Communities are “under siege from predatory lenders” as they struggle on low incomes that are not sufficient to meet the needs of their families yet have little or no access to safe or fair sources of credit. This is a key message to emerge from a recent hui about poverty held at Auckland’s Te Puea Marae on 17th May.
Families have little or no money to spare and if something goes wrong like needing urgent medical care or a fridge or washing machine needing repairs or the car breaking down, then often the only option is to turn to pay day lenders or instant finance, some of whom charge interest rates of 1% per day (i.e. 365% per year) or charge excessive and unreasonable fees for administration or late payments.
‘Wild West’ for Consumer Lending
As CPAG spokesperson Clare Dale points out, “unlike most of the rest of the world, in New Zealand there is no legal limit on interest rates or on the total cost of credit.” As a result ‘fringe lenders’ (or ‘loan sharks’) charge excessive interest or the mobile traders who sell from trucks direct to people in low income communities may charge no interest but instead sell products for excessive prices. As those who are working with people affected by these predatory lenders point out, many of the people affected do not have the resources or knowledge to challenge charges being added to their debt. They are often overwhelmed by the power and apparent authority of the lender, the urgency of their need, and the increasing enormity of the debt.
Microfinance Is Making a Difference
The good news is that there are new microfinance options becoming more available designed to offer small, safe, no-interest loans to low income people. Nga Tangata Microfinance is one such lender that NZCCSS has helped establish over recent years along with a number of other community organisations, while the Salvation Army is working with the BNZ, Newtown Ethical Lending in Wellington and the Australian Good Shepherd Microfinance is also now operating in New Zealand.
Nga Tanagata loans to people who are working with a budgeting service by offering a way for them to pay-off high interest debt and develop a plan to reduce their total debt through manageable repayments over time. Initial results from evaluation research conducted on the Nga Tangata loan programme show just how much it helps for people to have support to understand the extent of their debt and a pathway to free themselves from debt and begin to plan ahead.
A solo mother, Samantha (not her real name), with a teenage daughter had managed okay until she lost her job. She found herself in “a bit of a hole” feeling really tired and financially things got out of hand including $3,000 in debts. She found she was only managing to pay the minimum payments but that only covered the interest and the prospect of the debt never going away made her really scared.
She sought out a budgeting service for help and they connected her with a Nga Tangata debt relief loan to get the debt under control. Samantha says things are now looking up for her: “I was just going day-to-day, I could not even think of tomorrow because tomorrow would be all these things to deal with. Now I can look to tomorrow, or next week.”
Commerce Commission Taking Action
Since 2014 stronger rules around lending practices have been in place and the Commerce Commission is the Government agency that is responsible for enforcing them. Recent media releases from the Commission report on prosecutions of lenders breaking the law. One internet loan provider has been forced to repay unreasonable fees charged on more than 6,000 loans. Another has been banned from operating as a lender for not disclosing charges and default interest fees and has had to repay more than $25,000 to clients. The Commission has also been pursuing mobile traders who have been making false statements, charging unreasonable fees or not delivering goods paid for.
Total Cost of Credit Cap is needed
While welcoming this enforcement action, CPAG’s Dr Clare Dale sees this is just the “tip of the iceberg” of that exploitative behaviour going on around consumer credit. She says it shows that the sector self-regulation through the Responsible Lending Code is not enough to deter mobile traders and other fringe lenders. She is calling for a “total cost of credit” cap to protect those who are unable to access mainstream credit. Many people are unable to get loans from banks and other mainstream lenders because of the very strict credit rules that apply to conventional banks or “First Tier” lenders.
A group of women from Coromandel took a petition to Parliament asking for a cap on interest rates charged in New Zealand. The Finance and Expenditure Select Committee considered this petition and its report was released in May. The report notes that the Commerce Commission has investigated mobile traders resulting in 11 prosecutions and a further 12 traders are under investigation. The Commission is now also actively investigating lenders of high-cost, short-term loans. The Ministry of Business, Innovation and Employment has also told the Select Committee that it will undertake a formal evaluation at by the end of 2017 of the reforms to credit laws since 2014 and will be considering interest rate caps as part of that.
It’s All Good
Meanwhile, the Commerce Commission has released more video clips as part of the Its All Good series designed to help people understand what they need to think about and do when taking out a loan.
Check out Herman and his quest to borrow the money to pay for his dream TV….