Minister unveils cap on ‘predatory’ rates
Consumer Affairs Minister Kris Faafoi has unveiled proposals to cap the amount lenders can earn off loans.
Faafoi is on a mission to reduce the damage ‘‘predatory’’ lenders do in poorer communities, and released a consultation document with three options for capping borrowing costs.
The first, dubbed ‘‘Cap Option A’’, would be to limit the total accumulation of interest and fees over the life of the loan to 100 per cent of the original loan principal.
This option would only apply to high-cost lenders, and would aim to prevent unmanageable debt and financial hardship, the minister said.
Limiting the measure to high-cost lenders such as payday lenders and truck shops would not disturb mortgage lending.
A $400,000 loan at an interest rate of 6 per cent paid off over 30 years would result in about $440,000 interest paid, which would be above the Cap Option A’s limit.
Just how massive loan costs can be is shown by an example of someone buying an iPhone 8 from a truck shop for 156 payments of $25.64, adding up to $4000, when the phone only cost $1249.
Cap Option B would limit the interest rate and fees (calculated together) to between 200 per cent and 300 per cent per year, as well as limiting total accumulation of interest and fees over the life of the loan to 100 per cent of the original loan principal.
Cap Option C would set a low interest rate cap to prohibit high-cost lending. The interest rate and fees together would be limited to between 30 per cent and 50 per cent per year.
Faafoi said law reforms in 2015 failed to protect vulnerable borrowers.
‘‘I’ve spoken with people who have been given loans that are clearly unaffordable for them, and others who have been lashed with huge penalties and fees. These practices trap people and whanau in an appalling debt spiral that is very difficult to get out of.’’
The Ministry of Business, Innovation and Employment’s discussion paper outlining the proposals said there were ‘‘unacceptable rates of noncompliance’’ with lending laws, particularly the responsible lending rules, which are supposed to limit lenders to lending to people who can afford repayments without falling into hardship.
Consumer groups, regulators, dispute resolution schemes and even some lenders have reported it is common for some lenders to perform only ‘‘superficial’’ testing of loan affordability and accept income and expense information provided by borrowers without checking it, even where it is plainly incomplete or incorrect.
There was aggressive advertising of high-cost loans to consumers who had previously repaid them, and upselling of loans,’’ the paper said, for example borrowers being encouraged to borrow $2000 when they had applied for $1000.
Under the proposals, the Commerce Commission could be given the power to unilaterally ban a lender from making any new loans, if it is satisfied that the lender is causing or is likely to cause harm with their lending.
There could also be a ‘‘fit and proper’’ character test for lenders, which could mean some people running loans companies would be ejected from the industry.
And fines for breaching lending laws could be lifted to $200,000 for an individual, and $600,000 for a company.
Lyn McMorran from the Financial Service Federation (FSF) of second-tier lenders, including Instant Finance, was concerned the proposals could make business harder and more costly for mainstream lenders, and could drive exploitative lending underground.
She would have preferred to see greater enforcement of the current lending laws, which the Commerce Commission had used to put many truck shops out of business.
But she welcomed the ‘‘conversation’’ on interest-rate caps on things like payday loans. ‘‘Eight hundred per cent per annum in anyone’s language is outrageous.’’
Robert Choy, from ethical lender Nga Tangata Microfinance, welcomed the proposed crackdown on exploitative lending.
One of the potential benefits of the interest-rate caps was that it would be harder for short-term loans to morph into a decade of debt.
‘‘People may have borrowed $2000 for a car, and paid $10,000 over four years,’’ he said.