Loan shark crackdown includes interest & fee caps, fit & proper person test and tougher penalties, Commerce & Consumer Affairs Minister Kris Faafoi says

By Gareth Vaughan

The Government plans to cap the total interest and fees lenders can charge as part of a crackdown on loan sharks and truck shops. It's also planning to introduce a "fit and proper person" test for lenders, door-to-door salespeople and truck shops.

These moves are among changes to the Credit Contracts and Consumer Finance Act (CCCFA) following the release of a Ministry of Business, Innovation & Employment (MBIE) discussion paper in June detailing findings from a government review of the CCCFA.

Interest and fees on high-cost loans will be limited to 100% of the amount borrowed (the loan principal). Thus if an individual borrows $500, they will never have to pay the lender back more than $1000, including all fees and interest, the Government says. This will only apply to "high-cost lenders" with the aim being to prevent unmanageable debt and financial hardship from accumulating large debts from a small loan.

The idea is that even if the borrower defaults, they would repay no more than twice the original loan principal, including interest, default interest, and all fees. For the purposes of the Responsible Lending Code, a "high cost" credit agreement is one where the annualised interest rate is 50% or more. Commerce and Consumer Affairs Minister Kris Faafoi acknowledges this definition will likely need further development during legislative drafting, for use in the context of statutory interest rate caps.

The limit would apply to interest and fees on both the original loan, and any subsequent loans provided by the same lender used to repay or replace the original loan, the Government says. This would include new loans issued soon after the original loan is repaid. This is designed to prevent lenders from simply replacing the original loan with a new loan and continuing to charge interest and fees.

'Lifting the level of professionalism across the industry'

The Government says some lenders offer small loans over short timeframes that can have interest rates of up to 800% per annum, leading to financial harm and debt spirals. This, it says, is a problem for vulnerable consumers who might not have access to other forms of credit.

“The 2015 amendments to the CCCFA [by the previous National-led government] did not go far enough in protecting our most vulnerable consumers from loan sharks,” Faafoi says.

“The introduction of an interest and fees cap on high-cost loans will prevent people from accumulating large debt from a single small loan. For example, if you borrow $500 you will never have to pay back more than $1,000 in total, including all fees and interest."

“The changes also lift the level of professionalism across the industry, by requiring directors and chief executives of lenders offering consumer credit contracts to pass a ‘fit and proper person’ test in order to register as a Financial Service Provider," says Faafoi.

“Any lenders breaching the responsible lender principles will face stiff new penalties of fines up to $600,000 under the strengthened enforcement provisions in the CCCFA." 

“We listened to consumer advocates and the finance sector’s feedback and will also be seeking increased resources for enforcement and monitoring to ensure lenders who break the law are detected and stopped," Faafoi adds.

Under existing law there are no penalties for breaches of lender responsibilities. However, courts can order compensation for any loss to borrowers and issue injunctions, but there are no civil pecuniary penalties. Existing penalties in the CCCFA of up to $600,000 for body corporates apply to other offences such as breach of disclosure obligations, charging unreasonable fees, and breach of repossession requirements, but not for breaches of lender responsibilities.

Some 200,000 borrowers use high cost credit annually

Faafoi says a conservative estimate from MBIE data suggests more than 200,000 borrowers use high cost credit annually with customer numbers for these products growing rapidly. The proposal for the fit and proper test is that it would be done by an independent assessments officer employed by the Commerce Commission supported by Commission staff. The test would cover good character and capability assessments with "some level of research and investigation" by the regulator required.

Faafoi says the Government is also tackling predatory behaviour by truck shops and others who sell door-to-door on credit or other deferred payment, by requiring all mobile traders to pass the ‘fit and proper person’ test. Additionally the law will be strengthened to give consumers clearer powers when asking uninvited salespeople to leave their premises, including by strengthening the legal status of 'do not knock' stickers.

In terms of truck shops, the Commerce Commission in April fined Mobile Shop Limited $330,000 for breaches of consumer laws. This was the biggest fine for a truck shop to date, bringing the total fines handed down in 13 Commerce Commission prosecutions of mobile traders to $1.56 million.

Faafoi says the new rules will take effect from 2020, subject to Parliamentary timeframes. The law changes will see additional guidance added to the Responsible Lending Code.

Changes to debt collection

In terms of debt collection Faafoi is proposing a statutory obligation for key loan information to be shared with the debtor at the start of any debt collection process.

