The loan shark bill

July 21st, 2010 at 10:00 am by David Farrar

The Herald reports:

A members bill to stop loan sharks is up for its first reading tonight but the Labour MP behind it is fearful it will be voted down.

’s Consumer Credit (Responsible Lending) Bill was introduced to Parliament last August.

It would allow maximum interest rates to be set and would require a lender to reasonably believe a borrower would be able to repay a loan.

It also seeks to limit the ability of lenders to recover more than they initially lent in the event of a default.

Ms Beaumont said her bill was aimed at preventing loan sharks from charging excessive interest rates and lending irresponsibly.

“Many loan sharks lend out money at obscene rates, without checking to see whether the borrower will be able to meet the repayment requirements.”

This bill is well intentioned, but may have unforeseen consequences. A maximum level of interest rate you can charge could in fact lead to many lenders increasing their rates to the ceiling. Limits often become targets.

But having said that, I think Parliament should vote the bill through to a select committee. It is an honest attempt to deal with what is a real problem. It would be good to allow a select committee to hear submissions for and against what the bill proposes.

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36 Responses to “The loan shark bill”

  1. davidp (3,540 comments) says:

    Maximum interest rates and evidence of ability to repay might be a good thing if they remove the ability of poor or risky people to gain credit. The American government took a different tack over the past 30 years with the Community Reinvestment Act basically forcing banks to lend to poor and risky people. That bit of state intervention came crashing down a couple of years ago. It would be nice to avoid that in NZ.

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  2. malcolm (2,000 comments) says:

    A maximum level of interest rate you can charge could in fact lead to many lenders increasing their rates to the ceiling. Limits often become targets.

    Is there any reasoning behind that statement? John Key said the same, but (to me at least) this doesn’t follow.

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  3. tknorriss (327 comments) says:

    Problem is that a lot of people who would otherwise not get finance will now be locked out completely. The rate of return required equates to the risk in the transaction. If lenders can’t obtain sufficient return to justify the risk then they won’t lend.

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  4. MikeNZ (3,234 comments) says:

    Good on her, though I thought this was being pushed by someone else a few months back as I emailed all the National/Act/Maori MP’s about that initiative.

    Usury is just that.
    http://en.wikipedia.org/wiki/Usury

    It is the weak being preyed upon.
    So what if some go to the limits set by law, the market will out within the limits.
    Those who gouge will be outed and publicly.

    Those who don’t or can’t get credit will still be in the same situation sadly but at least there will be a limit.

    Yes some won’t lend but will look for safer investments but I don’t know that this is about safe investments and risk but greed.

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  5. Fot (252 comments) says:

    This is a stupid bill.

    I nearly every case the people who are paying high interest rates do so because they have an appalling credit history, frankly, they are lucky to find anybody who will lend money to them at all.

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  6. cabbage (454 comments) says:

    Is there any reasoning behind that statement? John Key said the same, but (to me at least) this doesn’t follow.

    For the more reputable finance companies that deal for the most part with people who have a demonstrated ability to pay their loan, then no – you’re correct in that it dosent follow.

    However for the less reputable companies that target specifically people who are unlikely to be able to service their loan for the duration of the finance term, then absolutely they will.

    Furthermore, capping interest rates could very well be pointless if fees are not capped. Capping the finance rate would be a much smarter move and whilst i would see a number of companies using this as a target, i still think its a better situation than currently where some people are being charged a 50-60% finance rate.

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  7. david (2,539 comments) says:

    Quite a good discussion on this on NewstalkZB (Auckland) this morning. Those with some knowledge of the law and of the activities of loan sharks particularly in South Auckland are very negative about the quality of drafting of this (Chuck Chauvel apparently) and the likely outcomes if passed.

    The old saying still holds that you can’t legislate against stupidity, and from some of the stories told, stupidity is not confined to newly arrived PI immigrants.

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  8. ben (2,399 comments) says:

    I’d be more worried about the supply side effects. A cap will necessarily reduce the amount of money available for legal borrowing, and mean some people cannot get access to funds without going into the black market. That means no legal recourse and no protection. That’s when the fun really begins, folks: higher interest rates (to compensate for the black market risk and costs) and more “robust” debt recovery methods.

