Backlash to Kris Faafoi's proposed law limiting loan sharks' grip

Kris Faafoi's Bill proposing measures to protect vulnerable people from loan sharks has received backlash from groups who say it doesn't go far enough.

Faafoi, the Commerce and Consumer Affairs Minister, said the proposed law would provide new provisions to ensure that people never have to pay more than 100 percent of the amount they originally paid for a loan.

His Bill passed the first reading on Tuesday, which claims to "make it much more difficult for lenders to prey on people in financial hardship, who are often amongst the most vulnerable in our community". 

But nine organisations including FinCap, The Salvation Army, The Council of Trade Unions, Christians Against Poverty, and the NZ Council of Christian Social Services, have expressed concern about the Bill's weak approach.

What's the issue?
 

The Bill proposes that loan sharks will not be able to charge interest and fees larger than the loan itself, but the organisations want an overall interest rate cap to limit how quickly a loan can double in size.

They've have questioned why the Bill doesn't include an interest rate cap, which they say is a "fundamental tool for managing predatory lending and is already in place in dozens of other countries around the world".

FinCap CEO Tim Barnett said: "A huge proportion of people who come to [budgeting services] have predatory loans repayments that are being put ahead of basic needs like food and rent. We can't stop this without an interest rate cap."

The Government first announced new measures in October last year to combat loan sharks who charge high interest on relatively small loans.

Commerce and Consumer Affairs Minister Kris Faafoi.
Commerce and Consumer Affairs Minister Kris Faafoi. Photo credit: Newshub

It said at the time there would be a cap on the total amount of interest and fees that can be charged by loan sharks, and they would not be able to charge interest fees larger than the loan itself.

But the proposed Credit Contracts Legislation Amendment Bill isn't strong enough to stop loan sharks preying on the poor because there needs to be an interest rate cap, according to Barnett.

He said 76 countries have already taken this step, adding: "The research shows it works - and also shows that the much-needed alternatives only emerge once the high-cost short-term loans are off the market."

While the Government's legislation would limit total fees and interest at 100 percent of the loan borrowed, budgeting groups want an overall cap on interest rates to effectively limit how quickly a loan can double in size.

Faafoi said the Government didn't propose an interest rate cap because people sometimes "need to borrow money so I want to strike a balance between tackling irresponsible lending while ensuring credit is still available to those who need and can afford it".

Last month he said: "We have in a way introduced a cap - we're capping the total amount that people can pay back."

But Jodi Hoare, Community Ministries Programme Coordinator of The Salvation Army, said she's "baffled" that an interest rate cap was not included in the proposed law.

"This Government has consistently focused on child poverty and holistic wellbeing which is admirable, but strong laws that protect people from predatory lenders are critical to fixing child poverty issues and building a healthy and well New Zealand."

Faafoi said new, more specific affordability and suitability requirements would be introduced to prevent lenders granting loans to people who cannot afford to repay them.

And stiffer penalties would prevent irresponsible lending, and require lenders and truck shops to undergo "fit and proper person" tests before they are allowed to operate.

The legislative changes, once passed, would be supported by amendments to the Responsible Lending Code.

The Bill is expected to pass this year, and come into effect in March 2020.

Newshub.

Contact Newshub with your story tips:
news@newshub.co.nz