Loan shark law submitters want interest rate caps and truck shops banned

Friday, 26 July 2019

Truck shops were a concern for many submitters.

Community groups want greater restraints on the interest short-term lenders can charge often vulnerable borrowers.

On Friday the Finance and Expenditure Select Committee heard submission in Auckland on legislation to crackdown on loan sharks and dodgy lending practices.

Several budgeting services argued for a cap on interest rates and ban on truck shops.

The Government's proposed Contracts and Consumer Finance Amendment Bill does not cap interest rates directly, instead capping the total repayment (including fees) at 100 per cent of the original loan amount. This means if someone borrows $500 they could would not pay back more than $1000.

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But the majority of the submissions from people dealing with victims of predatory lenders on a day-to-day basis said they wanted interest capped at 50 per cent or 30 per cent.

Ronji Tanielu for theSalvation Army told he committee that as it stood the proposed bill would not protect low-income families from predatory lending companies.

The select committee heard submissions to introduce a interest rate cap of 50 per cent.

Tanielu said most of his clients had at least two loans.

'Our clients often feel powerless when engaging with companies around their debt,' Tanielu said.

'An interest rate cap will provide the greatest amount of consumer protection and strengthen this bill.'

He said the Salvation Army saw about 60,000 people a year with some sort of debt related issue.

Ngā Tangata Microfinance's Robert Choy called for a maximum interest cap of 30 per cent a year, which would apply to companies lending larger sums, combined with a total cost of credit for these lenders in the range of 50 per cent of the loan.

The Ministry of Business Innovation and Employment (MBIE) said the 100 per cent credit cap struck the best balance between protecting vulnerable people and not taking away what was sometimes their only financing option – and possibly sending them to illegal lenders.

Currently some lenders charge interest rates of 500 per cent or more a year, and the cost of even small loans can quickly blow out.

North Harbour Budgeting Services financial adviser Christine Gillmore said a client who had borrowed $450 in November 2015 had paid $490 eight months later but still owed $1100 to her pay day lender.

'A 50 per cent cap on interest rates would be a good starting rate for providing additional protection and reducing harm to vulnerable followers,' Gillmore said.

In its submission the Salvation Army said its budgeting staff and social workers had worked with clients who were faced a 16 per cent interest increase per day if they were unable to pay their clothing truck debts by a certain date.

Te Aroha Family Budgeting Services advisor Sarah Matafeo-Ross said the Waikato town of 4000 people had three truck shops, that targeted low-income and vulnerable households.

Matafeo-Ross said she often saw people using their Kiwisaver hardship funds to repay loans.

But Erin White from Cash Converters said the credit cap proposed in the proposed bill was fit for purpose.

'The 2015 reforms went a long way, the current bill completes that job. The 100 per cent credit cap means borrower can't spiral out of control. Interest rate caps are not the solution and unviable for short loans.'

There is a need for short loans and it is working well, White said.

White said there were thousands of people earning six figure salaries and using Cash Converters for short term loans.

But when asked by Labour MP Anahila Kanongata-Suisuiki what proportion of its lenders were earning at least $100,000, White could not say but committed to finding out and responding later.