"The information to be disclosed would be specified in regulations, and would include the name of the original creditor, the date on which the debt was passed to the debt collection, any fees added in relation to the debt collection, information about the rights of the borrower, and contact information for relevant consumer support services," he says. 

"This option would improve transparency and enable debtors to more readily understand the debt, work with debt collectors to establish a repayment plan, and challenge the debt if necessary. It would also benefit debt collectors, who can resolve the debt more readily if all parties understand the key facts of the loan." 

"It has low costs, given that debt collectors indicated in their submissions that they already undertake a level of disclosure. To better understand and respond to concerns raised about hardship procedures, harassment and fees charged by debt collectors, officials will also be instructed to work with the sector to develop formal guidance on these points. No regulation or industry leadership currently exists on these matters," says Faafoi.

Meanwhile Prime Minister Jacinda Ardern says her government is committed to making New Zealand "the best place to raise a child.”

“To do that we must stop families becoming trapped in the appalling debt spirals and poverty that result from onerous lending and payback terms. These new measures will halt the very worst of those preying on vulnerable and desperate people while enabling borrowing that meets their needs in an affordable way," says Ardern.

“They will protect families through capping the total interest and fees charged loans, introducing tougher penalties for irresponsible lending, and raising the bar for consumer lenders to register as a Financial Service Provider,” Ardern says.

Below are the key changes the Government is making, which it plans to implement via a CCCFA Amendment Bill;

An interest rate cap on high-cost loans, to stop debt spirals.

Interest and fees on high-cost loans will be limited to 100% of the amount borrowed (the loan principal). For example, if an individual borrows $500, they will never have to pay the lender back more than $1000, including all fees and interest.

More accountability for mobile traders.

Mobile traders will need to pass a ‘fit and proper person’ test, and register on the Financial Service Providers Register. ‘Do not knock’ stickers will be legally enforceable. This will lift professionalism in the sector and give consumers more power to refuse to engage with mobile traders. 

Easier enforcement to ensure fees are reasonable.

Lenders will be required to prove (substantiate) that their fees are reasonable, if the Commerce Commission asks them to do so. 

Greater transparency and access to redress during debt collection.

Key loan information will need to be shared with debtors at the start of debt collection activity. 

Clearer responsible lending requirements, to increase compliance.

Prescriptive requirements for affordability and suitability tests, to make it simple for lenders to comply. This will also make it easier to complain and follow up where affordability is not properly checked.

New rules about disclosure and advertising. If a lender advertises in a language, they will also have to provide the loan disclosure documents in that language. Key elements of the current Responsible Lending Code guidelines for advertising will also be made binding.

Tougher enforcement for breaking the law.

Tougher penalties for irresponsible lending, including increased financial penalties, statutory damages, and banning orders.

‘Fit and proper person’ test, to lift professionalism in the industry. Directors and executives of consumer lenders will be required to meet a ‘fit and proper person’ test before the creditor can be registered on the Financial Service Providers Register.

Duties on directors and top executives to ensure that lenders comply with their obligations.

More information on the proposed changes is available here.

General terms and interest rates (in annualised form) across different types of NZ lending products, source MBIE.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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80 Comments

Excellent news , I have suggested this idea , on this forum numerous times over the years

A big problem with capping interest/charges/fees is that if loan sharks don't like it, then the incentive for them is to "go underground"........

In my view, it's better to keep these dubious "businesses" on street fronts - and not down back alleys, or in camping grounds (where they aren't visible and can get away with oppressive/sinister practices).

There are already clauses in the legislation to ensure charges reasonably reflect the actual cost to lenders - and the Commerce Commission is charged with enforcing the Act.

I hope the Commerce Commission is being sufficiently resourced?? if not, the government needs to increase its funding so the CC can do what's expected of it.

Proper, systematic enforcement of the existing legislation is likely to be more effective than arbitrary "capping". Capping might sound good, politically, but in practice it doesn't work well - it's a can of worms.

TTP

Frankly the gangs have more morals than the payday lenders, I'm all for running the owners of payday lending companies over with their own SUVs.. slowly and repeatedly.

clearly you have never examined the loan books of a gang.

Indeed, I steer the hell away from gangs. Would not the major component of debts to gangs be the drug users that buy off them? Sadly they are already on their way to rock bottom where the system has to try to pick up the pieces and do the best it can.

