Credit Reforms Responsible Lending Bill

May 20th, 2009 at 12:43 pm by David Farrar

Labour List MP has submitted to the ballot a private members bill – credit-reforms-responsible-lending-bill.

It does four things:

  1. allow pawn brokers to charge administration fees, thereby removing any need for high
  2. require lenders to seriously consider the actual means of a prospective borrower and their ability to service the debt
  3. allow for the prescription of maximum annual percentage rates of interest payable in respect of consumer credit contracts
  4. restrict the right for a creditor to recover from a debtor any amount beyond the value of the goods sold subject to a security agreement.

Taking each in turn

Pawn Broker Admin Fees

I’m not sure what the original rationale for pawn brokers not being able to charge an admin fee, but seems to me flexibility is a good thing.

Lenders to assess ability of borrowers to service debt

I should start off by saying that I am well aware there are many very scummy companies that exploit people with cashflow problems by taking advantage of their desperation to get them to agree to loans that with compounding interest are crippling.

But I am hesitant about putting the burden of assessment on the lender, rather than the person borrowing the money. The borrower does have some responsibility themselves to judge their own capacity to replay. And you could end up with a lot of uncertainity as to what steps lenders must take to assess repayment. I don’t see this as being practical or necessarily desirable – lenders do have an incentive already to check repayment ability – so they can get repaid.

Maximum rates of interest

The proposal is that the Reserve Bank Governor can set a maximum rate of interest for borrowing. This is well intentioned but may have unintentional side effects. Let’s say you can currently get unsecured borrowing from scummy lenders for between 35% and 75% interest. And let us say the Reserve Bank says that the maximum you can charge os 50%. Now yes that will stop money being lent at 75% interest, but may push the 35% rate up to 50%. A ceiling often becomes a target. And you may also get scummy lenderss claiming greater respectability as their interest rates are “approved by the Reserve Bank”.

Creditor Recovery

I’m not quite sure how this clause will work in practice, so will update when I have worked it out. As I understand itm, this is a more minor part of the law change.

I have doubts over the practicality and desirablity of parts of the bill, but neither do I think the current law is working particularly well – many families are getting exploited.

If the bill gets selected from the ballot, I think it should definitely be supported to select committee so they can consider the issues and proposed solutions. Any support beyond that would depend on what changes get made there.

Generally I support most going to at least select committee for hearings. My exceptions are those that are:

  1. Obnoxious (EFA type laws) and so bad not possible to make into good law.
  2. Directly contrary to the Government’s policy (designed just to score political points)
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27 Responses to “Credit Reforms Responsible Lending Bill”

  1. goodgod (1,348 comments) says:

    Meaning of oppressive

    Section 118 is amended by inserting after the words “of commercial practice” the
    words:

    “including extending credit to a debtor without a reasonably held belief on the part of
    the creditor that the debtor is able to repay the amounts which will fall due under the
    terms of the credit contract”.

    I imagine this is aimed at the type of outfit that advertises instant cash for people with bad credit ratings and the like. But the mind can only boggle at how a Labour MP or union official would interpret it to get a few days news-time over some waster that spent their money on booze then racked up several thousand dollars for more booze.

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  2. sonic (2,818 comments) says:

    “But I am hesitant about putting the burden of assessment on the lender, rather than the person borrowing the money. The borrower does have some responsibility themselves to judge their own capacity to replay. And you could end up with a lot of uncertainity as to what steps lenders must take to assess repayment. I don’t see this as being practical or necessarily desirable – lenders do have an incentive already to check repayment ability – so they can get repaid.”

    No offence David but have you been in a cave for the duration of the credit crisis? The whole point of credit default swaps and collataralised debt obligations is that the lender has aready been made their profit and no longer cares about the ability of the client to repay. That burden falls on the banks, who then get bailed out by the taxpayer (while of course the borrower still gets screwed by a debt they can never repay)

    Do try and keep up.

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  3. Will de Cleene (485 comments) says:

    Good on Charles Chauvel putting this forward. It is a poor thing to enslave another human, and usury is slavery. Lenders should be taking reasonable steps to ensure the borrowers can afford to repay the loan. It’s weird incentives to push low doc loans to NINJAS that set off the US subprime market. These loans were made without due diligence from the lenders, so they should have to carry the can for it. Lender beware.

