By Charles Chauvel.
Ever since I became an MP, an issue that I have supported is the regulation of so called "loan sharks". Loan sharks prey on the vulnerable with unscrupulous rates of interest and this includes many of our Pacific people. They are the scourge of our community and instead of lending a helping hand keep borrowers in poverty. It is common for payday lenders to charge interest at rates between "only" 8% and 15% per week, compounding well into four figures at a time when mainstream rates have declined. Tomorrow, I am expecting a ballot, and if successful, I hope that my Bill will make it on to the order paper.
Increasing numbers of people are pawning items like bikes and children's toys just to meet essential expenses like their power bill. I saw an elderly man taking his weed eater into a loan shark outfit in Wellington, and it was distressing to watch first hand. One of the worst cases I discovered was a person who borrowed to buy a $3,000 car. The car was repossessed after two months and the owner ended up owing $19,000! If that was not bad enough, Loan sharks use bullying tactics to recover debts such as turning up and parking outside borrowers' homes. I was present earlier this month at the home of a person who was on the receiving end of this kind of intimidation. The loan shark company had previously broken into this person's house illegally and taken property that did not belong to the owner.
New Zealand is now one of a very few western countries that allows this abhorrent practice to continue. In light of the global credit crunch, many other countries have cracked down on fringe/payday lender practices and implemented usury rate caps. Restrictions apply in Japan, Singapore, and many countries in Asia, Europe and Africa. In Australia, three States and the ACT have implemented interest rate caps at 48%, and two other States are in the process of doing so. A part of President Obama's economic plan is to cap interest rates at 36% right across the US. In recent months nine of Canada's ten Provinces have passed specific payday lender legislation or have regulated the industry. Almost all countries in Central and South America have implemented interest rate restrictions.
As you can see, the world has, or is regulating this sector, but here in New Zealand the sky is the limit, with payday lender rates now amongst the worst in the Western World. Market forces are clearly not an appropriate determinant of interest rates at this low end of the socio-economic spectrum. It's all very well to guarantee bank deposits and slowly roll out a nine-day fortnight. But this is something that would help those in real financial trouble. I call on the Government to do the right thing and take action in this area now.
To that end, I have drafted a Members Bill which proposes interest rate caps in line with most other western countries. Labour, Greens, Maori, and the Progressive have all agreed to cooperate in an effort to push for much needed legislation to prevent these unscrupulous rates of interest currently being charged.
My Bill, called the Credit Reforms (Responsible Lending) Bill has three parts. Part 1 proposes to amend the Credit Contracts and Consumer Finance Act 2003 by capping the interest rate lenders can charge under a consumer credit contract at 48%. It also renders a contract oppressive if the lender reasonably believes the borrower will not be able to repay the loan. Part 2 amends the Credit (Repossession) Act 1997 by limiting the amount a creditor can recover from a debtor. Currently, loan sharks can recover the value of the goods at the time they were purchased and my proposal to change this to the value of the goods when they are sold. Part 3 proposes to allow pawnbrokers to charge administration fees if they are registered under the Second Hand Dealers and Pawnbrokers Act 2004, so they can charge fees as well as interest, removing the need for exorbitant interest rates.
I have heard of fears that any caps to the interest rate would in effect become the established rate. But it's certainly not worse off to have the default rate of interest cut from 2000 to 48% In any case, I look forward to a detailed and thorough debate on this Bill. A copy of the bill is available here
However, a member's bill has to be drawn from the ballot, and even if the Bill is selected in tomorrow's ballot, there is no guarantee of success, although I am very confident. The best outcome is for the bill to be adopted by the Government and passed into law.
I believe this is an issue which all parties can cooperate on and I am looking to all parties in Parliament for support. So far however, the response from National has been lukewarm and the Minister of Consumer Affairs, Heather Roy (ACT) has said she is not interested at all as it may force fringe lenders out of the market.
I am always happy to hear feedback on this Bill, as well as your views on loan sharks; you can email me - firstname.lastname@example.org