Maybe we could find some common ground here TTP - I've long used the same kind of argument for the legalisation of drugs. Perhaps you would agree this market is also best taken away from the gangs and the products properly regulated?

100% agree. Loans and drugs should be available to all that really want to use them; but not the really bad loans and really bad drugs.

And it was a good recommendation, because those preyed on by the lending schemes often do not have the capability to manage them or pay them off without large debt. More sensible lending, less debt, more savings, better health, more people able to cover their own needs into retirement, oh and more retail spending, (even if only necessities like food & medical focused) so better for more ethical hard working businesses too.

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Add there should be RECKLESS LENDING PROVISIONS , where if you lend recklessly , you cannot take the borrower to court and expect to get summary judgement

The world must be a bit weird today.. I'm in total agreement with Boatman on something.

Totally agree, these predatory practices are a blight on society and often aimed at those least capable of understanding the situation they get themselves into. There is a concept of the 'average consumer' which applies in many countries (a consumer who is basically an idiot), but the rules are there to protect them from themselves and the predators.

Any understanding on the demand side please for example who/why needs high cost loans?

By only constraining the supply side but not the demand side, I may see that a black market for high cost loan is brewing.

What?

He is referring to the fact that if there is demand for a product, the product will be provided, regardless of whether it is legal or not. So the thought process goes, by forcing these loans to be provided illegally, you could ultimately make those at risk borrowers even worse off

I sometimes suspect that when it comes to lending money the gangs have more morals than the payday loan industry.. And the gangs won't be running TV, internet and radio ads that suck in the desperate but mostly law abiding working poor.

Of course people will be absolutely clamouring to be right royally ripped off. The sooner we get this stuff out of our society the better

Good!

We'll done!!!

Sounds great!
Not so sure about practicality. Banks know all too well it's not the interest rate but but the time frame. How else do they make over $5b when interest rates are down in the 4% range?
A home loan is a credit contract. So if you can't pay back more than double the amount borrowed how will that work? Especially if rates are up a little from where they are now.
$100,000 5.5% over 30 years. Total repayments $204,404. ILLEGAL!!

I'm sure it'll exclude Mortgages, and i'm sure there are already existing ways of differentiating between what is a Mortgage and what is a personal loan.

Hi Robt and Nzdan
It would seem that mortgages are/will be excluded as the proposal applies to "high-cost" loans - that is an interest rate over 50% - which no doubt will be defined/clarified in the proposed legislation. (OK, the cynics will say bank mortgage interest rates are high cost).
Whatever happens, I can see mortgage documents including a waiver being signed and witnessed by a solicitor.
However, there is need for much more detail. In particular there will be need to ensure that potential loop holes - for which the loan sharks and truck traders will be actively looking for - are covered. My understanding is that it is not only the loan conditions that are tough, but also the prices of goods tend to be very heavily inflated - which is likely to become more so of an issue - that needs to be more simply and effectively addressed than under current legislation.

Pretty sure mortgages will not be covered. Probably only covers unsecured lending. Hmmm, does that include credit cards?

The article explains this only applies to "high interest lenders" which is anything over 50% pa. So no, unless you have a really doggy Credit Card.

Pretty sure that wasn't in the original text of the article, might have been updated (or I just skimmed too fast).

Either way, I'd like to see some increased minimum repayment levels on credit cards and tighter credit control that prevents someone from maxing out a card and bouncing along at just below the credit limit for several years.

Yes sounds as if this part was an update.

I agree with you though, not just on credit cards but on debt management in general. I feel like something needs to be done to improve financial literacy, in theory that would solve underlying problem rather than being the ambulance at the bottom. The fact that there is a market for +50%pa loans is staggering to me.

I am fairly certain that margin lending on share trading accounts can get to 50% pa (if you annualised the rate) for certain types of products generally intended for very short term use.

Margin lending is currently 6%pa at ASB. You'd really have to do something quite daft to get to 50% with fees.

Pragmist
A good point regarding credit cards but the legislation will be limited to loans only over 50%.
I don't see reason as to why they couldn't (or shouldn't) be covered. It would seem that some with credit cards do get into equally serious problems with the credit cards' compounding interest debt. This can have significant implications for families - and hence indirectly affect children for which Jacinda has offered as a rationale for the proposed legislation.

