Monday, October 15, 2018

Frank Newman: Loan sharks and shady operators

Last week the Government announced it is going to get tough on loan sharks and truck shops.

The proposed changes include payday loan companies who provide short-term unsecured loans of small amounts intended to get the borrower though to the next payday. While they generally have a maximum term of a month or two, these small sums can become very large amounts very quickly.

According to the websites of these lenders, the loans are often used to pay for groceries, power bills, vehicle breakdowns, and the like. The reality is there are probably a host of other reasons why desperate people end up at the doorstep of these sharks. Every lender has different terms, but they do have one thing in common – outrageously high interest rates: 500% per annum is not unusual, plus default interest, plus application fees, plus dishonour fees, plus reminder letter fees, plus this, plus that, plus a bit more.

True to form, our Prime Minister went all cuddly and fluffy on the issue; saying the changes are needed to “make New Zealand the best place to raise a child.” She could have expressed it more directly because the problem deserves stronger language and strong measures. The truth is these loan sharks are predators who prey upon desperate individuals. They are ratbags that should be driven out of business.

Unfortunately governments are good at talking about getting tough on fringe money lenders but they are not good at doing anything about it. Five years ago the then National- led government took a tough stance but the outcome changed very little. The changes they made to the Credit Contracts and Consumer Finance Act in 2015 did not deal with the substantive problem which is the exorbitant fees and charges. What it did do was require better disclosure of the fees and charges.

As predicted at the time, better disclosure did not eliminate the problem - it was yet another example of a government being seen to be doing something rather than actually fixing things. In effect, our politicians in Wellington turned a blind eye to it, and were horribly naive to think that requiring loan sharks to disclose their outrageous fees would actually stop people from taking out loans at scandalous interest rates.

Some may say, let the free market work and if people want to pay high interest then so be it. But free market principles are based on people acting rationally and of their own free will. There is nothing rational about desperate people paying 500% interest on a loan to buy groceries or to fund an addiction.

According to the PM, the proposed measures will cap the total interest and fees that can be charged to no more than 100% of the loan amount. The cap will put an end to the compounding effect of fees and interest. Details are yet to be finalised but will only apply to high-cost lenders.

The new legislation will also impose fines for "irresponsible lending", will require consumer lenders to register as a Financial Service Provider and will require their directors and executives to meet a 'fit and proper' test. The potential fines are $600,000 for a company and $200,000 for individuals.

The motivation for requiring registration is probably because it then gives a regulator the authority to de-register problem lenders and ban directors and executives, therefore removing them from the industry.

Although the proposals are likely to see an end to the most outrageous and abusive forms of loan sharking, it will not be the end of payday lenders entirely. Some payroll companies are now catching onto the idea of providing payday advances that give salary and wage earners access to their pay before the scheduled payday - at interest rates much less onerous than fringe money lenders. This will not be any comfort to beneficiaries, who are the ones most likely to be the ones who resort to payday lenders.

The Government is also tackling so called "predatory behaviour" by truck shops and others who sell door-to-door on credit or other deferred payment. They intend solving this by requiring all mobile traders to pass the ‘fit and proper person’ test as well. This seems more like a measure to address problem operators rather than problems with the industry as a whole. This may be because the problems are less clearly identifiable, until the complaints are received. In my view this does not go far enough and will not eliminate rogue operators.

Unfortunately the law changes are not due to come into effect until 2020. It's a shame it's going to take that long to deal with a problem that needs to be addressed urgently and one that is relatively simple to fix.

Frank Newman, an investment analyst and former councillor on the Whangarei District Council, writes a weekly article for Property Plus.


Anonymous said...

I totally agree, although as you hint, these kind of laws are usually anathema to people who favour free and unregulated markets.

