Lenders have adjusted their rates after a clampdown on high-cost lenders. Photo / 123RF
A former high-cost lender says the introduction of loan interest rate caps has resulted in job losses in the industry and a spike in financial exclusion for Kiwis.
But the umbrella arm of New Zealand's budgeting service says it is a good thing that borrowers can no longer access loans which charged as much as 800 per cent interest per year.
On May 1 the Consumer Contract and Credit Finance law changed so that high-cost lenders - those charging more than 50 per cent in interest - had to disclose extra information to borrowers and the total cost of the loan - fees and interest - was limited to 100 per cent of the first advance.
High-cost lenders were also barred from charging compound interest and default fees exceeding $30 were considered unreasonable unless the lender could prove otherwise.
That was followed on June 1 by the introduction of a daily rate cap of 0.8 per cent and rules restricting how many high-cost loans a borrower can enter into.
Since May 1 the number of lenders offering new high-cost loans has plummeted. According to the Commerce Commission, before May 1 21 companies were trading under 30 trading brands offering high-cost loans.
But that has now shrunk to eight brands being offered by seven companies. Three have completely exited the New Zealand market while two company's websites are no longer active.
Many of the former high-cost lenders have simply dropped their interest rates below 50 per cent with some now charging 49.95 per cent for new loans.
Erin White, personal finance manager at Cash Converters which now charges 49.95 per cent interest, said like most small-loan lenders, it stopped offering small, short-term loans earlier in the year when interest and fees from loans became less than the costs of meeting CCCFA [Credit Contracts and Consumer Finance Act] and AML obligations.
"The CCCFA changes were a step too far, forcing a big spike in financial exclusion for Kiwis and the direct loss of hundreds of fulltime jobs in what has been a difficult year for many customers and staff."
In June it shut four stores and laid off 80 staff, blaming the Covid-19 lockdown and significant increases to compliance costs because of regulatory changes for payday lenders.
White said during its 27 years in New Zealand, Cash Converters had continuously adapted and evolved to meet its customers' need for responsible financial solutions.
"We have worked to fill that gap with a number of services that help our customers get on with their day-to-day lives."
Paul Park, a director at Save My Bacon, was not surprised by the drop in the number of lenders doing high-cost loans.
"If you look at the international experience it was exactly what happened in the UK when they changed the rules. MBIE [the Ministry of Business, Innovation and Employment] in their consultation made these points to the ministers, so they knew that was a real prospect and a real consequence.
"It does take a lot of effort to understand a borrower's situation and make sure you can lend responsibly so when you start to change how much you can charge for that it doesn't change the amount of work you need to do to actually find out whether the loans are affordable and suitable and so that does change the economics of those loans."
Park said an interest-rate drop had already been on the cards for Save My Bacon but the regulation had probably sped it up.
But, he said, the changes had also resulted in some unintended consequences with some of the changes being made at the last minute, meaning they weren't consulted on.
He said an example was for someone who already had a high-cost loan but would be eligible for a lower-cost loan it was not allowed to refinance them at the lower rate because it was not allowed to roll over loans or issue two loans.
"We can't just transition them from one to the other because of the way the rules work."
Park said the rules meant people had to fully repay their high-cost loan and have a 15-day stand-down period before any new loan was taken on.
"We have got customers where we would like to move them on to a cheaper loan. We are simply not allowed to under the regulations. That seems to be a strange outcome for people."
He is part of the responsible lending code advisory group and would be putting issues to the Government but said the election and a new minister had slowed the process down.
"Unfortunately this is very political space as well."
A spokeswoman for FinCap, the umbrella organisation for New Zealand's budget advice service, said it hadn't expected to see such a decrease in the number of high-cost lenders as a result of the law change and had been pleasantly surprised.
"It is much more dramatic than we thought it would be."
She said while charging 49.95 per cent interest was still high it was very different to the up to 800 per cent interest some like Ferratum - which left the market after the Commerce Commission took action against it - were charging.
"I would like to think that it is going to make a difference to people."
However, it remained concerned about those borrowing from lenders charging under the 50 per cent cap as well.
"One thing I am concerned about is once underneath the 50pc per annum cap then they can charge over 100pc of the principle so that debt spiral issue gets pushed lower.
"It is still there, just at a lower interest rate. That is definitely something for us to watch - are people getting into debt spirals?"
She said it was keeping a watching eye on the sector and its impact on borrowers particularly over the Christmas period where people may be faced with extra pressures of Covid-19.
"We are keeping a watching brief on it," she said.
Under close watch
A spokesman for the Commerce Commission said it continued to monitor the compliance of the remaining high-cost lenders with the new high-cost rules under the CCCFA.
"We are currently considering whether we open investigations into the conduct of some high-cost lenders."
It also continued to monitor entry and exit in the sector.
High cost lenders still operating
• Acorn Finance 2012 Limited trading as Cash Relief
• Eagle M.A.N. Group Limited
• Hippo Holdings Limited
• Moola.co.nz Limited trading as Needcashtoday and Moola
• My Loan Solution Limited
• Seed Credit Limited trading as Advanced Cash
• Tiny Loans Limited
No longer trading/website unavailable
Chequers Finance Limited
Ferratum NZ Limited
Quadsaa Pty Limited trading as Pretty Penny
Grit Money Limited trading as Nanocash
Zebra Finance Limited
Reduced interest rate below 50pc
Acorn Finance - 49.5%
Cantwait.com - 39.99%
Cash 4 U - 30%
Cash Converters - 49.95%
Future Finance - 9.95% to 19.99%
My Loan Solution - 49.5%
Northbridge Finance Limited trading as Teensy - 49.95%
Save My Bacon Limited 49.95%
Seed Cash - 49.95%
Smartcash 49%
Superloans 49.9%
Zethus Holdings trading as Cashwise, Cashburst, Payday Advance - 49.45%, Cashtillpayday 9.95% to 49.45%
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