    I don’t see a problem with the Reserve Bank Governor being able to set a floating rate on usury. If the maximum becomes the norm, I’m sure Bollard to crank it through to reflect an accurate ceiling of risk. If nothing else, I would like to see advertising limited to expressing lending rates on an annual basis only. No more of that 6 per cent (a week) business.

    It is well worth looking at Obama’s credit card reform passing through Congress:
    http://www.nytimes.com/2009/05/20/your-money/20money.html

    Such things as a minimum font size for fine print, repayments going to repay the higher accruing interest before the lower tier (in the case of cash withdrawals for example) and various minimum responsibilities of billers to get their invoicing out earlier to allow a more reasonable amount of notice before due dates, thereby cutting back the churn of cash cow penalty payments.

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  4. Rob Salmond (246 comments) says:

    DPF

    I think yours is a well-reasoned post, and a thoughtful set of reflections on a thoughtful Bill from Charles. I do have one question, in relation to this para:

    “The proposal is that the Reserve Bank Governor can set a maximum rate of interest for borrowing. This is well intentioned but may have unintentional side effects. Let’s say you can currently get unsecured borrowing from scummy lenders for between 35% and 75% interest. And let us say the Reserve Bank says that the maximum you can charge os 50%. Now yes that will stop money being lent at 75% interest, but may push the 35% rate up to 50%. A ceiling often becomes a target.”

    Is there **evidence** out there suggesting that ceilings become targets in the way you suggest? Especially compelling here would be examples from sectors with near-perfect competition (which I think the low-level finance industry approximates).

    I ask because the arguments that many on the right run against a legislated minimum wage are of the exact opposite variety, namely that a floor on wages (or a ceiling on “labour cheapness” depending on how you see it) pushes other, higher wages up. Shouldn’t the same argument apply here? If a minimum wage pushes non-minimum wages up, shouldn’t a maximum interest rate push non-maximum interest rates down?

    [DPF: Lots of evidence. Take one. Telecom have a ceiling on how much it can increase a line rental by. It has increased line rentals every year by that ceiling. In fact the technology improvements should have seen drops]

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  5. toad (3,674 comments) says:

    Without having looked at the detail, I think this is generally pretty good stuff from Charles.

    The funny thing is that much of this is what the Greens were pushing for when Labour was putting the Credit Contracts and Consumer Finance Act through Parliament back in 2003. And back then, Labour didn’t want to know about it.

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  6. Brian Smaller (4,023 comments) says:

    Hey toad – your lot voted to throw in with Labour for last nine years. How did it feel?

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  7. s.russell (1,642 comments) says:

    RETURN OF THE WERE-NANNY

    Just when you thought she was dead… she’s back.

    Foolish people are exercising their right to borrow money. They must be stopped! Only Nanny can save them from themselves. Bad children! Nanny will make them stop making choices for themselves. Then we can all sleep safe in our beds, confident that obedience will prevail, conformity will triumph and all independent thought will be eliminated.

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  8. kiwirights (48 comments) says:

    DPF, I’m sure Charles will reconsider his Bill as soon as he knows you support (most) of it! I must ask too though about your speculation about maximums becoming targets – is there evidence? Also does the bill put the onus on the lender completely to assess the ability of the borrower to repay? Some onus on the lender is needed – how will they be able to be sure of being repaid otherwise? Lenders have to be practical too.

    [DPF: I'm not sure I would say I support most of it. I support it going to select committee]

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  9. sonic (2,818 comments) says:

    I ses s russell was also in the cave with David. Irresponsible lending is a now some sort of human right, have you noticed how we got into this mess mate?

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  10. Will de Cleene (485 comments) says:

    The funny thing is that much of this is what the Greens were pushing for when Labour was putting the Credit Contracts and Consumer Finance Act through Parliament back in 2003. And back then, Labour didn’t want to know about it.

    You’re spot on, toad. Nice to see some new blood in Labour starting to look out for the vulnerable once more.

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  11. toad (3,674 comments) says:

    Brian Smaller said: …your lot voted to throw in with Labour for last nine years. How did it feel?

    Actually, that Act went through during the three years the the Greens OPPOSED Labour on confidence and supply.

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  12. KiwiGreg (3,255 comments) says:

    I’m in the same cave as s russel – voting adults want to borrow money and nanny state needs to get involved?