I have some experience of this sector during my time working as a junior lawyer in one of the poorer areas of Auckland (around 12 years ago). Part of the regular fee earning work was performing order for examination (OE) hearings on debtors – they would come and ideally would lay their cards on the table (income, outgoings etc). and based on that the registrar would make an order attaching a repayment sum from their income (at source). The creditor’s lawyer (myself) had the chance to challenge their statements and how much they could afford to repay. The rules ensured they would never lose more than a certain % (I recall 40%) of their net income.

The vast majority of the debts came from these short term loans, clothing vans, door to door appliance sales, or other hire purchase arrangements. The debtors would describe other loans, and usually these were considerable, many also subject to attachment orders. Nearly all debtors had the majority of their income coming from the state, even if working. From my own discussions with them, and witnessing their attempts to complete the paperwork involved, my impression was nearly all were very simple intellectually and lacked the literacy and numeracy skills to understand the contracts they entered into – most would cooperate and just nod and agree with whatever was said in these hearings which is no doubt how they got into these arrangements in the first place (which is why better disclosure regulations will not assist here).

I recall at the time thinking this was a complete fraud, both on these people and the New Zealand taxpayer (who was in the end the one repaying these debts). The people were totally bankrupt and would have been better off declaring themselves to be – they had no assets at risk. Instead, it suited these creditor companies to keep the debtors out of bankruptcy – that way they get their money back, directly from WINZ, albeit more slowly. The various fees (e.g. my appearance at the OE hearing, court fees) went straight on top of the debt (not to mention the various other exorbitant company default fees etc.). By going bankrupt they would at least be prevented from taking out further debts for two or so years. Again, their lack of sophistication meant many did not explore this option – they would be content to just accept a bit less from their state benefits each week.

Rather than meddling in credit markets (with all the likely unforeseen consequences) it would better to revisit how these debts are managed and resolved. There is no obvious market solution to this – it is more a matter of how the justice system administers itself. My impression at the time was the courts had only blunt and limited tools for personal debt recovery. I’m not sure what things are like today, but perhaps the registrar/judge should be empowered to escalate matters to bankruptcy when it is apparent the debts are overwhelming (in most cases this would be an easy test – if no sizeable assets, would the agreed repayment schedule be longer than the usual time it takes to be bankrupted and discharged). Facing a likelihood of having an instantaneous haircut would impose discipline on the lenders. Similarly, most of the judgments for these debts are made by default, even where the people may have good arguments not to repay (in particular, that the debtors lack capacity to agree to these kind of arrangements). There ought to be an easier and cheaper route for them to re-open default judgments - normally it requires a sizeable fee plus submission of complex court documents.

Unknown said...

Upfront... I'm a hardliner. No ifs. No buts. Government, and I mean ALL parties in the house of representatives, need to work "together" on this. Keep partisan politics out of what needs to be done.

First step introduce usury laws. Tie it down so that there is no wriggle room for the scum that deliberately put vulnerable people in a never ending cycle of poverty. Limit interest rates to no more than 0.5% above top bank interest rates. Force ALL lenders to have an unblemished record in handling financial loans. And to keep it unblemished. Force them to be registered, and if any is deregistered then that is for life so that they cannot re-enter into the lending business ever again. Those that do get serious jail time. Minimum 10 years at hard physical labour. See. I told you I was a hard liner...

Second step... Ban Truck Shops. Outright. They are some of the lowest of the low. Operated by scum who have no morals at all. Peddling items worth, for example, $250 and selling to vulnerable people for $1500 plus interest rates of, so I've heard, of 120% or thereabouts. That. Is. Outright. Criminal... the only thing worse than these leeches are the scum who manufacture and peddle metamphetamine etc. And they deserve the death penalty.

Step 3... those people who are vulnerable and been caught up in this poverty cycle need to be compelled to attend financial and budgeting services. They also need to attend social assistance organisations such as Salvation Army, Barnardos and the like. Make it compulsory otherwise there are consequences. The term Tough Love comes to mind.

Step 4, introduce financial literacy classes to all schools. Start it young in Primary Schools and have it taught by budgeters NOT teachers. Too many teachers are pathetic handling money so not good examples to the students.