The Government plans to cap the total interest and fees lenders can charge as part of a crackdown on loan sharks and truck shops. It’s also planning to introduce a “fit and proper person” test for lender, door-to-door salespeople and truck shops.
These moves are among changes to the Credit Contracts and Consumer Finance Act (CCCFA) following the release of a Ministry of Business, Innovation & Employment (MBIE) discussion paper in June detailing findings from a government review of the CCCFA.
Interest and fees on high-cost loans will be limited to 100% of the amount borrowed (the loan principal). Thus if an individual borrows $500, they will never have to pay the lender back more than $1000, including all fees and interest, the Government says. This will only apply to “high-cost lenders” with the aim being to prevent unmanageable debt and financial hardship from accumulating large debts from a small loan.
The idea is that even if the borrower defaults, they would repay no more than twice the original loan principal, including interest, default interest, and all fees. For the purposes of the Responsible Lending Code, a “high cost” credit agreement is one where the annualised interest rate is 50% or more. Faafoi acknowledges this definition will likely need further development during legislative drafting, for use in the context of statutory interest rate caps.
The limit would apply to interest and fees on both the original loan, and any subsequent loans provided by the same lender used to repay or replace the original loan, the Government says. This would include new loans issued soon after the original loan is repaid. This is designed to prevent lenders from simply replacing the original loan with a new loan and continuing to charge interest and fees.
“The 2015 amendments to the CCCFA [ by the previous National-led government] did not go far enough in protecting our most vulnerable consumers from loan sharks,” Faafoi says.
“The introduction of an interest and fees cap on high-cost loans will prevent people from accumulating large debt from a single small loan. For example, if you borrow $500 you will never have to pay back more than $1,000 in total, including all fees and interest.”
“The changes also lift the level of professionalism across the industry, by requiring directors and chief executives of lenders offering consumer credit contracts to pass a ‘fit and proper person’ test in order to register as a Financial Service Provider,” says Faafoi.
“Any lenders breaching the responsible lender principles will face stiff new penalties of fines up to $600,000 under the strengthened enforcement provisions in the CCCFA.”
“We listened to consumer advocates and the finance sector’s feedback and will also be seeking increased resources for enforcement and monitoring to ensure lenders who break the law are detected and stopped,” Faafoi adds.
He says a conservative estimate from MBIE data suggests more than 200,000 borrowers use high cost credit annually with customer numbers for these products growing rapidly. The proposal for the fit and proper test is that it would be done by an independent assessments officer employed by the Commerce Commission supported by Commission staff.
Faafoi says the Government is also tackling predatory behaviour by truck shops and others who sell door-to-door on credit or other deferred payment, by requiring all mobile traders to pass the ‘fit and proper person’ test. Additionally the law will be strengthened to give consumers clearer powers when asking uninvited salespeople to leave their premises, including by strengthening the legal status of do not knock stickers.
Faafoi says the new rules will take effect from 2020, subject to Parliamentary timeframes. The law changes will see additional guidance added to the Responsible Lending Code.
Meanwhile Prime Minister Jacinda Ardern says her government is committed to making New Zealand “the best place to raise a child.”
“To do that we must stop families becoming trapped in the appalling debt spirals and poverty that result from onerous lending and payback terms. These new measures will halt the very worst of those preying on vulnerable and desperate people while enabling borrowing that meets their needs in an affordable way,” says Ardern.
“They will protect families through capping the total interest and fees charged loans, introducing tougher penalties for irresponsible lending, and raising the bar for consumer lenders to register as a Financial Service Provider,” Ardern says.
Below are the key changes the Government is making;
An interest rate cap on high-cost loans, to stop debt spirals.
Interest and fees on high-cost loans will be limited to 100% of the amount borrowed (the loan principal). For example, if an individual borrows $500, they will never have to pay the lender back more than $1000, including all fees and interest.
More accountability for mobile traders.
Mobile traders will need to pass a ‘fit and proper person’ test, and register on the Financial Service Providers Register. ‘Do not knock’ stickers will be legally enforceable. This will lift professionalism in the sector and give consumers more power to refuse to engage with mobile traders.
Easier enforcement to ensure fees are reasonable.
Lenders will be required to prove (substantiate) that their fees are reasonable, if the Commerce Commission asks them to do so.
Greater transparency and access to redress during debt collection.
Key loan information will need to be shared with debtors at the start of debt collection activity.
Clearer responsible lending requirements, to increase compliance.
Prescriptive requirements for affordability and suitability tests, to make it simple for lenders to comply. This will also make it easier to complain and follow up where affordability is not properly checked.
New rules about disclosure and advertising. If a lender advertises in a language, they will also have to provide the loan disclosure documents in that language. Key elements of the current Responsible Lending Code guidelines for advertising will also be made binding.
Tougher enforcement for breaking the law.
Tougher penalties for irresponsible lending, including increased financial penalties, statutory damages, and banning orders.
‘Fit and proper person’ test, to lift professionalism in the industry. Directors and executives of consumer lenders will be required to meet a ‘fit and proper person’ test before the creditor can be registered on the Financial Service Providers Register.
Duties on directors and top executives to ensure that lenders comply with their obligations.
More information on the changes is available here.