    Is there no evil Labour will not inflict on its constituents? This is econ 101 stuff.

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  9. nickb (3,660 comments) says:

    I have a simple idea.

    Why not stop living beyond your means, and thinking twice before signing up to a 100% per annum loan? Then these bastards would be out of business.

    Preying on the weak? More like the stupid and greedy.

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  10. lastmanstanding (1,210 comments) says:

    Oh dear yet another King Canute Act of Parliament Why do these bozos and their supporters not get it that you cant change basis human nature by legislation.

    Loan sharking is a terrible thing. In fact if i had my way it would be one of the measures that are dealt with under Sharia Law. At least this would send a signal to the others and after 2 convictions the felons would have the ability to do it any more.

    But as with so many bad things laws dont make a blind bit of difference They merely make the sad pollies feel better about themselves having “fixed” the problem.

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  11. Pascal (2,015 comments) says:

    24 months interest free. And people who don’t understand there is always a cost. There is the biggest problem.

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  12. dime (9,472 comments) says:

    I heard Carol on zb this morning. She mentioned something about special loans/options for people who couldn’t borrow from he banks or credit unions. maybe community loans…

    is she suggesting we enter into the sub prime loan business?

    loan sharks are pieces of shit.. but the risk component of each loan is quite high..

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  13. ben (2,399 comments) says:

    Again this discussion is predicated on the idea that loan sharks are taking advantage. It would be a nice to see a study of this. I would be surprised if it didn’t find that most people who borrow from loan sharks a) had been turned down or could anticipate being turned down by all other lending institutions, b) borrow the money for very short terms to tide them over, in which case 10% per week is actually a nominal amount to cover admin fees, and extrapolating to annual amounts is ludicrous, and c) these people will be made considerably worse off if they are forced to go to the black market without legal protection, and d) loan sharks compete hard, incur large costs, and do not make huge sums of money, and e) loan sharks are willing to work their borrowers when repayments get out of control, since some money back is better than none.

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  14. kyotolaw (52 comments) says:

    There is a really good report from the New York Federal Reserve about the impact of various bans that have been put in place in different US states and the impacts on things like bankruptcies and credit events. The US is a great testing ground due to the abilities of different states to tweak their laws. They looked at some states which banned payday loans, and others which loosened regulation and see what impact was had.

    Its a little academic, but you can get it here: http://www.newyorkfed.org/research/staff_reports/sr309.pdf

    Essentially the conclusions are that banning high interest rate loans actually impacts the poor most of all – they have very little ability to access credit, and small events can consequently push them over the edge into bankruptcy.

    Campbell Live had a report last night, and most of the issues raised were failures to properly implement the current law. ie not properly disclosing the annual interest rate, and establishment fees not being justified by costs (The Commerce Commission is cracking down on this, but they really should go to these money shops in South Auckland!) It was pretty one-sided, and of course Carol Beaumont was in her usual state of agitation.

    My personal experience is from Japan where the Supreme Court brought in a maximum 18% interest rate. (This is lower than many New Zealand credit cards, but lets put that aside!) The result was that huge numbers of consumers lost access to credit, and they were forced to go to loan sharks that didn’t follow the law (the yakuza etc) – and the resultant misery was extreme.

    New Zealand has a great piece of legislation in the Consumer Credit Contracts and Finance Act – it is very pro consumer. The Commerce Commission should get more money to enforce it, instead of a kneejerk reaction which will throw the good out with the bad and reduce access to credit for a large number of New Zealanders.

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  15. Crampton (214 comments) says:

    Well, it’ll certainly be interesting if John Key supports this through first reading, letting it get to committee, while he shot down Sir Roger’s minimum wage bill. Very interesting. Especially since, as Ben points out above, it’s Econ 101 to ditch this bill (while it’s Econ 101 to have supported Sir Roger’s).

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  16. Falafulu Fisi (2,176 comments) says:

    This bill is stupid, because people are too stupid not to take a loan in the first place of high interest rates. If the government legislate this, then it will go underground in South Auckland as has previously been done in the Pacific Island (PI) community. The establishing of finance companies to lend to PIs is something recent, within the last 8 years or so. What did the PI people do then before these lending finance companies appeared? Well, they went to Lenders who operated underground (without the knowledge of IRD).

