Gordon Campbell: The need to control loan sharks

As jobs vanish and incomes shrink during the recession, loan sharks can be expected to prey more avidly on poor and vulnerable communities. After all, even the main lending banks have hardly been innocent of predatory lending practices. In April, Prime Minister John Key criticized the banks for the interest rates they have been charging on credit card lending. Banks were ‘taking advantage’ of their customers, Key maintained, by raising money at 6-7 % and lending it out to their customers at 21 or 22 %, with no desire for prompt repayment. “It’s a pretty lucrative business.” Nothing of course, has been done to curtail it.

If 22% seems exorbitant under current conditions, you’d think the government – and other political parties – would be rallying behind Labour MP Charles Chauvel’s private members bill on loan sharking. After all, this is a sector where recent research has cited interest rates of 38% a year as the going rate, rising to 100% or more in repayment obligations once various fish-hooks involving set up and servicing costs and insurance have been counted in. To date though, Chauvel has found only lukewarm support for his Credit Reforms (Responsible Lending) Bill.

Who are the targets of these extortionate rates of lending? Disproportionately, loan sharks prey on Maori and Pacific Island communities. A 2006 desk study by the Consumer Affairs Ministry identified 185 fringe lending companies in New Zealand, with 71 of them based in Auckland - mainly concentrating their business on Maori and Pacific Island communities in south Auckland. The borrowers were seeking loans to finance essential household items (44 % of loans) and/or social and cultural obligations to church and to family – in the shape of spending for weddings, funerals and family support, and for remittances back to dependent relatives living back in the Islands. According to the 2006 findings, over a third of loans (36%) were taken out to consolidate payments for existing loans, as borrowers tried to escape the web of debt.

Currently, there is little regulation of these ‘fringe lenders,’ and no obligation on the lender to assess the borrower’s capacity to service the debt. Across the Tasman, Australia has tried to control loan sharks by (a) imposing maximum limits on the extent of annual interest rates and loan set-up, servicing and insurance fees they can charge and (b) by requiring the lender to make at least minimal inquiries into the financial income and outgoings faced by the borrower, to ensure that commitments do not create compounding debts that quickly become extremely burdensome to service, and highly stressful on family life.

In New Zealand, the governing Bill in this sector is the Credit Contracts and Consumer Finance Act. In 2007 however, a major report on fringe lending within Pacific Island communities in New Zealand found that the CCCFA was an inadequate defence. From the conclusions :

The Credit Contracts and Consumer Finance Act may work as intended for consumers borrowing from "mainstream" financial institutions. There is clear evidence, however, that the Act does not provide sufficient protection to credit consumers dependent on "fringe" lenders. While the detrimental effects of fringe lenders apply to all who use them, the impact on Pacific communities is greater because they are disproportionately represented in the low income communities in which fringe lenders operate. There can be no doubt that fringe lenders have flourished in South Auckland in the period since the CCCFA became effective, and that they deliberately and aggressively target Pacific communities. Furthermore, this research makes clear that Pacific consumers continue to be extremely vulnerable to fringe lenders' often "unreasonable" charges and "oppressive" practices, and that the forms of redress available under the Act are neither understood nor accessed easily by Pacific consumers. There is a strong case for New Zealand credit legislation to be tightened and/or more strongly enforced in order to better control the operations of the fringe credit market-place, even if this means credit, beyond small cash loans, is harder to get.

Access to credit, as the 2007 report says, is vital for many Pacific families. Yet the toll on family and community life is severe. Cultural obligations are accentuated in some churches for instance, by the practice of reading aloud to the congregation the names and the level of donations. In sum :

”The realities for many are that they and their families are struggling to survive, not only physically but also mentally, emotionally, culturally and spiritually. The complexities surrounding Pacific cultural and financial competencies tear at the already fragile intergenerational/intra-ethnic/gender roles and responsibilities of Pacific consumers in a way that jeopardises the well-being of many Pacific individuals, families and communities of South Auckland. \While….there is a growing awareness of financial literacy amongst some Pacific consumers, it is also clearly evident that many Pacific consumers are not coping at all well, and are not in control of their socio-cultural realities, resulting in negative outcomes at personal, familial and community levels. Many Pacific consumers in this study are of the view that there is a need for non-mainstream credit providers, and they are keen to meet their financial obligations. However, the confusion and stress caused by hidden high costs and exploitative credit contracts exacerbates their already vulnerable positioning, with negative and dire consequences in many cases.

