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Interest rate cap needed in New Zealand

SPEECH TO THAMES COROMANDEL WOMEN’S LOAN FUND/WAHINE PUTEA LAUNCH OF PETITION TO CAP INTEREST RATES

28 MAY 2015

 

Kia ora koutou. Talofa lava. Malo e leilei. Thanks to the Thames Coromandel Women’s Loan Fund/ Wahine Putea for the fantastic initiative of a petition calling for a cap on interest rates. And thanks for inviting me tonight.

 

The Thames Coromandel Women’s Loan Fund is a wonderful example of a community initiative which supports local people, and creates positive change in the community. There are others of these funds around New Zealand which also have been going for many years. They pretty much fly under the radar but I want to acknowledge how important they are, and how much good they do. Hopefully, more and more of them will spring up in other parts of Aotearoa in coming years.

 

Tonight, we’re here to talk about interest rates, finance companies, loan sharks and usury. It’s hard to believe that our law provides absolutely no protection to vulnerable borrowers on interest rates. Loan sharks, finance companies and others can charge whatever interest rates they want, and there is no legal way of challenging them. They can charge 20 per cent interest; 50 per cent; 100 per cent; or 1000 per cent, and there is nothing in law a borrower can do about it. It’s considered perfectly acceptable.

 

We’ve all seen the horror stories in the media of families in severe hardship needing loans for emergencies, and being charged outrageous interest rates.

Sometimes these can be as high as 100 per cent – or even a thousand per cent. Other times the interest rate might be 50 per cent. In some cases, it can be 50 per cent interest for a seven day loan.

 

I had a client who went to a car yard to buy a car. He told the salesman he was a family man, on a low income and didn’t have much money to spend. He asked for a “running around” car. He ended up signed up to buy a car that was going to cost him $48,000 when the interest and all the other charges were added to the cost of the car. Plus it was an old dunger of a car that was worth nothing like the sale price.

 

The other problem is there are so many of these lenders in low income areas. They set up shop where vulnerable families live and prey on them by advertising “no credit checks”, “bankrupt ok”, “bad credit history no problem”, “lend to beneficiaries” etc.

 

Why this happens is because low income people can’t get loans from banks. Banks think they are risky customers. Banks won’t give them loans, and so they’re driven into the arms of loan sharks, when they need money quickly for family emergencies.

 

When I worked at Nga Ture Kaitiaki ki Waikato Community Law Centre we did a lot of work on rip-off loans and high interest rates. Our clients were all people who couldn’t get loans from banks, but needed money for a car to get their children to hospital; or to go to a funeral back in the islands.

 

One of the lawyers did an interesting exercise. She cut out all the ads for loans in the local Ellerslie paper where she lived. There were only about three or four. Then she did the same thing for Otahuhu, where our community law centre was based. She ended up with a massive long piece of paper which when she held it up stretched just about to the ground. It was almost as tall as her to have room for all the lending ads.

 

New Zealand is completely out of step with other countries in refusing to take action to cap interest rates. Many other nations did this years ago. But, in our country, governments have repeatedly refused to do it.

 

The reason is, they accept advice from the Ministry of Consumer Affairs that, if an interest rate cap was written into law, the cap would become the de facto interest rate charged by lenders. So, they say, it could actually lead to an increase in the interest rates charged.

 

That’s absolute rubbish. All we need to do is write into law a cap of a reasonable rate – not a really high one such as 60 per cent, which is the case in some countries . Even 40 per cent, which is the rate in other nations, is way too high.

 

So, which other countries have recognised the interest rate problem and taken action ? Canada, Mexico, Japan, Singapore, most South American countries, most African countries, and most European nations have interest rate caps. Finland in 2013 introduced a law providing that the interest to be paid on one -month loans of one hundred euros is four per cent. Japan, six years ago, lowered its maximum interest rate for consumer lending to 20 per cent, while South Africa acted in 2007 to limit the monthly interest rate for short-term loans to a maximum of five per cent.

