License to prey
How Government could stop Loan-Sharking… But won’t
By Catriona MacLennan
Let’s make 2010 the year that New Zealand stamps out loan sharks. The Government and the community working together have the power to do this, using a range of strategies. And what’s more – it would not actually be that difficult to do.
I believe that just two steps hold the key to success. The first would be for the Government to make credit available at low interest rates and with minimal fees to low income borrowers through Kiwibank. Borrowers would still pay interest so that the loans could be done on a commercial basis, but providing access to credit at reasonable rates would immediately remove people from the grasp of unscrupulous lenders.
The second move would be for the Government to set up car yards to sell secondhand vehicles at reasonable prices. The cars would be checked to ensure that they were roadworthy and had a reasonable amount of life left in them.
Week after week and month after month for a decade now. I have dealt with people who have bought secondhand cars, only to have them break down completely within days. They are then left with bills for tens of thousands of dollars – since the loan has to be repaid to the finance company regardless of the car’s performance – and no vehicles.
There is no need for any further research about the damaging impact of unscrupulous lenders on the most vulnerable members of the community.
The 2007 report Pacific Consumers’ Behaviour and Experience in Credit Markets with Particular Reference to the “Fringe Lender” Market set out clearly the harm being done by lack of access to credit at reasonable interest rates.
The research found that 42 per cent of the respondents had household incomes of under $15,000, while 22 per cent had incomes of between $16,000 and $30,000, and only 11 per cent had incomes over $45,000.
Only 43 per cent were in paid employment.
The study said that the most common reason for borrowing was to pay for household bills. The second most common cause of indebtedness to fringe lenders was borrowing to buy a car. The individual cases cited in the study explain just how hard it is for people from different ethnic groups, or with English as a second language, to deal with banks and other top tier lenders.
A young Niuean man said that he had wanted to borrow from a bank but his application was not “good enough,” so he went to a fringe lender.
A Samoan mechanic said that banks’ processes and procedures were too strict and prevented many Pacific peoples from accessing bank loans.
Other respondents said that –
“At the banks, I want to have access to the manager but most of the times the junior staff at reception don’t look at people like myself favourably, so that’s another disincentive for me to go the banks,” and
“Another reason some of our people don’t go to the banks for loans is that bank staff are always formally dressed up in suits so people see them as very important people and their status is perceived as higher than those of potential borrowers, that is another disincentive and reason why some Pacific people wouldn’t approach banks for loans.”
Fringe lenders, by contrast, hook borrowers in by being extremely accessible, providing cash within 30 minutes, and understanding the Pacific approach to life. The research reveals that the most common single item financed through fringe lenders is motor vehicles.
This comes as no surprise. It is almost impossible to manage in Auckland without a car, particularly for families with children. People on low incomes are more likely than well-off people to have health problems, necessitating frequent hospital and doctors’ visits for themselves and their children.
A car is vital in such cases.
However, large numbers of low income people buying cars are being ripped off in two ways. They are charged very high prices for vehicles worth only a fraction of what the purchaser has paid. On top of that, the car is financed by a loan with a high interest rate and excessive loan fees.
I have dealt with many cases in which people have been charged $15,000 or $20,000 for cars which are worth perhaps only $5000 or $6000. The vehicles sometimes run for only a day, a week or a month before breaking down and requiring expensive repairs.
Sometimes the car stops going altogether, and the family is left with no car and a debt which may be $15,000 to $30,000 or even more. The same was found by the report, which gave examples such as a man who borrowed $9000 to buy a car and thought that he would repay a total of $11,000 when interest and fees were added in, but found that his total bill was in fact $21,000.
In another case a Samoan man bought a car for $10,000, but faced total repayments of $25,000. A third respondent discovered that a car worth only about $5000 was to cost her $29,000. The research also found that fringe lenders were concentrated in lower income communities, particularly in South Auckland. The report recorded 38 per cent as the most-commonly mentioned interest rate during the research.
This is a truly staggering sum.
The Ministry of Consumer Affairs on 29 May 2009 provided a further report on fringe lending, this time to the Maori Affairs Committee. That paper also gave details of the practices of fringe lenders, such as a finance company lending $4800 to a client secured with around $20,000 of tapa mats of high cultural and emotional importance. Another company secured a cash loan of $2600 against the borrower’s home.
