The Commerce Commission has filed action to regulate pawn loans, but a High Court ruling will be too late for vulnerable communities of Hawkes Bay and Tairāwhiti. Jonathan Milne reports.
Budget advisors are concerned at pawnbrokers and high street lenders offering over-priced loans to desperate victims of Cyclone Gabrielle, after the Government loosened lending rules.
Figures from credit reporting agency Centrix show the numbers of New Zealanders falling into arrears on their mortgages, car loans and personal loans has increased to 410,000 – and even before Cyclone Gabrielle, the communities most likely to be in arrears were Gisborne (14.7% of borrowers) and Hawkes Bay (12.7%).
This week, the Government amended the Credit Contracts and Consumer Finance Regulations for Gisborne, Hawkes Bay and Tararua residents affected by the cyclone, floods and slips, who want to borrow up to $10,000 to get them through the crisis.
The “emergency relief” waives affordability tests on prospective borrowers. Banks and other lenders won’t have to make inquiries about whether affected borrowers can repay the debt, or whether their guarantor can comply without suffering substantial hardship.
Payday lenders and pawnbrokers (who were already contesting whether they were covered by the consumer finance rules) have embraced the opportunity to lend to cyclone victims. Superloans Napier and Superloans Hastings posted on their Facebook pages yesterday, promoting their express loans and pawn loans.
Customers responded enthusiastically, debating which type of loan was better. “Express loan be the way for me, that’s if I made enough to get one,” writes one customer. “Pawn, nah, not really for me, the next minute I’ll be trying to pawn everything! Nah, those days are well and truly over.”
The value of consumer loans increased 27.2 percent to $636 million in the year to December, and lending remained up 14.5 percent into January.
"Credit arrears are up across the board as more Kiwis struggle to meet their repayment obligations across a range of products," said Centrix managing director Keith McLaughlin. "While this level is similar to pre-pandemic figures in 2019 and still low by historic standards, the broader economic landscape is vastly different in 2023.
Changes to the Credit Contracts and Consumer Finance Act in 2021 became controversial for the requirement that mortgage lenders interrogate borrowers about their discretionary spending on the likes of takeaways.
“Borrowing from pawnbrokers has exceeded the pre-pandemic high and with the new responsible lending criteria. People are finding it difficult to borrow from traditional lenders and are looking at alternative lenders pawnbrokers as an option."
– Kevin Garner, National Pawnbrokers Association
But the main focus of those law changes were to protect vulnerable borrowers from predatory lenders – and the Commerce Commission has been working to ensure both payday lenders and pawnbrokers are covered.
Shirley McCombe, the general manager of Bay Financial Mentors, has been pushing for better regulation of pawnbrokers and other last resort lenders. She's seen pawnbrokers target families and take things like tapa cloth from them. They will charge 90 percent interest if they're not picked up paid for within 90 days.
In two cases, families has borrowing $2000 against the heirlooms. The pledge interest added up so fast that one woman ended up borrowing $4000, from family and church members, to redeem the pledge.
"Organisations will always try to find ways to categorise themselves as something other than lenders, to be able to exploit vulnerable people," McCombe says. "They take them from a position of difficulty to a position of no return often, because the debts just get bigger and bigger and bigger. It's important our sector stay on top of these challenges as they pop up.
"The people that we've seen caught by these sort of situations end up borrowing from family, or from illicit sources in order to try and get back something that's really valuable to their family, and end up thousands and thousands of dollars deeper in debt than they were when they first pawned off the valuable.
Payday lenders shouldn't be marketing their loans to cyclone survivors. "It's really sad," she says. "People are really scared and vulnerable. And that is the time when people will make decisions that they think are right in that moment, that they haven't fully understood the implications of."
McCombe said had the pawnbroker asked how she would find the money to redeem the loan, it would have been obvious she could not pay without borrowing the money from somewhere else.
Jake Lilley, from financial mentoring association FinCap, says it's important the Commerce Commission enforced compliance by pawnbrokers. “Financial mentors have shared some shocking situations where whānau they were assisting have been up against losing their most important possessions to pawn brokers," he tells Newsroom. "In such cases it is often clear that this form of lending should have never occurred in the first place."
The commission has filed proceedings in the High Court to clarify the law in relation to pawnbroking contracts, to ensure consumers are protected.
"The Commission’s view is that the Credit Contracts and Consumer Finance Act does apply to pawnbroking contracts," says Louise Unger, the commission's general manager of credit. "The purpose of the proceeding is to ensure that the whole pawnbroking industry has clarity on this.
The case is being contested by the National Pawnbrokers Association. A trial date hasn't yet been set. Unger says the commission is looks forward to the court’s ultimate decision providing clarity for the industry as a whole.
In the commission's court filings, it gives examples of DollarDealers and Cash Converters contracts that its lawyers argue meet the definition of credit contracts. It has asked the court to confirm that these pawn contracts involve ‘credit fees’ and ‘security interest’. Cash Converters NZ reported a profit of NZ$923,000 to its Australian parent company last year.
But the Pawnbrokers' Association says its members' contracts don't meet the definition of a credit contracts, and so they're not covered by the regulations.
Its members' contracts don't involve the creation of ‘a debt’ under s6 of the Credit Contracts Act, it says. "There is no obligation under the Secondhand Dealers and Pawnbrokers Act on a pledger to redeem the goods or repay any money advanced under a Pawnbroking Contract."
In a trading update, the National Pawnbrokers Association said pledge lending hit record levels last year. "Borrowing from pawnbrokers has exceeded the pre-pandemic high and with the new responsible lending criteria," said association member Kevin Garner, in a blog post. "People are finding it difficult to borrow from traditional lenders and are looking at alternative lenders pawnbrokers as an option."
But he said tougher times also brought higher risks for pawnbrokers, as it got harder to sell pledged items that were not redeemed.
"People who obtain loans from pawnbrokers and payday lenders can be particularly vulnerable due to financial stress,"
– Commerce Commission
The Commerce Commission has long been concerned about pawnbrokers as lenders of last resort, when the risk is too high even for unscrupulous payday lenders. The commission settled with an Invercargill based pawnbroker in 2009, after breaches of the Credit Contracts and Consumer Finance Act and the Fair Trading Act.
The Pawn Shop admitted misrepresenting 240 percent annual interest rates to payday loan and pawn broking customers, and incorrectly calculating interest when customers repaid their loans early. "People who obtain loans from pawnbrokers and payday lenders can be particularly vulnerable due to financial stress," the commission said.
Two years earlier, west Auckland pawn broker xtraCASH Finance was fined $45,000 in relation to 68 loan contracts. It had overcharged borrowers a total of $23,935.
But it's taken until now for the Commerce Commission to act to secure full regulatory oversight of pawnbrokers. By contrast, its Australian counterpart ASIC and the Australian Government have been forthright in their determination to control high-risk lending by pawnbrokers.
The Australian Parliament has just passed a law that payday loan repayments cannot exceed 10 percent of a person’s net income. Lenders will now be prohibited from charging monthly fees for the residual period of the loan term if the borrower pays off the balance early, banned from making unsolicited communications to consumers to enter into a payday loan.
But Cash Converters chief executive Sam Budiselik has hit back by warning that payday loans will be up to 70 percent more expensive to borrowers, as a result of the crackdown.
Cash Converters is one of the biggest Aussie payday lenders. In 2019, it was fined A$650,000 to help fund the National Debt Helpline, after an ASIC surveillance found that it had systematically failed to meet regulatory guidelines on debt collection practices, and provided incorrect information to a consumer credit reporting agency.