Rule changes force high cost lenders out

Firms charging interest rates of up to 800 per cent go

Aformer high-cost lender says the introduction of loan interest rate caps has resulted in job losses in the industry and a spike in financial exclusion for Kiwis.

But the umbrella arm of New Zealand’s budgeting service says it is a good thing borrowers can no longer access loans which charged as much as 800 per cent interest per year.

On May 1 the Consumer Contract and Credit Finance law changed so high cost lenders — those charging more than 50 per cent in interest — had to disclose extra information to borrowers and the total cost of the loan — fees and interest — was limited to 100 per cent of the first advance.

High-cost lenders were also barred from charging compound interest and default fees exceeding $30 were considered unreasonable unless the lender could prove otherwise.

That was followed on June 1 by a daily rate cap of 0.8 per cent and rules restricting how many high-cost loans a borrower can enter into.

Since May 1 the number of lenders offering new high-cost loans has dived. According to the Commerce Commission, 21 companies were trading under 30 trading brands offering high-cost loans before then.

Now only eight brands are being offered by seven companies. Three have left the NZ market while two companies’ websites are inactive.

Many former high-cost lenders have simply dropped their interest rates below 50 per cent.

Some now charge 49.95 per cent for new loans.

Erin White, personal finance manager at Cash Converters, which now charges 49.95 per cent interest, said that like most similar lenders it stopped offering low-sum, short-term loans early in the year when interest and fees from loans became less than the costs of meeting CCCFA (Credit Contracts and Consumer Finance Act) and anti-money laundering obligations. “The CCCFA changes were a step too far, forcing a big spike in financial exclusion for Kiwis and the direct loss of hundreds of full-time jobs in what has been a difficult year for many customers and staff.”

In June it shut four stores and laid off 80 staff — blaming the Covid-19 lockdown and significant increases to compliance costs because of regulatory changes for pay day lenders.

Paul Park, a director at Save My Bacon, was not surprised by the decline in lenders doing high-cost loans.

“If you look at the international experience it was exactly what happened in the UK when they changed the rules. MBIE [the Ministry of Business, Innovation and Employment] . . . made these points to the ministers, so they knew that was a real prospect and a real consequence.

“It doesn’t take a lot of effort to understand a borrower’s situation and make sure you can lend responsibly so when you start to change how much you can charge for that it doesn’t change the amount of work you need to do to actually find out whether the loans are affordable and suitable and so that does change the economics of those loans.”

Park said an interest rate drop had already been on the cards for Save My Bacon but the regulation had probably sped it up.

But he said the changes had also resulted in some unintended consequences, with some of the changes being made at the last minute meaning they weren’t consulted on.

For example, someone who already had a high-cost loan but would be eligible for a lower-cost loan could not be refinanced by the firm at the lower rate because it could not roll over loans or issue two loans.

“We can’t just transition them from one to the other because of the way the rules work.” The rules meant people had to fully repay their highcost loan and have a 15-day standdown before taking out any new loan.

A spokeswoman for FinCap — the umbrella body for NZ budget advice services — said it hadn’t expected to see such a decline in high-cost lenders as a result of the law change and had been pleasantly surprised.

“It is much more dramatic than we though it would be.” She said while charging 49.95 per cent interest was still high it was very different to the up to 800 per cent interest some like Ferratum — which left the market after the Commerce Commission took action against it — were charging.

A spokesman for the commission said it continued to monitor the compliance of the remaining high-cost lenders with the new high-cost rules under the CCCFA.

“We are currently considering whether we open investigations into the conduct of some high-cost lenders.”