 

In July 2013, a new law took effect in Australia capping interest rates at a maximum of 48 per cent. In the United States, most states have laws capping interest rates. The lending of small sums of between $100 and $4000 for short terms at high interest rates is regulated in 37 states.  In South Carolina, for example, the maximum consumer interest rate is 18 per cent, while in Washington State it is 25 per cent. Payday lending is either illegal, or impractical, in 13 other states. The United Kingdom in 2013 decided to introduce interest rate caps.

 

Why, then, do New Zealand Governments refuse to follow suit and pass a law which will help to stamp out loan sharks ? The need for interest rate caps in this country has been well-documented in research over the past decade, including in the following reports –

  • Fringe Lenders in New Zealand: Desk Research Project (July 2006)
  • Pacific Consumers’ Behaviour and Experience in Credit Markets, with Particular Reference to the “Fringe Lending” Market: Research Findings (July 2007)
  • Background Statistics for Considering Credit Issues (2011)
  • Third-tier Lender Desk-based Research (2011)
  • Using a third tier lender: experiences of NZ borrowers (2011)
  • New Zealand’s debt society and child poverty (2014).

 

The 2011 research showed just how toothless changes made to credit laws in  2003 were, revealing that between 2006 and 2011-

  • there had been a 60 per cent growth in the number of third-tier lending outlets;
  • up to 40 per cent of them were flouting the law by not registering as financial service providers; and
  • 127 new lenders had entered the market.

So, there is plenty of evidence of the need for interest rate caps. What is lacking is politicians and a government with the guts and the will to implement a cap.

 

Back in 2010, then- Labour MP Carol Beaumont introduced a member’s bill to cap interest rates. It was called the Credit Reforms (Responsible Lending) Bill and would have capped interest rates and regulated loan sharks.  The bill provided for the Governor of the Reserve Bank to set maximum annual percentage rates of interest payable on consumer credit contracts.

But, the Government voted it down.

 

Then, last year, Carol Beaumont tried again. When the amendments to the Credit Contracts and Consumer Finance Act were going through Parliament, she moved a Supplementary Order Paper that an interest rate cap be included in the changes. That was also voted down.

 

Te Ururoa Flavell from the Maori Party also moved an amendment that there should be a maximum limit on interest rates and that was also voted down. His bill provided for the Minister to set and alter maximum interest rates from time to time, taking into account things such as the prevailing interest rates charged on credit cards. It’s shameful that politicians refuse to take action to stop the most vulnerable in our community from being ripped off.

 

The other thing the Government could do to stop loan sharks and finance companies ripping off low income people is to provide affordable loans.

Microfinance lending is very established in other countries, but has been slow to get off the ground in Aotearoa. The Thames Coromandel Women’s Loan Fund is a fantastic example of a successful loans scheme. There are other schemes in places like Christchurch and Timaru. Women have been running them very successfully for many years. They often provide loans to women trying to get back into the workforce, or wanting to set up their own small businesses.

The schemes operate in many other countries besides Aotearoa, but have been slow to spread widely in this country. It was pleasing to see in the 2013 Budget the Government saying it would investigate a partnership with NGOs and financial institutions to provide loans to low income borrowers. In May last year, the Government announced it would partner with the BNZ, Good Shepherd NZ and the Salvation Army to run a pilot community finance initiative offering interest-free and low-interest loans to people banks don’t normally lend to. We need loans schemes like the Thames Coromandel Women’s Loan Fund all over Aotearoa.

 

The 2013 Budget also announced a whiteware procurement programme to enable beneficiaries to buy new appliances under warranty. We need more of this, so families can get reliable appliances, furniture and other necessities.

 

I’ve been doing some work this year on mobile shop trucks. They prowl around low income areas and sell goods at inflated prices to families who don’t have cash to go to shops, and can’t access credit from banks. The trucks used to be pretty much in South Auckland and Porirua. But now they’ve expanded to West Auckland, East Cape, Napier, Kaikohe, Kaitaia, Kawerau, Rotorua, Whangarei and Whakatane.  They’re also in Thames.

 

They used to be called “clothes trucks” because they mainly sold clothes. But they now sell clothes, appliances, bedding, electronic goods and furniture. Recently, some trucks in South Auckland have started selling food, which I find completely despicable.