Despite the recession, few solutions to this situation are yet on the political radar. Chauvel’s proposed Bill is a welcome start, though it barely scratches the surface. Unfortunately, there are few votes in devising and funding pre-emptive mechanisms for the communities at risk. So far, the regulatory emphasis has been further up the socio-economic ladder. Labour, while in government, sought to regulate the finance companies that were putting the lifetime investment of middle income New Zealanders at risk. John Boscawen of the Act Party is offering more of the same. The vulnerability of low income New Zealanders to the twin predations of loan sharks and pokie machines has been virtually ignored over the past decade, by Labour and National alike.

The solutions would not be all that difficult – or expensive to implement - especially when offset against the savings in social and personal distress. Rather than spend millions on prisons and punitive policing, there might for instance be better returns if Kiwibank could be subsidized by government to offer low interest micro-lending for the relatively small amounts – usually $500 -$2000 - that comprise the vast bulk of loan shark transactions.

In the meantime, Chauvel’s proposed bill is the only option on the table. Unlike South Australia say, which sets a maximum annual interest rate of 48% on lending, Chauvel has declined to state a maximum. “ One of the problems of enshrining in legislation a rate like 48% is that seems quite high – and it then becomes the default rate,” he says. He would prefer to leave the setting of such a maximum to the Governor of the Reserve Bank. The RBNZ has the research at its fingertips to assess the cost of money, and the risk involved at any given time.

Chauvel’s Bill has two main components. As mentioned, it grants power to the RBNZ Governor to set and vary the maximum rates of interest on lending. For the first time in New Zealand, it also places an onus upon the lender to assess the borrower’s capacity to pay - and in the absence of such a written evaluation at the outset, any subsequent inability to repay will result in the borrower having to meet only the amount of the original loan.

Won’t that create an incentive for borrowers to default, knowing they will only then need to repay the original sum ? “ No,” Chauvel says, “ it will create an onus of proof on the borrower to show they had money thrown at them without proper inquiry. I think that is a prudent way to put responsibility back on the lender.” In practice, this initial inquiry into the capacity to pay may consist of nothing more than the borrower filling in a form setting out their current commitments. Clearly, in a situation where the borrower wants the loan, there will an incentive to overstate their capacity to pay, and to understate their commitments. Unfortunately, both elements would be likely to get the lender off the hook, in any subsequent default situation.

To be the devil’s advocate for a moment - couldn’t these fringe lenders be seen as providing a social service in offering loans to people who mightn’t otherwise qualify for financial assistance ? “Only in the same way,” Chauvel replies, “that a bartender provides a social service when they supply booze. Yes, I suppose you’re right. But we regulate that activity, because of its potentially harmful effects. And that’s what I’m proposing here.”

Tomorrow may provide the first chance in weeks for a member’s day, in which case Chauvel’s Bill will come up in the ballot for the first time, for a right of entry to the House legislative programme. Ironic indeed that the victims of pokies and loan sharks should need to rely on a ballot, for even the chance of this fairly minimalist attempt of regulatory protection seeing daylight.

Tomorrow, the loan shark Bill will also be competing with another Chauvel-originated Bill that his colleague Lianne Dalziel will be putting forward on his behalf. This Bill seeks to remove the defence of provocation – which anachronistically, is still currently available under section 169 of the Crimes Act - whereby an alleged advance by a gay person, or a ‘provocative’ form of behaviour by a spouse ( such as threatening to leave her husband ) can later be cited in court to reduce a charge of murder, to a lesser one of manslaughter. The law may exist to protect the vulnerable – but it moves awfully slowly at times.

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