Here is my ten point plan for ridding New Zealand of loan sharks –
1. Cap interest rates. The interest rates lenders can charge should be specified by law and it should be an offence to charge more than that rate. Maximum interest rates could be pegged to the official cash rate, inflation rate or bank interest rates and periodically reviewed. This single step would end most of the rip-offs immediately because it is the huge – and compounding – interest rates which low income borrowers pay that cost them the most.
2. Cap loan fees. Consumer law requires loan fees to be reasonable and related to the costs incurred in preparing loan documents. Moroever, loan contracts nowadays are speedily prepared using precedents and with a few strokes on a keyboard. There is no reason why uniform fee rates cannot be set to prevent unscrupulous lenders from claiming inflated costs.
3. Make low interest loans available through KiwiBank Borrowers could still pay interest and the lender could still earn a profit, but the interest rate would not be excessive.
4. Further simplify loan documents. Credit law changes in 2005 were supposed to make contracts easier for borrowers to understand, but they are still complex and contain many pages of small print. Many borrowers have no idea of how much they will pay over the life of the loan – they only understand their weekly repayment amounts. The front page of the loan document should contain nothing other than the following statement in large, bold type “YOU WILL PAY A TOTAL OF $X IF YOU TAKE OUT THIS LOAN.”
5. Introduce strict controls on insurance relating to loans. People are commonly talked into taking out loan repayment insurance covering risks which do not apply to them. An example of this is beneficiaries being signed up to insurance contracts covering them for loss of a job.
6. Mandatory legal advice. Make it mandatory for borrowers to receive legal advice before signing loan contracts.
7. Change the law relating to cooling-off periods. Borrowers can cancel loan contracts within three working days of borrowing money. However, if debtors have taken possession of goods – such as cars – they cannot cancel the car purchase contract. This means that, even if borrowers belatedly understand that they have been ripped off in their loan contracts, they cannot cancel them because they still have to pay for the vehicle or other goods and cannot get money elsewhere.
8. Involve the Ministry. The Ministry of Consumer Affairs should be charged with taking cases on behalf of individual consumers to enforce credit laws. The Commerce Commission has responsibility for monitoring and enforcing the legislation, but does not act for individuals. The ministry could do that.
9. Plug the gap in the law regarding early repayment fees. The 2005 act was supposed to prevent lenders from charging excessive loan repayment fees, but the first test case produced a disappointing outcome in the District Court.
10. Establish government-run car yards which sell reliable secondhand cars at reasonable prices. After more than a decade of dealing with desperately poor people who buy faulty cars at greatly-inflated prices and are then further ripped off by being charged huge interest and loan fees, I see no other way of preventing this. Cars are essential for people with families, especially those with sick children who require frequent trips to doctors, hospitals and chemists
Unfortunately, successive governments have to date shown little appetite to take serious steps to protect low income people from fringe lenders.
The recommendations in the 2007 report on Pacific credit were not implemented by the previous government.
A review of the operation of the Credit Contracts and Consumer Finance Act 2003 is currently underway, with submissions closing on 14 November 2009. However, the discussion document released by the Ministry of Consumer Affairs and the Government – Review of the Operation of the Credit Contracts and Consumer Finance Act 2003 – appears to indicate that the review will simply tinker with minor issues, rather than lead to the sort of action required to achieve substantial change.
Labour MP Charles Chauvel has drafted a member’s bill titled the Credit Reforms (Responsible Lending) Bill which would cap interest rates and require creditors to make inquiries about debtors’ financial positions to ascertain whether they can meet the repayments under the loan. It appears unlikely, though, that the bill has any prospect of being passed.
Yet just because the Government is not prepared to act, that does not mean that the community cannot take steps. A number of people have contacted me with suggestions. These include -
* Setting up a community micro-lending operation. this would be modelled on the Grameen Foundation operations in other countries – The Grameen Foundation uses micro-finance, providing tiny loans and financial services to assist the poor – mainly women – to start businesses and escape poverty. A New Zealand operation could provide cheap loans for household bills, emergency loans for people needing to return to the islands at short notice for family funerals, and for car purchases. This would remove people from the clutches of loan sharks without the need to wait for a government to act to do it . People with small spare sums of money – perhaps a few hundred dollars or, even better, a few thousand – could put the money interest free, into a fund which would lend to people needing assistance.The borrowers would repay the money as they could, and the repaid money could then be lent to someone else.
*Car pools – in Berlin, a scheme operates enabling people to make use of cars when they need them, rather than everyone buying their own cars when they do not require them every day.
