New measures added to protect against loan sharks

The Government is adding new rules around high cost short term lending to protect consumers from punishing debt at the hands of loan sharks.

“We know that many consumers are trapped in a cycle of debt, causing extreme hardship – and often, intergenerational poverty – for them and their families. This is an unacceptable situation and the Government is taking action to address it,” said the Minister of Commerce and Consumer Affairs Kris Faafoi.

“The Credit Contracts Legislation Amendment Bill currently going through Parliament contains new measures that will ensure people taking out high-cost loans never have to pay back more than twice the amount they originally borrowed.

“Following public feedback on the Bill at select committee, we’ve decided to include a 0.8 per cent per day cap on interest rates in addition to other changes which will strengthen protections for vulnerable borrowers.

“At the moment, high-cost credit is too easy for people in hardship to access. While this type of credit can be an immediate solution to financial problems, we know that high-cost, easy credit leads to worse problems in the long run,” Kris Faafoi said.

Another change the Government is making is to regulate mobile traders, such as ‘truck shops’, who often sell goods on credit at inflated prices, especially in low-income areas.

“While most mobile traders are already subject to some regulation, some are not. We believe all mobile traders who sell goods on credit should be subject to the same levels of disclosure and responsible lending requirements – including affordability checks - before credit is given,” Mr Faafoi said.

Public feedback also called for lenders to provide clients who fall behind on their loan repayments with information about financial support services.

“I know that some lenders are already referring customers who are struggling with repayments to financial mentoring services and this is good to see because it ensures that those struggling with debt can access the advice they need to get back on their feet. I encourage other lenders to follow this example. We are changing the law so that this can become a requirement in future, if needed.

“I thank everyone who helped develop this Credit Contracts Legislation Amendment Bill so that is workable and combats the very serious problem of predatory lending.”

The Bill is expected to pass this year, and will come into effect, in stages, starting in March 2020.

Examples:

The Government is adding key measures to the package of proposals to tackle predatory lending:

1. Setting an interest rate cap of 0.8 per cent per day.

‘Tui’ needs a loan to repair her car, which she uses to get to work. She can’t get a credit card so would normally take out a small loan with a high-cost lender who charges 1.7 per cent per day (or 620.5 per cent per annum). By setting a cap on the daily interest and fees she has to pay, her total interest repayments will reduce by about half.

2. Requiring all mobile traders who sell goods on credit to be subject to responsible lending and disclosure obligations

Some truck shops structure their business so that the credit that they provide falls outside of the protections in the Credit Contracts and Consumer Finance Act. For example, they might not charge any interest or default fees, and instead have very high prices. The new requirements will mean that all truck shops have to make sure that any credit given is suitable and affordable for each borrower, and that the borrower is helped to make an informed decision about the contract.

3. Payment reminders to provide contact details for financial support services

We are aware that currently a range of lenders are already working with financial mentoring services to implement active referrals for customers who are at risk of hardship or are struggling with repayments. We need to encourage other lenders to follow this example. The intention of this proposal is to ensure that, if needed, we can make this a requirement.

How the 0.8% interest cap works in conjunction with the limit on the total cost of credit.

The Bill currently contains a cap on the total cost of credit for high-cost loans. It is a protection for people who default on these loans, or need to reduce their repayments because of unforeseen hardship. It means that high-cost debts can’t keep growing indefinitely. The amount owed can never be more than twice the amount originally borrowed.

The new interest rate cap adds a limit on how much a lender can charge borrowers, right from the start of a loan. It reduces the dollar amount of regular repayments. Indirectly, it also limits how much risk lenders can take on borrowers, which will help reduce high-cost loans being given to those who can’t afford them.