Crackdown on Loan Sharks will protect vulnerable

Crackdown on Loan Sharks will protect our most vulnerable

“Protecting out most vulnerable New Zealanders and their families is at the heart of my campaign to crackdown on Loan Sharks”, Labour’s Spokesperson for Consumer Affairs said today

“Times have never been better for loan sharks. Unemployment is at record levels 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 for many Kiwis is that losing a job coupled to rising food costs can often leave with a loan shark as the only alternative”, says Carol Beaumont

“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 like bikes and children’s toys to borrow funds 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”, says Carol Beaumont

“The first step in my campaign to crackdown on these money lenders is to introduce my private members bill the Credit Reform (Responsible Lending) Bill, which, prevents lenders (loan sharks) from charging excessive interest rates and will ensure that they are more responsible when lending money.

“This Bill is a necessary but not a 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 find credit when they need it.

I am asking all political partiers to support this bill to select committee where it can be considered in full.

“It is clear that loan sharks target communities where they can prey on strained circumstances and a lack of financial literacy. This business of making money off our most vulnerable families needs to be stopped.

“My bill and the campaign to stop loan sharks is to start the process of eradicating these predatory loan sharks from our communities”.

Case Studies
1. Tongan family who needed $3,200.00 to repair their car. This family has 5 children under the age of 13. Husband works as a Store man at an airport based company and the wife is a stay at home mother. His total take home pay is $598.00 per week. They took out a loan with a company in Otahuhu and put up their car (valued at $4,500 as well as two cultural mats which had been in their family for over 80 years. The loan was for $3,500.00, interest charged was 55%over 24 months, which meant they had to repay $1,925.00 in interest or in total: $5,425.00. They defaulted on the payment in the 3rd month when default payments were established. Some 9 months later this family have had the car repossessed by this company and they also had to pay for the towage and storage of the vehicle. At today’s date they owe just under $9,800.00 and the case is still not resolved. The family want their mats returned but the company refuse until such time the debt is paid off in full. They have no car and still owe almost $10,000.

2. Samoan family with 2 children, aged 3 and 7. Mother works as a cleaner part time earning $12.50 an hour whilst the father was made redundant in October last year from a forklift operator’s position, he was earning $16.50 an hour at the time. They borrowed money to pay their rent and also to clear some existing debt they had. In total they borrowed $6,000 from a local money lender on Massey Road, interest charged was 80%. Total value of debt with interest is: $10,800. They defaulted in the second month as the fortnightly payments were $300; which they simply could not afford. 7 months later they declared themselves insolvent under the No Asset Procedure.

3. Tongan family, solo Mother of 4 children aged between 2 and 9 years of age. She borrowed $13,000 as she needed to return to Tonga to bury her father. She put up as security all the furniture in her home including the beds, TV, microwave and several items of jewellery from her previous marriage and the title to a plot of land she owned in Tonga. Interest charged was 52%, bringing total amount owed to $19,760.00. Weekly payments over 4 years was $411.66. This lady defaulted in the 11 month and at today’s date owes the loan company $23,711.25; she has had her furniture reposed and so we had to help them with beds and items of furniture through a furniture bank. She is now working with a lawyer to fight them over her land. She has also made enquiries with us about declaring bankruptcy.

Q & A: on the Credit Reform (Responsible Lending) Bill

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 borrower 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?
Some repossession 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 to 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% (rates in three and four 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 over 1000 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.

Sources of further information:
‘Escaping the Debt Trap: Experiences of New Zealand Families Accessing Budget Services’ Families Commission December 2009
‘Fringe lenders in New Zealand: Desk Research project’ Research New Zealand August 2006
‘Pacific Consumers’ Behaviour and Experience in Credit Markets, With Particular Reference to the ‘Fringe Lending’ Market’ Auckland Uniservices Ltd July 2007
Report to the Māori Affairs Committee on Fringe Lending and Māori' Ministry of Consumer Affairs 29 May 2009.

ENDS