Sweeping changes in a government discussion paper on money lending practices could, if adopted, effectively shut down payday lending and limit unreasonable borrowing fees, aggressive debt collectors and predatory mobile traders.
Minister of Commerce and Consumer Affairs Kris Faafoi is calling for public submissions after today releasing a discussion paper on consumer credit regulation. This follows a review of the Credit Contracts and Consumer Finance Act. The previous government amended the act in 2015, but Faafoi said today that those amendments “clearly … did not go far enough and it is time now to finish the job and protect the most vulnerable consumers”.
The paper suggests caps on interest and fees able to be charged, and explores three options: limiting accumulation of interest and fees for high-cost lenders over the life of the loan to 100 percent of the original loan; limiting interest and fees to 200-to-300 percent each year, with the same limit on accumulating interest and fees as in the first option; or setting a cap of 30 percent-to-50 percent per year on interest rates and fees, which the paper said “would effectively prohibit payday lending and other commercial short-term lending of relatively small amounts of money.”
Unreasonable fees are a concern across the industry, not just with high-cost lenders, the paper says, and asks for input on whether current regulation, which says a credit fee or default fee must not be “unreasonable”, should be replaced with specific fee caps. The paper also suggests having an ‘equivalent interest rate’, that lenders would have to disclose and advertise, like the annual percentage rate (APR) in the US and UK.
The paper also says research showed “unacceptable rates of non-compliance” with regulations. For example, lenders commonly provide loans without doing robust testing of whether borrowers can afford repayments, it says, and there is upselling and aggressive advertising of high-cost loans. Often borrowers and guarantors are unaware of details of their agreements, despite the obligation on lenders to help them make an informed decision.
Research showed “unacceptable rates of non-compliance” with regulations. For example, lenders commonly provide loans without doing robust testing of whether borrowers can afford repayments, and there is upselling and aggressive advertising of high-cost loans.
There are low regulatory barriers to registration and entry into the credit markets, the paper says. It suggests the Commerce Commission could be given greater powers to act if a lender is causing harm and further tests or licensing could be introduced for would-be lenders.
The paper’s authors said the feedback they got was that there has been insufficient enforcement of lender responsibilities, despite the Commerce Commission being active in relation to lending, and there may be inadequate incentives for compliance.
Often borrowers and guarantors are unaware of details of their agreements, despite the obligation on lenders to help them make an informed decision.
To increase that, the paper explores five enforcement options. It says the courts could order damages of up to $600,000 for breaches of lender responsibilities; directors and/or senior managers could be subject to civil procedures if they breach their obligations; there could be a requirement for lenders to substantiate their affordability and suitability assessments, and provide that on request; and lenders could be legally required to act in good faith when dealing with a borrower’s advocate, such as their lawyer or budget adviser.
Levies on the industry could also be lifted to fund more monitoring and enforcement activity by the Commerce Commission, the paper says, with most funding now coming from the Crown and creditors paying an annual levy of $460.
Currently, lenders have guidance on how to satisfy responsible lending requirements under the Responsible Lending Code, but this isn’t binding. Stakeholders have said this has led to non-compliance and lack of clarity on legal obligations, the paper says.
It says the courts could order damages of up to $600,000 for breaches of lender responsibilities, and directors and/or senior managers could be subject to civil procedures if they breach their obligations.
To solve this, it suggests introducing mandatory requirements for conducting affordability assessments, and tightening rules on advertising, where the code’s guidance is regularly ignored. It also recommends requiring credit contracts to be available in the language that the borrower is most comfortable communicating in, if the lender advertised in that language. Many borrowers do not have English as their first language.
Increasing consumer protections for debt collection also comes under consideration, with stakeholders having concerns about debt collectors making false and misleading claims, harassment, excessive charges and unrealistic payment demands.
The paper suggested increasing disclosure requirements to debtors at the commencement of debt collection; requiring affordable repayment plans; or specifying how debt collectors can contact borrowers, or their nominated representative.
Currently, third-party debt collectors acting as agents are not directly subject to the act, and the paper says an option of making them subject would create stronger incentives for them to comply. The legislation could also limit how much debt collectors are able to charge borrowers for costs incurred in recovering debts, as currently third-party debt collectors can charge high fees and the original creditor has “weak incentives” to limit how much they charge.
Many of the solutions already explored could be applied to mobile traders, including increasing creditor registration requirements, strengthening enforcement and penalties for irresponsible lending, more prescriptive requirements regarding affordability and advertising, and options to address unreasonable fees.
Continued predatory behaviour by mobile traders – or truck shops – was another concern raised by stakeholders. This has continued despite legislative changes and increased work by the Commerce Commission, the paper says.
It suggests many of the solutions already explored could be applied to mobile traders, including increasing creditor registration requirements, strengthening enforcement and penalties for irresponsible lending, more prescriptive requirements regarding affordability and advertising, and options to address unreasonable fees.
The government could also step in to ensure goods bought on credit from mobile traders which don’t currently fall under the act (as there are no explicit interest or credit fees and the creditor does not take a security interest) could be automatically considered a consumer credit contract, thus regulated, the paper says. The cap on interest could also be applied to these credit contracts by any fees charged over the cash price of the goods being considered interest.
The paper also asked whether small business loans, investment loans and family trusts should be covered by the CCCFA. They are currently only covered by the act if a consumer good, such as a personal car, is provided as security.
“Businesses, investors and trustees may be expected to have a greater level of financial literacy than most consumers and are expected to obtain legal advice,” the paper says. “However, this may not always be the case, particularly for small businesses, retail investors and non-professional trustees.”
Submissions on the paper close on August 1.