What YOU Can Do
Everybody can make some contribution to ridding New Zealand of loan sharks. There does not need to be a major time or monetary input involved. I am in contact with about half a dozen people who have contacted me after reading my articles and would like to take action. It would be good if someone wanted to set up a more organised email means of us keeping in touch
Write or email Consumer Affairs Minister Heather Roy, Prime Minister John Key and your local MP asking them to take some of the steps outlined in this article and any other steps you may suggest – Write to Ms Roy, Mr Key and your local MP in support of the Credit Reforms (Responsible Lending) Bill
Make a submission on the review of the Credit Contracts and Consumer Finance Act
Lobby for restrictions on credit advertising
Write to the Prime Minister and Kiwibank advocating that is make cheap loans available to low income people
Is anyone willing to look into setting up a micro-lending operation in New Zealand ?
Create a panel of people with expertise about car mechanics – I bought my car at a car fair for $3900. A friend with mechanical expertise went with me to check the car out. There are many other people out there who like cars and think hanging around at car fairs and car yards is a fun way to spend weekends. If they were prepared to offer their time, they could go with potential purchasers to check out cars for them. This would stop people from buying cars which break down within days and would be a major way of preventing people from being ripped off. ENDS
Catriona MacLennan is a South Auckland barrister and journalist.
I’m not too sure about direct government used car sales – though as a job creation scheme they might have some merit – they might be better budded off existing organisations such as polytech motor trades departments or pacific churches, (or both) with some government funding.
A similar alliance, community groups and financial watchdogs, could run a joint campaign against loansharks, if the government really wants them gone.
Catriona Maclennon sounds like a newly minted barrister, one of those student loan beneficiaries ( you ask beneficiary, how, and reflect where else in the world can you borrow $70 or $100,000 for study and personal spending without a sliver of asset, yes a high risk loan offer only comes from a socialist government intervention and users are all beneficiaries). Perhaps Catrona might stick to being a barristor and specialise in that, because when you start to delve into areas outside your area of real knowledge you quickly expose your lack of market understanding.
The reason that we have tiered banking arrangements is to separate risk profiles and deal with the cost of risk. At the top, government bonds, they pay little because the default risk is little, in the middle is commerce and residential housing, risk is moderate and cost is moderate, at the lower end we have second tier finance companies that give higher risk housing and property development loans, and they charge in accordance with borrower risk, they obtain funds from a pool of lenders who lend to risk at a higher interest earning rate, (of some concern is their demise because they are the lenders of last resort to the middle class) and at the bottom we have the lenders of last resort who lend to poor families for emergencies. Only a middle income family buys a car and its a low risk investment, when a poor family buys a car its a high risk, the car is often cheap and near its lifes end, it is often used past its capacity, (overloaded, the borrower has no savings and no equity, the poorer job earner generally has less job security and they dont save, life is a series of one crisis after an other. This is your very high risk lending and whilst we middle class and barristers refer to the lenders as rogues and sharks, let us be aware that those who they deal with are very often cheats, liars, fraudsters and near-do-wells, or the as well as being highly mobile and often untraceable. Some of the more respectable ones are often silent, obstinant, dont even acknowledge their debt and completely immovable to rectify their situation, as if by ignoring their obligation it will go away. And worse they are often counceled culturally that this is acceptable. catriona speaks as if the availibility of “car” or a low cost loan to purchase one, was a “right”, it is NOT.
Thus the alternative is to; open lending to these high risk lenders and as a nation avoid the costly social consequences of even more expensive catastrohpes on the tax paying public, costs like; car theft, burglary, suicide and addiction and supply, house eviction, stranded travel, or close these lenders down and let the tax payer pick up the pieces and all the clean up costs as well. and pay for the borrowers who would otherwise more or less support their own shortcomings. In reality in every major city, bottom of the heap lending exists and in every country that has sought to provide an all inclusive welfare system, we have seen an immediate transition to welfare fraud and welfare abuse.
For Catrionas benefit, Act Member Roger Douglas was close to the mark in his work “Closing the Circle” where he advocated community led measures of self sustainability. The most likely type of operation to succeed is if an organisation like Brian Tamaki’s church were to operate a membership subscribed emergency loan scheme. Under such a scheme the peer connection and religious ethics have a hope of mentoring control into the lives of the borrowers, something a commercial lender has no access to do. It is community attitude that makes for success, not regulation.
As for a government run used car yard, I can hear used car mechanics laughing so loud, their laughter could be bottled and sold for carbon credits.