 

They charge $20 for a can of corned beef; $35 for a packet of noodles; and $66 for powdered milk. One contract I saw charged $23.99 for a packet of biscuits, $49.99 for a packet of rubbish bags, $39.95 for a packet of cereal, $14.99 for a packet of potato chips, and $14.99 for a can of fruit salad.

 

The reason people pay these outrageous prices is the trucks come to their homes, and they offer credit. People who don’t have a car or don’t have money for petrol or bus fare to go to the supermarket or shops, can buy at their front door. The trucks also offer credit to people who can’t get loans from banks, who have bad credit histories or who are bankrupt.

 

I knocked on four doors in Mangere one day. People answered the door at three of the homes. All three people had debts to the trucks, including a man with a young son. He’s on a benefit and has debts to around 10 mobile truck companies and pawn shops. He’s supposed to be repaying about $200 a week but he doesn’t have it, so each week he’s getting more and more into debt.

 

One of the women I spoke to has a 17-year-old and a 35-year-old son with hereditary conditions meaning they will need dialysis for the rest of their lives. The 17-year-old has 4 hours of dialysis three times a week. His mum bought him clothes and a mobile phone from the trucks, because she didn’t have to pay money up front. And, of course, if you had a son with a serious illness, you’d want him to have a mobile phone so he could get help in an emergency.

 

The trucks usually tell people how much they will repay each week, rather than the total amount they’ll owe if they buy goods. There are also often really high fees for all sorts of things. One company has the following fees –

  • A delivery fee of between $5 and $500
  • An establishment and booking fee of $50
  • A PPSR registration fee of $3
  • An administration fee of $25 for changes to the agreement requested by the customer
  • A dishonour or missed payment fee of $15
  • A $6 fee if the company sends out a letter about a default; and
  • Selling costs if the agreement is cancelled.

The law and regulatory agencies have been pretty useless about controlling the trucks.

 

The companies often obtain multiple signed direct debit forms from people. So, if a buyer cancels one direct debit, the company activates another.

I’d like to see the Auckland Council, other councils around the country and the Government taking steps to stop these trucks from ripping families off.

We should ban multiple direct debit forms; register and license trucks; ban them from selling food; stop their misleading advertising; abolish all the fees; and look at other ways to provide low income families with the items they need.

 

Obviously, raising wages and benefits is the most important step we can take to prevent people having to buy from trucks. Affordable and healthy housing is also important.

 

And access to vehicles is crucial for low income families who are more likely to live in cold, damp, overcrowded houses. Children suffer more illnesses. A car is vital for families needing to transport children to doctors and to hospital, as well as for getting to work and other family needs.

 

When I bought my car, I went to a car fair, and a friend checked over the car I found, to make sure it was mechanically sound. I paid $3900 for the vehicle and it’s been going well for ten years. Total cost of car purchase: $3900.

 

That’s completely different from the typical car-buying experience for my clients. They get ripped off, both when they buy the car, and with the loan they take out to finance the vehicle. I’ve dealt with many cases where people have been sold unreliable cars for $15,000 to $20,000, when the vehicles might actually be worth $3000 to $5000. Then, as my clients can’t pay cash, they need to borrow to pay for the car.

 

They won’t be able to get a loan from a bank, meaning they are driven into the clutches of lenders charging extremely high interest rates and fees. A family might end up paying a total of $30,000, for a car worth only $5000. Sometimes, the cars break down within a week or a month of purchase. However, in law, the car purchase and the loan contract are two completely separate legal transactions. Even if the family now has a car which doesn’t go, and is worthless, they still have to repay the entire loan.

 

So affordable loans schemes could provide funding for car purchases.

But, the missing part of the equation is that there is still nowhere people can buy cheap, reliable cars. Low income families need to be able to access cars like mine – affordable and which keep going for years.

 

There is no reason a government could not set up car yards, selling reliable secondhand cars which had been thoroughly checked over before being placed on the market. Families would then be able to access funding through a low or no-interest loans scheme to buy the car.

