Tougher laws for loan sharks

Consumer Affairs Minister Chris Tremain today released draft consumer credit legislation to better protect consumers from irresponsible lenders.

Over the next six weeks the Minister will visit community and industry groups around the country to discuss the draft Credit Contracts and Consumer Finance Amendment Bill.

“The Government is getting tough on loan sharks and lenders who don’t play fair. Money lenders should not be able to prey on desperate people, leaving them and their families trapped in a spiral of debt,” says Mr Tremain.

“These will be the biggest changes to consumer credit law in a decade. It is time for a significant shift in lending laws to increase protection for borrowers and target irresponsible lenders.”

Key changes include:

• Making it illegal to lend money to someone whose loan repayments would be likely to result in substantial hardship;
• Requiring more timely and complete disclosure of loan terms, and extending the ‘cooling off’ period for borrowers to cancel their loan;
• Obligating lenders to properly consider applications by borrowers for hardship relief, and provide reasons for their decisions;
• Better controls against misleading, deceptive or confusing advertising;
• Introducing a new Code of Responsible Lending – and allowing for lenders to be banned from the industry for non-compliance;
• Providing that borrowers won’t have to pay the cost of interest or fees if their lender is not a registered financial service provider.

“With such significant changes, it is important that we get it right. I’m looking forward to touring the country and getting feedback from the community services that deal with people who have been targeted by loan sharks,” says Mr Tremain.

“I am also looking forward to meeting with members of the lending industry. I know many lenders are calling for changes like these to help rid the industry of those who give it a bad name.”
 

Draft law changes are now open for submissions until 11 May 2012. Submissions can be made to the Ministry of Consumer Affairs at cccfa@mca.govt.nz, or PO Box 1473, Wellington.

Q&A
Why are these reforms necessary?

Too many unscrupulous lenders are preying on desperate people, trapping them in debt which leaves them worse off. Our changes support responsible lending, and toughen up on lenders who don’t follow the rules.

What is the background to these changes?

The Financial Summit in August 2011 brought together 250 people from community groups, budgeting services, NGOs, banks, financial regulators, and credit providers to look at ways of tackling irresponsible lending. Participants called for legislation to support responsible lending, and for greater penalties for unregistered lenders. This followed a review of the Credit Contracts and Consumer Finance Act (CCCFA) by the Ministry of Consumer Affairs.

On 31 October 2011 Cabinet agreed to a package of reforms to introduce tougher consumer credit laws to target loan sharks and protect consumers.

What are some examples of unscrupulous behaviour by lenders?

Some lenders are giving loans that borrowers will clearly struggle to pay back; misleading customers who don’t understand the real cost of a loan; not disclosing essential information; or taking disproportionate security (for example security over all of a customer’s present and future property, for a small loan amount). These are just a few examples of the behaviour this Bill is targeting.

What will the changes in the Bill mean for consumers and lenders?

• It will be illegal to lend money to someone whose loan repayments would be likely to result in substantial hardship;
• Disclosure of contractual terms will need to be made up front (not within 5 days as at present), and the “cooling off” period for borrowers to cancel loans will be extended;
• Lenders will need to properly consider applications by borrowers for hardship relief;
• There will be better controls against misleading, deceptive or confusing advertising;
• A new Code of Responsible Lending will be introduced, and lenders may be banned from the industry for non-compliance;
• Borrowers won’t have to pay the cost of interest or fees if their lender is not a registered financial service provider.
• Lenders must make their standard terms and conditions and cost of borrowing information available at their premises and on their website if they have one.
• There will be clearer provisions to prevent unreasonable charges.

Why is the Government releasing an Exposure Draft?

Because this is a complex area, the Government is releasing an Exposure Draft of the Bill in advance of introducing final legislation to Parliament. This will provide an opportunity for stakeholders to provide feedback before the final Bill is drafted.

Stakeholders will still have the opportunity to submit on the final Bill at Select Committee stage; submissions can be recycled for this purpose.

When will the reforms come into effect?

This work is a priority for the Government; however, it is important that it is carefully considered. Once submissions on the Exposure Draft have been considered, the legislation will be finalised and introduced to Parliament. It is hoped that the new legislation will be in effect by mid-2013.

Who should make a submission on the Exposure Draft?

Any individual or organisation with an interest in consumer credit should submit their views for consideration. The Ministry of Consumer Affairs’ website will also allow people to make a quick submission on the Bill if they do not wish to make a full submission.

Will the changes affect registered banks and other lenders?

The legislation applies to all credit providers. This includes registered banks and other lenders. However, registered banks and lenders who are members of the Financial Services Federation are already committed to responsible lending. The objective of the responsible lending reform is to lift the business practices of lenders towards an industry best practice.

Will these changes remove loan sharks from the market?

The objective of the reforms is for lenders to behave more responsibly, not to eject lenders from the market. However, if particular lenders fail to comply with the law, the changes in the Bill will enable courts to ban them from operating.

What does responsible lending mean?

Responsible lending means that lenders have a duty not to provide credit which will be inappropriate or unaffordable for the borrower. They cannot be indifferent to the circumstances of their customers or the effect of the debt they are providing. In some circumstances, that debt can be harmful to the individual borrowers and to society generally.

Why is an interest rate cap not included in the Bill?

The initiatives in the draft legislation are expected to create downward pressure on interest rates. We are seeking views on whether the reforms in the Bill will make it unnecessary to cap interest rates and/or the cost of finance.

How can I make a submission?

Submissions should be forwarded to the Ministry of Consumer Affairs by Friday 11 May 2012.

Submissions can be emailed in either Adobe PDF or Microsoft Word format to the cccfa@mca.govt.nz, with "Submission on Credit Law Exposure Draft" as a subject heading.

If you would prefer to make a brief “quick submission” you can do this on the Ministry of Consumer Affairs Website at http://consumeraffairs.govt.nz/legislation-policy/policy-development/credit-review.

Alternatively, submitters may send hard copies of their submission to:

Consumer Policy
Ministry of Consumer Affairs
PO Box 1473, Wellington

We will acknowledge receipt of all submissions. Please contact us if you do not receive an acknowledgement of your submission within 5 business days.