Catriona MacLennan: Moneylenders still preying on poor

Catriona MacLennan

New credit laws designed to offer better protection to consumers have been in force for six months. Unfortunately, they are failing to stamp out many bad practices by finance companies and other lenders.

Borrowers are continuing to be ripped off and the Government needs to take further steps.

Debt is one of the key issues faced by beneficiaries and people on low incomes, and unscrupulous lenders are preying on their vulnerability.

The end result of high interest rates and excessive - and unjustifiable - loan fees is that poor people are left with insufficient money to feed their families and take their children to the doctor.

At Nga Ture Kaitiaki Ki Waikato Community Law Centre we see clients every week who have problems with debt. Some end up losing their homes while others buy faulty cars for excessive prices and the vehicles are then repossessed, leaving the debtor with no car and a debt of tens of thousands of dollars.

The Credit Contracts and Consumers Finance Act 2003 came into force on April 1. It bans "unreasonable" fees on loan contracts.

Fees must now be reasonable and related to the creditor's costs in preparing the contract.

Low-income people often have bad credit ratings and are unable to obtain loans from banks. This leaves them at the mercy of more unscrupulous lenders who commonly charge large fees when loans are taken out.

Under the old law, one woman was charged a total of $7300 in loan fees and payment protection insurance, including a brokerage fee of $3200.

Other fees commonly charged include establishment, security inspection, document, and loan shortfall insurance policy fees.

Contrast that with the position of a wealthier person taking out a mortgage. The lending market has been so competitive in recent years that borrowers are not charged any loan fees and banks commonly pay around $700 towards legal fees.

The position in respect of excessive loan fees does not appear to have improved under the new law. We regularly see contracts where people continue to be charged fees totalling several thousand dollars.

It is now possible to challenge these fees, but people must first be aware that the fees are illegal. Most people do not, in any case, know how to take action about them. They also fear retaliation by the finance company.

Another common rip-off is for beneficiaries to be signed up to payment-protection insurance, covering sickness, accident or loss of employment.

This is a complete waste of their money. As they are on a benefit, their income continues even if they become ill or have an accident and they have no job to lose. Accordingly, they will never receive a payout under the policy and should not be signed up in the first place.

People unable to get loans from banks generally face paying extremely high interest rates. It is normal for finance companies to charge 19 per cent interest, and an even higher penalty interest rate. In some cases, the interest rate can be 25 or 29 per cent, or even more.

Other problems continuing to occur under the new law concern people who are not given copies of loan documents and complicated paperwork, which almost no borrowers understand.

In my submissions on the law, I suggested that the front pages of loan contracts be left blank except for the total figure payable under the loan, which would be recorded in large, bold letters.

Few debtors realise the total amount they are required to pay under loans. The figure may be on the second or third page of the document, is normally the same size as all the other figures and does not stand out.

The people we act for are almost always shocked when we tell them the full amount they owe.

The Commerce Commission has new powers to enforce the law. I hope the commission will be proactive. It has 12 investigations under way into breaches and has checked 50 lenders in Auckland, Wellington and Christchurch to see whether they were complying with the law.

The industry was given a "mixed" report card after the checks. The commission said consumers were still not getting enough information, details were not clearly set out, fees appeared unreasonable and insurance policies were unjustified.

So what can be done to improve the position? Here are some suggestions.

* The Government should make cheap loans available to low-income people through Kiwibank.

* Interest rates should be capped at a specified percentage above either the inflation rate or current bank lending rates.

* Loan documents should be made simpler.

* Ministers should monitor enforcement of the law by the Commerce Commission.

* The "hardship" provision covering people in financial difficulty should be amended to allow borrowers in default to use it.

* The Commerce Commission should be given the job of applying under section 108 for orders banning non-complying finance companies from continuing to lend.

* Catriona MacLennan is a South Auckland barrister.