    Let’s put caps on rentals to stop rapacious land lords fleecing innocent tenants and food is essential, lets put a maximum retail price on that (complete with MRP stickers). If people wont produce or sell enough at that price lets put laws in place to make them. We can make hoarding illegal on the way through and if that doesn’t work, why the state can step in an directly own the mans of production. Everyone knows markets are improved by government regulation. I dont know what planet you folk are on but if you can see WHY for example, the RBNZ setting maximum interest rates is bad, there is no saving you.

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  13. big bruv (13,887 comments) says:

    Oh please!

    99.9% of the time the reason people borrow money off the so called “loan sharks” is because nobody else will lend it to them.

    Until recently lending institutions were falling over themselves to lend money, only those with an appalling credit history were refused.

    If you have borrowed money in the past and have not paid it back then any financial institution who is considering an application for finance must take this risk into account, that company is quite within its rights (or should be) to charge an interest rate that reflects that risk.

    If you regulate this industry to cap the amount one can make from those who have a cavalier attitude to paying it back then where do those losers go to borrow money……yes, they will end up at WINZ, when that happens the tax payer will be the one who carries the risk and I am fucked if I want to be the one dishing out money to people who have no intention of ever paying it back.

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  14. Grendel (1,002 comments) says:

    i could care less about irresponsible lending. its irresponsible borrowing i am against.

    and that needs no regulation from the govt other than a slap up the side of the head for idiots who borrow moer then they can afford. no one forces you to walk into the short term finance lender (fuck this loan shark crap), no one forces you to sign the loan agreement, you are given the opportunity for legal advice and to read the contract.

    if after all of this you still sign up for the 36% interest rate on a fastly depreciating consumer item, then you deserve it.

    hell, when i needed to, i have taken out a high interest loan, but i knew why i was doing it, what it was going to cost me and i made sure i paid it back in 6 months, not the 5 years they wanted.

    what happened to personal responsibility?

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  15. Rob Salmond (246 comments) says:

    DPF – I would need to see more of this evidence before I am convinced. Certainly the example you cite, the market for telecommunications services, has little in common with the small-scale finance market which is the target of Charles’ Bill. Few competitors vs many, substantial non-price competition vs basically price-only competition, massive barriers to entry vs almost no barriers to entry, etc. I am open to being convinced on this one, but the examples need to be much closer analogies to the market in question. Otherwise it is apples vs oranges.

    [DPF: The fact that many operators are charging interest rates of over 50% shows that competition is not working. Otherwise everyone would go to the 30% company]

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  16. Rob Salmond (246 comments) says:

    [DPF: The fact that many operators are charging interest rates of over 50% shows that competition is not working. Otherwise everyone would go to the 30% company]

    Which is a pretty strong argument for regulating interest rates, no? Even if you believe regulation is only justified in cases of clear market failure, this – as you point out – appears to be one of those cases.

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  17. Jack5 (5,137 comments) says:

    Will de Cleene at 1.25: “…usury is slavery”

    What mindless, leftist drivel.

    Where are people enslaved by usury in NZ? Enslaved by P and heroin and gambling addiction and alcoholism, but by usury? Come off it Will.

    The West’s progress over the last three centuries has been allowed by harnessing group capital and lending it to others. That entails interest being charged.

    Slavery was what existed before the commercial and industrial revolutions: serfdom to the barons. They got a chunk of your corn and animals and perhaps your women.

    If you want to see countries emerging from crass poverty look to those that are applying the Western model of harnessing capital, such as China, India, South Korea. Even in NZ, it was early law that facilitated sheep being used as collateral for borrowing that led to the pastoral industry’s initial take-off.

    As for pawn brokers, their interest rates have been controlled by Government regulation for at least three-quarters of a century. They are lenders of last resort, and the idea is they are very short-term lenders, hence the interest burden is probably not as heavy as first appears.

    Look where the newer pawn brokers have set up. Near a casino is a favourite spot, as in Christchurch. Not near schools or supermarkets.

    Remember, too, that if pressed borrowers sometimes forfeit goods to pawnbrokers, these become cheaper goods for other poor people, and perhaps ones who aren’t poor because of pokies or the casino or horses or the booze or dope.

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  18. brucehoult (195 comments) says:

    This must be some new definition of “market failure” of which I was previously unaware.