What a eutopian farce, what a socialist daydream, what an academic boondoogle. It would be broke within a week, as the poorer elements, not one bit short of cunning, fraud and deceipt, took every opportunity to; swap bits, change plates, strip equipment, return carefully fabricated clunkers, writeoff registered wrecks, and every other form of scam and rort known to man.
The wiley and experienced used car dealers have every moment committed trying to stay on top of their game dealing with this element of the public, and still a good many are caught out. Only the availibility of near dying clunkers at cheap prices that can be made to go one more trip around the block and the prompt finance house payout, keeps their business alive, for it is sabotaged by nearly every purchaser. Remember also that this class of purchaser does never lift the hood to clean or check the mechanics, never inspects a brake or oils a moving part, never buys a new set of tyres for safety or keeps a good paid up insurance for protection, of their own will, these consumer types most generally borrow money to buy the gas and drive till it stops, then complain about the quality of the merchandise. There is little of the element of care and prudence in practice.
In every society since Christ walked the earth, we have had an element who are waiting. They waited for the flood, They waited for the flood to drain, They waited for the sun to come up, They were still waiting when their backs were burned deep with sunburn. They wait. Do you find these persons self educating at night school, NO, they are waiting in front of TV for life’s answers, do you find them evenings and weekends in the garden producing food for their families and communities, no they are waiting, mostly in the welfare queue, while state housing has thousands of barren backyards. Best choices are forethought and provisioning, these people dont make best choices. They wait for circumstances to befall them and then look for escapes. One convenient escape is the high interest lender. It is not the role of society to provide low interest loans representing low risk, with a built in subsidy by prudent taxpayers, to high risk borrowers who are in fact lifes low productivity “waiters”.
There are genuine people who are in need of welfare and a few who have a genuine need for emergency assitance, for which our welfare system, health care and Mps provide access. It is just ludicrous to imagine that a “car” is some form of necessity or right to people who only a decade ago were “waiting”, waiting for a bicycle or running water. Commodities are not rights nor their possesion and use, a right, it is a privilege of prudence and work, earned and cared for. What is a “right”, is the “opportunity” to use your God given abilities to work, and to produce, in order that you might save, repay, deploy and maintain that which you would wish, for some, a car.
Long John Silver
Please try to keep comments less than half the length of the original post. Nobody will read them.
I couldn’t be bothered reading all that last comment, but apparently putting controls on lending is the way to a socialist eutopia [sic]. Oh, well, I guess I’m a socialist eutopian then.
Very interesting article Catriona. Do you advise your clients to modify their behaviour when dealing with businesses as you describe ?
An obvious one is to play the cultural ‘game’ you describe the banks are doing. Their staff are neatly and cleanly dressed – they have to be, that is required by their employers. Money is a very serious business, so dressing formally, or at least neatly, indicates that one is taking the situation seriously. If one dresses and presents in a casual way, then of course it is easy for you to be treated in a casual way.
Do you recommend to your clients that they ‘swot up’ on the subject before approaching moneylenders ? Do you or your network provide basic education about handling money, about how the financial systems work ? Do you provide volunteers to assist those people whose abilities or English is poor when the approach is made. What are you doing on the ground to get the message out to the people of South Auckland ? You’ll not get much penetration by writing about it in this forum will you ?
Your suggestions that the ‘government’ ‘should’ assist by providing cheap loans etc will not work. This attitude is the same one that keeps your clients in thrall to the ratbags. The patch to salvation and a decent financial situation is to take personal responsibility, not ask the ‘government’ to help. Does your network and church groups in South Auckland preach self-reliance, improving education, improving English ?
[...] Catriona MacLennan’s recent article in Werewolf challenges John Key to show some leadership in reforming payday and fringe lenders. [...]
I really don’t see how Kiwibank could provide cheap loans in competition with loan sharks. These loans are likely never ton be paid back in full, so essentially Kiwibank would be operating a parallel welfare system that pays cash to those who ask the most. What would happen when somebody with no job, no income and existing large debts wants to buy a car? Would the bank always say yes? Or would they turn them away and keep the loan sharks in business?
I’d suggest we need to move away from the situation where “It is almost impossible to manage in Auckland without a car”. This isn’t the case in many world cities. Rather than perpetuate the problem by having government-subsidised cheap cars, we should put the money into better public transport and cheaper housing in the inner city.
Are you retarded ?