 25 per cent were on salary or wages.
Others had a student allowance, ACC payments or some other form of income.
Tuhura supported the proposed regulations of "retail truck shops".
These mobile traders offer everyday items at a high interest rate to isolated communities without large, easily-accessible retailers.
"But with the introduction of low-cost retailers such as Kmart in Rotorua, a ban is probably not required here," Tuhura said.
The Taupō Budget Advisory Service's submission on the bill, prepared by co-ordinator Jan Otsuka, made it clear truck shops were a major problem there.
She provided a case study of a couple in their mid-50s who were not very literate and had signed direct debit forms for payments for appliances and technology items valued at $10,500.
"Their [the vendor's] actions were extremely predatory because they returned to this couple and sold them something new each time they came to Taupō."
The budget services' national representative, FinCap, is calling for a cap on the repayment amount for high-interest loans, which is something Tuhura and Otsuka say must be added to the bill.
Otsuka said in Taupō, 13 per cent of the service's clients in the past 12 months had presented with debt levels over 100 per cent of their annual net earnings.
On average they were spending $2.18 for every dollar they earned.
"From this position, their future wellbeing is severely diminished and is being felt in the greater community through foodbanks, emergency housing, medical centres, welfare agencies, counselling services, churches, and government departments."
She cited an 87-year-old man the service had helped, who had been trying to pay off his credit card for 14 years but could only just pay the interest.
"In the meantime, he had reduced his quality of living by boarding with friends and was reducing his food consumption."
Tokoroa Budget Advisory Service's co-ordinator Tai Taiki's submission on the bill said staff saw "harm from predatory, high-cost and irresponsible lending every day".
He said closer monitoring of lenders could reduce the risk to "low-income families that struggle with everyday expenses, and have no financial understanding about interest rates but are happy to receive the money in hand and suffer the consequences".
Cash Converters, one of New Zealand's largest providers of small loans from $100 to $2000, also made a submission on the bill.
It has 28 branches across the country, including in Rotorua, and the company submitted that it had "a long-standing reputation for ethical conduct and the provision of responsible services in New Zealand".
It supported most of the bill's proposals, but opposed the removal of section s9C(7) of the Credit Contracts and Consumer Finance Act "which allows lenders to rely on information provided by borrowers where there is no sound reason to suspect the information is unreliable".
"We believe a repeal will drastically increase the cost and burden of the affordability assessment process, make an already intrusive process substantially more so, and ultimately exclude many borrowers from access to credit.
"We are already seeing a growing number of our customers who are either partially or completely financially excluded from obtaining credit through traditional means such as banks."