Catriona MacLennan: Loan protection fails the poor

The Government needs to take urgent steps to prevent low-income people being ripped off by unscrupulous lenders.

The Herald on Saturday reported the case of Grey Lynn beneficiary Nga Tuaineiti, who owes $35,259 for a car with a $9000 value.

Ms Tuaineiti bought a Toyota Rav for $17,999, and took out a loan to cover the cost. But interest and a slew of charges - such as application, brokerage and registration fees - escalated the total cost. This is an all-too-common situation which, as a lawyer, I have dealt with many times on behalf of clients.

Vulnerable people desperate to borrow for essentials such as a vehicle to transport chronically ill children, find that they cannot get a bank loan. Banks have strict lending criteria, which mean that the poorest people in the community will never qualify. They are therefore at the mercy of lenders who exploit their vulnerability by charging high interest rates and unjustifiable, sometimes illegal, fees. The Government could end this exploitation overnight by making low-interest loans available through KiwiBank.

This would put unscrupulous operators out of business and ensure people did not lose their homes or rack up debts of tens of thousands of dollars when trying to deal with family emergencies.

The worst case I have dealt with was a solo mother of six children who had owned her home for 16 years and never missed a mortgage payment. She found herself in financial difficulties after a family member pressured her to act as a guarantor for a vehicle purchase. The woman ended up being liable for a loan with an interest rate of 18 per cent and "fees" on the loan totalling a huge $7200.

The Credit Contracts and Consumer Finance Act 2003, in force for 18 months, was intended to put an end to such rip-offs and offer better protection, but it has proved disappointing in practice.

The most vulnerable borrowers do not know the details of the law and are unaware that the contracts they sign contain elements which breach the law.

Even if they were aware of this, they could be too scared to do anything for fear they would not be able to access money in future.

The Commerce Commission, which has the job of enforcing the law, has campaigned to advise traders about the details of the legislation and has warned those lenders it believes are not complying.

It is now time for the commission to take a far more pro-active approach and use the full force of the law against those who breach it.

I lodged a complaint with the commission on behalf of a client about a loan taken out through Provincial Finance.

The commission spent a year investigating before sending a warning letter to Provincial, but by that time the company was in receivership.

This is simply not good enough. The most unscrupulous lenders don't care about warning letters as long as they can continue doing exactly as they have been doing.

The commission needs to take court proceedings and use the provisions in the law to put non-complying companies out of business.

The commission also needs to take cases on behalf of any borrowers who have no hope of bringing court proceedings themselves.

In addition, the Government needs to take a hard look at what goes on daily in the secondhand car market.

The people I act for are ripped off not once, but twice, when they buy vehicles.

They are charged extortionate fees by finance companies and are also exploited when they buy cars at vastly inflated prices and often with serious defects.

Attempting to obtain redress in such cases is time-consuming and difficult.

One man I acted for went to a car-yard and explained that he had a large family and could not afford an expensive vehicle.

He said he wanted a "running around" car. Instead, he signed a contract under which he was to pay $60,000 for the car, loan and fees.

Other steps the Government should take:

* Cap interest rates on loans at a specified figure above the inflation rate

* Require people to obtain independent legal advice before signing loan contracts

* Restrict advertising targeted at low-income people

Unfortunately, I see people only after they have fallen behind with their loans and by then it's almost impossible to help them.

Better education and a requirement for legal advice at the outset would stop such problems right at the beginning.

* Catriona MacLennan is a South Auckland barrister and the author of Know Your Rights - A Practical Guide to the Law for every New Zealand Household.