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  19. Rob Salmond (246 comments) says:

    brucehoult: I think DPF’s phrase to describe this market, namely “competition is not working,” is pretty much at the heart of all definitions of “market failure.”

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  20. Jack5 (5,137 comments) says:

    Whoops! Re my 4.17 post…. I may be out of date on the control of pawnbroker interest rates.

    The Secondhand Dealers and Pawnbrokers Act of 2004, which came into effect on 1st April 2005 appears to have deregulated Pawnbrokers, freeing them from a ceiling on interest rates they could charge.

    Under the Pawnbrokers Act 1908, for almost 100 years, the maximum interest they could charge, was set by regulation.

    Clark, Labour and its allies thus seem to be to blame for any current exortion occurring.

    It would be good if any legal eagle with access to the old pawnbroker legislation can tell us the interest rate ceiling the Helenistas removed.

    Now they apparently want to put it back.

    What did H1 and Cullings used to say? Flip flop, was it?

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  21. bobux (349 comments) says:

    sonic

    The whole point of credit default swaps and collataralised debt obligations is that the lender has aready been made their profit and no longer cares about the ability of the client to repay. That burden falls on the banks, who then get bailed out by the taxpayer (while of course the borrower still gets screwed by a debt they can never repay)

    Do try and keep up.

    Perhaps I’m not keeping up, but I haven’t noticed the helpful people at Pacifika Friendly Finanz issuing CDOs or any other arcane financial instruments. I wasn’t aware that Charles Chauvel was targeting the international bond market with this measure.

    My understanding is the business model looks like this:
    – borrow money from finance company at (e.g.) 18%
    – lend it out a few hundred backs at a time at 50% +
    – when people fall behind in payments, go round and repossess/steal their stuff

    My impression is that the high overheads associated with lending such small amounts, combined with the fact that some customers have nothing worth stealing, means that the instant-finance isn’t really all that profitable.

    Can anyone point to any studies of the NZ cash-loan industry?

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  22. Michael E (274 comments) says:

    This bill is actually very dangerous – the fourth part “restrict the right for a creditor to recover from a debtor any amount beyond the value of the goods sold subject to a security agreement” has caused a lot of problems in the US as the house is the only security a mortgage is lent against.

    When borrowers default they tend to walk away from the home as they aren’t liable for anything else. When too many people walk away you get the kind of banking and financial market meltdown that we saw in the US last year.

    The result will be banks restricting all lending back to a maximum 80% of a homes value.

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  23. Goldie75 (1 comment) says:

    Michael – the amendment only relates to a “security agreement” which is defined under the Personal Property Securities Act 1999. This means an agreement creating a security interest in “personal property” only. In other words it doesn’t cover security over real property like a home mortgage. The amendment will cover the likes of hire purchase agreements etc. The moral hazard question remains as to whether the purchaser of a car on HP (for example) should have their liability limited to the realisable value of the car and not the actual amount of the debt. Do we want the situation where irresponsible people can buy a car on HP and then simply hand back the keys and walk away even if the car has dropped in value? I don’t think so….

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  24. sonic (2,818 comments) says:

    “I haven’t noticed the helpful people at Pacifika Friendly Finanz issuing CDOs or any other arcane financial instruments.”

    Which must mean that they do not exist! I guess we all must have imagined the credit crisis, after all if you have not noticed it at your made up financial company, what more evidence does one need that it never happened.

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  25. bobux (349 comments) says:

    Well, sonic, you are the one suggesting that companies within the scope of Chauvel’s bill are issuing CDOs and credit default swaps. Produce some evidence of this, and I will happily concede you are right.

    Nothing in my first comment disputes the existence of the credit crisis – my reference to the bond market only makes sense if I think there are problems with lenders outside the scope of this bill.

    Do try to keep up.

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  26. Tui (28 comments) says:

    I agree with DPF that Chauvel’s bill should at least go to select committee if pulled out of the ballot. The trouble is there is no guarantee of this happening, so it would be better if it were adopted as a government bill. Correct me if I’m wrong but I think NZ is one of the few developed countries that do not regulate this type of lender.
    Tithing in the pacific communities also plays into the hands of loan sharks. People are too scared to say they can’t affford the tithes.
    Good on Chauvel to trying to do something about payday lenders.

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