Catriona MacLennan: Govt chance to reel in loan sharks

Under our current law, loan sharks can charge borrowers whatever interest rates they choose. Photo / Richard Robinson

Politicians will have the opportunity next month to strike a small - but important - blow against loan sharks.

Fringe lenders in New Zealand prey on low-income people in poorer communities, seeking out the most vulnerable members of society and exploiting their desperate circumstances.

People on benefits or in casual work, people without assets and people with poor credit histories are regarded by banks and other top tier lenders as unattractive risk propositions.

This means that such borrowers are in practice forced into the clutches of fringe lenders, who charge exorbitant interest rates and fees and may employ standover tactics to recover their loans.

A 2006 report by Research New Zealand and titled "Fringe Lenders in New Zealand: Desk Research Project" identified 185 fringe lending companies.

Some 94 per cent of them offered cash or personal loans and 71 of them operated in Auckland, with a particular concentration in South Auckland.

The study found that fringe lenders drew people into using their services by targeting specific communities such as beneficiaries, emphasising the simplicity and alleged affordability of their loans, and stating that almost anyone could obtain credit, regardless of their lack of security or employment status.

As a disincentive to loan defaults, some companies printed the names and photos of defaulters in their community newspapers.

A more detailed 2007 research project, titled "Pacific Consumers' Behaviour and Experience in Credit Markets with Particular Reference to the 'Fringe Lender' Market", recorded that the most common interest rate mentioned by borrowers spoken to was 38 per cent.

Examples detailed in the study included:

The case of a man who borrowed $9000 to buy a car and thought that he would repay a total of $11,000. However, when interest and fees were added in, his total bill was in fact $21,000.

* In another case, a man purchased a car for $10,000, but faced total loan repayments of $25,000.

* A third example was that of a woman who bought a car worth only about $5000, but discovered that it would in the end cost her $29,000.

I have come across many, many similar cases in practising law in South Auckland. The low interest and no- or low-fee loans available to middle-class people are simply not provided to those most in need.

Under our current law, unscrupulous lenders can charge borrowers whatever interest rates they choose. There is absolutely nothing in the law to prevent a firm from charging 10 per cent a week and compounding the figure.

New Zealand lags well behind other nations in its failure to pass laws to provide borrowers with at least a minimum of protection from excessively high interest rates.

Nine of Canada's 10 provinces have laws capping the interest rates which can be charged by creditors. Three Australian states and the Australian Capital Territory cap rates at 48 per cent a year, Ireland caps at 200 per cent, Germany at 20 per cent, and Japan at 18 per cent.

The cap figures provided by laws in other countries are still extremely high, so there can be no argument that lending operations will be hampered by such legislation.

However, in New Zealand, the Ministry of Consumer Affairs has consistently argued against the introduction of interest rate caps. It says that Ireland's cap has resulted in a smaller range of short-term loan options than is the case in Britain.

The ministry also says that the Australian experience suggests that caps lead to lenders increasing their fees. However, if lenders tried to do that in New Zealand they would be caught by the Credit Contracts and Consumer Finance Act, which bans excessive fees.

The ministry says that fringe lenders play an important role in lending for unforeseen financial difficulties and capping interest rates would encourage them to go underground. This is an appalling argument.

The role that such lenders play is that of exploiting the most vulnerable in our communities. Rather than being concerned about assisting such firms to continue operating, we should be providing affordable loans to low-income people.

Labour MP Carol Beaumont is to introduce to Parliament a member's bill designed to cap New Zealand's interest rates. The Credit Reform (Responsible Lending) Bill provides for the Governor of the Reserve Bank to set maximum annual percentage rates of interest payable on consumer credit contracts. The bill also requires lenders to make inquiries to ascertain that borrowers have a reasonable prospect of repaying loans.

The bill is a very small blow against loan sharks and it is to be hoped that MPs will vote in favour of it.

Prime Minister John Key said in April 2009 that banks were taking advantage of their customers by charging very high interest rates on credit cards. However, credit card interest rates are only a fraction of those charged by fringe lenders.

Mr Key and other MPs now have a chance to do something about it.

* Catriona MacLennan is a South Auckland barrister.