Unregistered fringe lenders to be 'dragged into the sunlight' as part of crack down on loan sharking

By Amanda Morrall

Unregistered high-interest rate money lenders peddling easy credit to the nation's most vulnerable will be "dragged into the sunlight'' to face potential sanctions and possibly the invalidation of their contracts with borrowers, Consumer Affairs Minister Simon Power warns.

Following a day long financial summit on "loan sharking" attended by a wide spectrum of financial service sector representatives, Power said he was determined to take swift and stern action to put "unscrupulous" lenders out of business.

"We can't continue to let the weary be preyed upon by the unscrupulous and we can't continue to see those people who are most at risk of getting into debt way over their heads,'' said Power.

Power said officials would investigate the extent to which there were financial contracts held by money lenders who aren't registered with the Financial Service Providers Registry, which is in breach of the law. It is estimated that between 35-40% of all so-called third-tier lenders remain unregistered.

Power said the situation was intolerable and needed to be dealt with promptly as part of a wider plan to deal with spiraling debt affecting the county's most needy.

After hearing the outcome of brainstorming sessions by delegates broken into groups, Power pledged to look into them and report back to Cabinet within two months (when he is stepping down as Consumer Affairs Minister) with some firm recommendations.

Stricter compliance with existing laws, the formal adoption of a responsible lending code, a greater emphasis on financial literacy, and the simplification of financial documents were identified as some of the top priorities.

Legislation to spell out the total cost of borrowing touted; Cap on interest rates to be explored

Power said there would also be close consideration given to legislation that could force lenders to spell out the total cost of borrowing along with a provision to ensure that borrowers had adequate time to fully understand contracts "before having more credit shoved down their throats.''

While Power said he would direct his Ministry to explore a cap on interest rates, he acknowledged objections by the industry players who said there are too many complexities.

"It's a blunt instrument that could have unintended consequences,'' he conceded.

National MP Sam Lotu-liga, who is introducing a private members bill aimed at curbing loan sharking, said capping interest rates has failed in other jurisdictions. It was mostly problematic in the case of short-term loans, as it severely restricted lending profitability.

Instead, Lotu-liga, in the Moneylenders (Licensing and Regulation) Bill proposes a 48% cap on interest rates and for those above that threshold lenders would have to prove that imposing a higher rate would not be "oppressive.''

'700% interest rates'

Power, and others speaking at the packed out summit, said it was not uncommon for desperate borrowers who were not able to make the terms of their contracts to be charged upwards of 700% taking into account fees, interest rates and penalties for failing to meet the payment.

Power described such contracts as extortionate and  immoral.

At the same time, Power said he believed credit was a necessary part of capital markets and that short-term facilities were often legitimate and in fact necessary.

He said possible compulsion to disclose the total cost of borrowing, alongside a host of other responsible lending practices  could help to better manage negative impacts.

"We have the ammunition now to make serious decisions.''

But social service sector represents warned Power that any efforts to regulate the money lending industry more aggressively would not necessarily resolve the underlying causes.

Habitual credit users

Jolyon White, with the Auckland City Mission, said the debt spiral was being driven by financial desperation.

White said poverty in New Zealand has become such an "intractable and cyclical problem" that many had people have resolved to never be able to rise above a subsistence level existence, and therefore use roll-over cheap credit on a habitual basis.

Power, asked how the Government would address underlying social causes, said greater transparency and improved understanding about credit contracts would go a long way.

By loan size, consumers of third-tier debt are relatively small. They make up less than 0.1% o household credit markets, with NZ$200 million to NZ$300 million in total debt.

Financial Services Federation executive director Kirk Hope said while they were proportionately small holders of debt, the relative social costs of their problem debt were high.

"That's where over a long period of time the most harm can accrue.''

Hope (whose organisation represents predominantly mainstream lenders) said he was widely in support of the initiatives suggested.

"I think one of the strong things that has come through is to enforce the current law."

'Regulation not a panacea'

However, Financial Markets Authority head Sean Hughes cautioned government and industry leaders about treating regulation and enforcement as a panacea to the problem.

"We must take action and be seen to be forceful, but just forcing registration won't deal with the problem.''

Hughes said consumers themselves also needed to be empowered so they could avoid problems in the first place and also know what to do when things go wrong.

Despite a dispute resolution process having been put into place to hear complaints related to rogue lenders and dodgy practices, the uptake of the facility has been low.