Why do people get so caught up with total interest over the life of the loan?? In the case of long term mortgages at low interest rates it is incredibly misleading. If i lend a NZ company some of my money.. lets say Genesis Energy (which did a bond recently at 5.7% for memory), and over that 30 years they pay me the same or more money as your example above.. am i as the lender doing something illegal?? Of course im not. Just as i dont mind paying a bank interest to enable me to buy something i cant afford outright.

The article explains this only applies to "high interest lenders" which is anything over 50% pa. So after 1 year you have charged al the interest you can.

I stand corrected. "...where the annualised interest rate is 50% or more..." Didn't read article thoroughly.
Mea culpa

Seem as this was an update after you may have read it, so no fault at all.
Felix culpa

50% p/a wasn't shown in the original article this morning. Good that they've cleared that up now.

oh I see! I was wondering why there were so many comments on that.

So we will see many 49.9% interest loans?

$500,000 home loan at 5.25% over 30 years means total payments over $1,000,000. More than 100% of the original loan. It will be interesting to see how they classify "high-cost loans"

Yep any long term loan will break this rule even if the interest rate is low. It seems quite arbitrary.

the real loan sharks?

a mortgage is a security document. If the loan is to a "natural person" and is for personal use it is a consumer credit contract. but you're right. the real predators will continue hauling out billions of dollars from NZ.
Not trying to justify some of these small operations mind you...

yes credit cards. Banks borrow at 2 or 3% (term deposits and daily bank balances) and lend out at 22%. Often when they have mortgage security on same customer and could easily offer same money at 4%

sorry to hog the conversation... (last entry).
Credit card minimum payment schedule means interest charges will come to about 192% of principle balance. Definitely should be classed as small consumer credit loans and way over the proposed 100% cap. Be interesting to see bank submissions to select committees on this

I'd have no problem if this forced the credit card minimum repayment of outstanding balance to be pushed up to 15 or 20% level.

Even better, add a provison that if the credit card balance gets to >90% of the credit limit the card must be stopped until the balance is paid down to 50% or less.

Gosh they (the govt) have been talking about capping the interest rates on loan sharks since 2009. Finally someone is taking action!

I think we can give the Labour/Greens/NZFirst coalition credit where credit is due.

Yes absolutely! I remember this well. I did some volunteer work for family budgeting service in Otara back then and we had Fair Go turned up to do an interview on this loan shark interest charges.

yawn

all a bit dumb really. atm the cccfa provisions and district court rules are at odds with one another. this will only compound the problem further.

most district court judges haven't a clue how to apply the current regs. and for the most part make it up as they go.

Clearly something needs to change, however at least get the courts on the same page so that they can enforce.

All I can see is a raft of unforeseen consequences

Will these changes impact your firm Kane?

no, not directly. In fact it will most likely improve the landscape.

We see some crazy behaviour particularly by payday lenders. Many would appear to fail the responsible Lending Rules now anyway. However I cant see the Commerce Commission actively enforcing. Even though they said they would look into this sector.

The area that needs a massive overhaul is the debt collection space. The courts are in disarray. And the District Court judges are making up a lot of rules on the fly.

Onerous lenders are not the cause of poverty. They are just a symptom. A huge number of people . A lot of them working for a living. Simply don't have enough to live on. They survive week to week and if a big ticket expense comes up then they have little choice but to borrow from whoever will lend them the money at whatever rate. The risk of default for the lender is huge (because they know their customer is broke) So that is built into the rates and fees. If you actually pay off the shark then you are subsidising those that don't. If the government are so worried. Why don't they set up WINZ or Kiwi Bank as lender of last resort? At least they have the power of the IRD to garnish future income if the payments are not met. There is plenty of competition among payday lenders. The rate reflects the risk. It's not as if they are an Australian Banking oligopoly.

But the paydays lenders are going out of their way to make getting eyeball deep in debt easy.. In australia there was some scumbag compmay that was setting up ATM like machines in the shopping malls to try to lure more people into debt they couldn't afford.

They were effectively putting plates of cake in front of fat kids. If parents did that you'd call them useless parents, not fit to be parents, but when a payday lender does effectively the same thing to working poor people, thats just "market forces".

I agree with his underlying point though. While I cannot argue against regulation for loan sharks, the fact is that they exist to benefit from desperation. If desperate people have a better alternative, they will be unlikely to fall victim of these parasites. It does help to control the damage these parasites cause, but it will be even better to reduce the infection rate.