    I know this issue because I have got lots of relatives who are caught up in this saga of defaulting on their loans or simply couldn’t pay them back. I also knew some of those (underground) lenders too, where some are still operating today. Were the underground operations had better interest rates? Nope! They were much much higher? What’s the point of trying to push this legislation? Well Carol Beaumont had got nothing to do in Parliament; therefore she comes up with this bill so it makes her appear to be doing something.

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  17. Will de Cleene (485 comments) says:

    This bill is well intentioned, but may have unforeseen consequences… Limits often become targets.

    Heh. Exactly my complaint about the change in labour laws!

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  18. Adolf Fiinkensein (2,798 comments) says:

    Ben and fullafulla, you are absolutely right. If they can’t borrow short term then their last resort is burglary and the market down the pub. Proper enforcement of existing laws does not provide the opportunity for grandstanding that goes with something ‘new.’

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  19. Inventory2 (10,114 comments) says:

    The cynic in me wonders whether Carol Beaumont’s stewardship of this Bill is in any way related to Labour having lost the Maungakiekie electorate (in which she stood) to a National MP of Samoan heritage in 2008. Just thinking out loud ….

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  20. peterwn (3,168 comments) says:

    The proposed control on interest rates is attracting the most attention. The other ‘plank’ in the bill is to require ‘responsible’ lending. To some extent the law (especially equity) already requires ‘responsible’ lending, for example the Bowkett v Action Finance where an elderly couple almost lost their house by lunchtime and was saved by the kindly intervention of the judge (who is now a Supreme Court judge). This is being slugged out in the Blue Chip cases (Supreme Court appeal pending) and I look forward to seeing what that particular judge says about it.

    In the former case Action Finance was plain reckless. A young man had a non-performing loan from Action Finance, and Action lent him a heap more on condition he got his elderly parents to guarantee it (with a charge on their house). Action Finance ‘indirectly’ knew that the son would inevitably default and his parents lose their home so it was inequitable to proceed with the loan.

    Blue Chip involved a lawyer who acted recklessly (to say the least). The finance company was a loan ‘wholesaler’ who relied on a Blue Chip company and the lawyer to ‘deliver’ sound lending propositions. The issue for the Supreme Court is whether this recklessness can be imputed on the finance company (the Appeal Court says it can). Hats off to the top lawyers who are perusing this for the elderly folk affected on a ‘pro bono’ basis.

    There seems to be a case for legal restraints against reckless lending, but a reasonable balance needs to be struck so lenders are not ‘chilled’ out of business. A lender should only ‘forfeit’ a loan in blatant cases, in other circumstances repayment terms including adjustment of interest rate may be appropriate – the Disputes Tribunal would seem a good forum to sort this out.

    There is the matter of education. For example a beneficiary in urgent need of a loan for (say) medical treatment should see his or her case officer first who may be able to provide supplementary assistance or an ‘advance’ (ie interest free loan repayable through benefit reductions).

    A further matter – although a 8% per week ‘payday’ loan sounds horrendous, it may well be a cheaper option than a more conventional loan since the latter may incur higher ‘up front’ costs.

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  21. GPT1 (2,091 comments) says:

    I find it difficult to believe that a court would uphold 200% interest loans. I suspect the problem is that the poor buggers borrowing these amounts don’t have the ability to go to court and the enforcement of the loans tends to be a bit more, erm, direct. I agree, it is an issue deserving of debate at select committee level.

    DPF – is their a general reluctance to allow opposition members bills to go through from governments (of all shades)?

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  22. ben (2,399 comments) says:

    Regulation begets regulation.

    Look at the first page description of the bill:

    The bill also amends the Secondhand Dealers and Pawnbrokers Act 2004 to allow pawn
    brokers registered under that Act to charge administration fees, thereby removing any need for
    high interest rates in order to compensate for not being able to charge fees in addition to
    interest.

    So you ban admin fees and then wonder why interest rates on short term loans go sky high.

