Are the new labour payday lending rules for interest rates shortsighted?
Payday loans have garnered a lot of negative press over the last few years, not just in New Zealand, but worldwide. Stuff reports Consumer Affairs Minister Kris Faafoi has unveiled proposals to cap the amount lenders can earn off loans. It was no secret that payday lending and predatory loans were to come under the spotlight under the new Labour Government.
Faafoi is on a mission to reduce the damage "predatory" lenders do in poorer communities, and released a consultation document with three options for capping borrowing costs.
The first, dubbed "Cap Option A" would be to limit the total accumulation of interest and fees over the life of the loan to 100 percent of the original loan principal, or if you borrow $1,000, you will not pay back more than $2,000.
Interest rate caps on loans have been introduced overseas with Britain notably placing the same cap on their borrowing. Whilst this cap came into effect three years ago, it is widely accepted that the cap had an almost instant reaction. The number of people who contacted Citizens Advice with unmanageable payday loan debts halved within a year. The regulations also carried more stringent demands on lenders and the market is now working better for all – people can still get access to credit and fewer are having problems.
So should we see a similar trend in New Zealand?
Definitely. However, what many people don’t realise is that the majority of the larger players in the payday space currently cap loans at 90 days and do not roll over loans, unlike in the UK. The threat of the Commerce Commission looming over the industry over the last 5 years has made lenders anxious and made them take a more centred approach to responsible lending. A quick search online reveals plenty of payday loan companies in New Zealand
Enacting legislation to cap interest rates, could in effect lead to lenders charging more than they already do. Think about it, if you check out this calculator here, a $1,000 loan over several weeks attracts fees and interest of approximately $250. Under the government's new rules, technically this company could charge 4 times what they currently do. It’d be harder to distinguish predatory lending when the payday operator only charges a quarter of what they are allowed to charge.
This is the problem with definitively drawing a line in the sand. It allows everyone to move up to that line. In contrast, take for example the lending fees a lender can charge under the Credit Contract and Consumer Finance Act 2003. A lender may charge reasonable fees in conjunction with a loan, including an establishment fee. However, the Supreme Court in the case of
Sport Zone and MTF created such a grey area, that it is very difficult for lenders to be certain whether the fees they are charging are allowed, however the penalties that apply if they are wrong by the Commerce Commission are very severe. As such, in the advent of that case, most lenders scaled their fees off dramatically or even done away with them all together.
So perhaps definitively deciding what a finance company, not just a payday loan company can and cannot do is not a good idea. The real solution may be to create an eerie grey area forcing companies to err on the side of caution about what they are doing. As we all know that when boundaries are set, they get pushed further along as time goes by