Faafoi targets high interest loans
Putting interest rate caps on payday loans is among the priorities for Labour’s first 100 days in office.
And Commerce and Consumer Affairs Minister Kris Faafoi, who pushed for caps when in opposition, has instructed officials to look at how low New Zealand’s payday loan interest rate caps should be.
Currently, high-interest, short-term payday loans can sometimes attract interest at a rate of 1.5 per cent a day, though there is no legal maximum.
Bringing in caps on high-interest, short-term loans would take New Zealand into the club of nations with rate caps intended to protect low-income people from predatory lenders.
The UK has a cap of 0.8 per cent per day on all interest and fee charges on short-term loans, and a total cost cap of 100 per cent of the amount borrowed, including interest and set-up fees, should the loan go overdue.
In Australia, the maximum that can be charged for loans scheduled for repayment in 16 days to one year is an establishment fee of no more than 20 per cent of the amount borrowed, and monthly interest of no more than 4 per cent.
Australia banned loans of A$2000 or less which have to be repaid within 15 days.
While in opposition, Faafoi supported 2013 lending reforms inspired by National’s Peseta Sam Lotu-iiga, who like Faafoi had seen first hand the damage that high-cost credit was doing to Pacific and Maori families in poorer areas like South Auckland, and Faafoi’s own Mana electorate to the North of Wellington.
But the reforms, which focused on ending abusive debt collection and repossession practices, including violent convicted criminals working as collection agents, did not go far enough, Faafoi believes.
‘‘I sat on the Commerce Select Committee when these reforms were going through,’’ he said. ‘‘The major issue for us was always that we didn’t make substantial changes around interest rates.’’
The committee decided: ‘‘Whilst restricting interest rates may offer consumers protection from one form of highcost credit... we consider that it may also have unintended consequences. They include restricting access to credit for consumers, and also that the interestrate which is the upper limit coming to be viewed as a target or ‘reasonable’.’’
While in opposition Faafoi tabled a private members bill seeking interest rate caps, but had no power to get it into law.
As a minister he now has the power.
The UK claims the regulation of ‘‘high-cost, short-term credit’’ (called HCSTC in Britain) has brought ‘‘substantial benefits for consumers’’. ‘‘The cost of a typical loan has gone from over £100 pounds (NZ$190.50) to around £60 pounds (NZ$114.30), saving 760,000 borrowers a total of £150m a year,’’ The Financial Conduct Authority (FCA) says.
Organisations like the UK’S Citizens Advice saw a drop in clients with HCSTC, it says, and 63 per cent of people it surveyed, who had applied for HCSTC and were declined, felt ‘‘this was for the best’’.
US academics Thomas Miller and Harold Black were critical in a 2016 paper on caps, saying: ‘‘Interest rate caps harm the very people who they are designed to protect’’. If caps were set too low, lenders exited the market rather than make unprofitable loans. They could result in ‘‘loan deserts’’ which created unintended consequences, such as households paying more dishonour fees for ‘‘bounced checks’’, Miller and Black found.