 

This would in, one go, deal both to exploitative finance companies and to rip-off car yards. But, unfortunately, there seems to be no enthusiasm from politicians of any party for such a car yard scheme.  But, there is no reason why it couldn’t be done as a community venture.


A group of women in Timaru runs a low interest loans scheme. They’ve partnered with a local car yard. The owner has a garage attached to his vehicle sales business. He finds cheap cars, does repairs and ensures they are mechanically sound. He then makes them available to the women running the loans scheme. They provide funding so low income people can buy the cars. In particular, vehicles and finance are provided to women seeking to re-enter the workforce.

 

That scheme needs to be replicated all round New Zealand. We could do it as a community project. Car enthusiasts who like nothing better than spending weekends at car fairs could find cheap, reliable cars. They could be checked over and any repairs done by volunteers. Then the cars could be sold to low income families. The purchases would be funded through low or no-interest loans schemes.

 

Loan sharks and unscrupulous car dealers would be put out of business overnight. Many of the crippling debts which are a millstone around the necks of low income families would be avoided.

 

On 6 June, more changes to credit laws will come into force. The Labour-led Government when it reformed the Credit Contracts and Consumer Finance Act in 2003 said it was going to stamp out rip-off lenders and protect borrowers. That didn’t happen.

 

Now the National-led Government is having another go.  Changes to credit laws take effect on 6 June. They include –

  • borrowers now having five instead of three working days to change their minds about taking loans;
  • essential consumer goods such as beds, stoves and washing machines can no longer be repossessed;
  • there are tighter rules about the types and amounts of fees which can be included in consumer credit contracts;
  • more consumer-focused rules about unfair or harsh practices; and
  • clearer rules for unforeseen hardship applications – when borrowers have trouble repaying loans, they can ask the lender to alter payments. Previously, applications could only be made if the consumer was not already in default, but applications can now be made up to two months after default. This provision is a perfect example of a law change that sounds good in theory but has been useless in practice. How many of us have our lives so well organised that we know in advance we will default and we’re organised enough to do something before it happens ?  That’s just not how people live their lives. So this provision hasn’t really been used since it came in in 2005. Hopefully it might be more use as amended.

 

Also, for the first time, Aotearoa will have a Responsible Lending Code. It aims to stop consumers from being signed up to loans they have no hope of repaying. It also aims to stamp out misleading advertising such as “instant approval, “bankrupt ok,” and “bad credit history ok.”

 

The new credit law introduces lender responsibility principles and the code sets out how these are to operate in practice. The code says annual interest rates should be displayed at least as prominently as other interest rates, such as daily or weekly charges. If an ad describes a loan as “interest free” but the lender charges an establishment fee, the ad should spell out how much it is. Lenders should also state the total amount payable under the loan if they are referring to the sum to be paid weekly or fortnightly.

 

Creditors will have to make detailed inquiries about why the borrower wants the loan and also check that the person can repay it without substantial hardship. This means the repayments must be able to be made without jeopardising the borrower’s ability to pay rent, food, power, other essentials and existing debts.

 

The code is not binding and has some loopholes. It’ll be interesting to see how effective it is in practice and whether it does stamp out some rip-offs. But that remains to be seen.

 

In the meantime, congratulations again to the Thames Coromandel Women’s Loan Fund for its petition to cap interest rates. Let’s hope other communities around the country get out and support it.

 

It would also be great to see another MP sponsor a member’s bill to cap interest rates. The balance in Parliament has changed as a result of Winston Peters winning the Northland by-election. If Labour, the Greens, NZ First, the Maori Party and Peter Dunne got together, they would have enough votes to pass a bill on interest rate caps.

 

Please sign the petition and also let MPs and Ministers directly know you support a cap on interest rates. You can write to/ email / or Facebook  your local MP, the Prime Minister, the leaders of all the main political parties, and as many other MPs as possible calling for a cap on interest rates. Even better is if you ask for an appointment to meet with your local MP to speak to him or her about an interest rate cap – it’s hard for them if they have to sit in front of you and justify why they don’t support a cap. Please also talk to as many people as possible about the petition and ask them to sign it and to lobby MPs about interest rate caps.


Thank you.



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