I agree, sort of. Without relative poverty they wouldn't exist.. but without them siphoning 10 or 20% of some peoples paychecks away in interest charges and fees it there would be a lot of people far more able to claw their way out of the hole they've found themselves in for whatever reason.

To do that we're probably going to need to address housing costs, and not keep the OCR so low as to see the currency keep going down in value (giving all these folk a pay drop) in order to protect the few.

What a load of crap. I was poor for years and I never once went to a loan shark or food truck. The supermarket was only 45 minutes walk away, so that's where I went. As for gadgets or cars I simply did without. At the end of it all was debt free.

How many kids were you supporting at the time?

Zero. I had heard tell of a strange device called contraceptives from wandering minstrels faring from a far off kingdom. I endeavoured to embark upon my own epic quest to that aisle in countdown with all the makeup in it, to lay hands on such a miraculous contraption.

Please keep using that miraculous contraption.

I think the problem our dullard friend is struggling to grasp is that your financial situation can change after you have children, through no fault of your own.

Sure, I'll make an exception for people who get raped Lloydleft, if that's what you're too meek to spell out. Then it's 'no fault of your own'.

If only your mother had said the same thing

Hit a nerve I see =)

Sure, I thought it was exceptionally rude to tell someone not to have children.

It's tall poppy syndrome. People from a good background love to feel pity and compassion for poors. But if one of the poors get themselves out of that situation, suddenly they're nasty upstarts who shouldn't pro-create.

Lets address your concerns shall we.

1) Actually you implied that people shouldn't have children and you were "better" because you don't have any.

2) You need to look up tall poppy syndrome because its not what you think it is (link below)

https://en.wikipedia.org/wiki/Tall_poppy_syndrome

3) You seem to be oblivious to the fact that acting like a "nasty upstart" might be the reason that people treat you like one. Case in point: I don't know you, so have no bias toward your situation, but to me your comments make you sound like a horrible person. That's not tall poppy syndrome (see point 2).

Labour is certainly getting more done than National.

I don't see anything changing here. this is fringe stuff

I didn't voted for either of them and I won't be voting for either of them in 2020. But National did drop the ball BIG Time over the last 9 years.

in respect of housing I have to agree.

The way this govt is closing loopholes and chasing down employment and all the other rorts that exist in this country we run the risk of being far less attractive to many immigrants.

Oh no, really? because we really want more people on the job seeker benefit & overcrowded medical system. No why couldn't we make the exploitation of migrants for low wage often illegal job conditions greater and we could exacerbate the housing & infrastructure issues. Oh well more jobs available to those being made redundant due to age, and more low wage work & housing for the locals then

Dang, did I forget to press the sarcasm key again?

I think they might at some point dust off the recommendations made for changes to the MMP system after the review we had back when that Judith Collins just summarily consigned to the bin. I really hope they do.

This is good news reining in these parasite lenders. National sat on their hands for 9 years so definitely kudos to Labour for doing something about it.

Now please fix the immigration rort that National also ignored.

"Interest and fees on high-cost loans will be limited to 100% of the amount borrowed"

I wonder if they will apply this to Student loans as well.

student loans are interest free while living in NZ, and fees are about $50/ year, so not likely to be a problem.

"While living in NZ"

Yes, and interest rates are 4.3% at the moment..so never going to get anywhere near being a "high cost credit agreement" even if you are overseas.

This is a dumb idea. First, you cannot regulate against human stupidity, so this is futile. If the govt seriously wanted to help the poor and the genuine blue collar strugglers, then they should start by making the first $50k of income tax free (and abolishing working for families). I can’t see that happening though as the govt obviously thinks that these people are too stupid to help themselves...they need to be slaves to the govt.
Second, if the govt really believes in this and it’s not just another pointless political stunt for the dim witted amongst us, then shouldn’t a ban be forthcoming on all casinos and pokie machines to be consistent? Yeah, right...

You realise that there is no limit to the amount of laws they can change/implement its not an either/or situation.

Use the fine proceeds to pay for budgeting advice. There needs to be more information at the time of making these quickie purchases and loans. Like clearly stating what part of the purchase price is interest , and what part is the actual purchase price. Stating the weekly repayment price , rather than the full purchase price including interest , should be illegal .

I see this as a positive. I am keen on free market forces but it makes my stomach churn when I see the less financially knowledgeable being exploited.

One positive doesn’t make a successful Government.....