    What bureaucratic idiot thought writing a rule like this could possibly not have secondary effects like this? How unbelievably short sighted. How about the government just get the fuck out of this market altogether.

    Reminds me of this, from The Onion via Anti Dismal:

    Truck Accident That Killed Rafters in Canyon Sparks Truck-Canyon-Rafter Reform Debate

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  23. fatman43us (166 comments) says:

    Beaumont wants, if I can understand her at all, a lender of last resort for these people, and seems to think the taxpayer will do nicely. Many of said people have to go to the Loan Shark because they have had Loans before from some of the traditional lenders and have defaulted. Often without paying even one installment.

    What sort of muppet then loans to them again – only the muppet who can extract a high, often very high, rate of interest, and break legs when there is a default. Many of the Loans are for things which are completely ridiculous in terms of funding them through High Interest Loans. But if that is what people choose to do, they should steam on full speed ahead.

    My taxes are not to reward the dumb and stupid.

    And to those who say the Bill deserves to go to Select Committee – there are somethings even too stupid for Parliament, and this is one of them.

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  24. backster (2,082 comments) says:

    Finance Company Advertisements seem to be becoming more prominent in both Radio and Newspapers and promise the solution to all your troubles. I think they should also be obliged to clearly state the true interest rate.

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  25. Kimble (4,383 comments) says:

    Who is this law targetted at?

    Instant finance charging 25%pa? Or individuals operating out of the back of a dairy charging 25%pw?

    “Community loans” are a stupid idea.

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  26. tvb (4,210 comments) says:

    Maybe we should make it illegal to BORROW at such high rates of interest.

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  27. peterwn (3,168 comments) says:

    ben – pre 2004 pawnbroker legislation basically drove traditional pawnbrokers out of business. They had to retain unredeemed pledges for 6 months then advertise the intention to sell before having them auctioned. This meant a pawnbroker had to capitalise ‘dead’ business. Some smart dealers got around this by purchasing the goods stapled with a promise to sell them back. The 2004 Act presumably was to stop this. Interesting that ‘Cash Converters’ does not do pawnbroking in NZ, but does it in other countries.

    I think many of the loan sharks filled the gap left by the demise of pawnbroking. It may not be a bad thing for the government to encourage pawnbroking on terms fair to lender and borrower.

    In France, pawnbroking is a local government function. George Orwell described how he took a suitcase of stuff to the agency, took a number and waited for the value to be assessed. It was so ridiculously high that he took the money and got out quick – he never bothered redeeming his pledge.

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  28. rouppe (918 comments) says:

    Wouldn’t one of the first unintended consequences be that reverse loan mortgages would be hit? If a bank loaned $25,000 to someone on a reverse mortgage, then the intent is that it plus accumulated interest is collected from the estate.

    If the person is dead they can not repay and are in effect in default…

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  29. RKBee (1,344 comments) says:

    The loan shark bill will not be passed after the select committee stage .. because the govt loan $240.000.000 a week plus interest of loan sharks that don’t without check to see whether the country will be able to meet the repayment requirements.
    The bill will stop the ability of the govt to keep borrowing because it seeks to limit the ability of lenders to recover more than they initially lent in the event of a default.

    I know I know govt borrowing is different to joe blow borrowing.. the same as govt budgeting is different to household budgeting… and living within ones means.

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  30. ben (2,399 comments) says:

    RKBee; yes how ironic to have a Labour member telling others to reign in their spending.

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  31. Rex Widerstrom (5,278 comments) says:

    Many of the people getting themselves into trouble with loan sharks are after what would be considered “micro” loans in NZ terms… $500 – $1000 which are often too small for the banks to touch. I’ve occasionally been to the bank to ask to borrow what I need only to be told that I’d better increase it or they can’t be bothered.

    A law insisting the banks not have a minimum loan amount might take care of some of the problem.

    And I wonder how a NZ version of Kiva would go?

    Just last week Redbaiter was telling me that I was overly pessimistic with regard to my view of the likely effectiveness of private welfare. Well, a NZ version of Kiva, allowing people to fund small loans to people needing, say, an accommodation bond or some tools for self employment or other purpose for which the banks would turn up their noses and the sharks would charge usurious rates, would put that assumption to the test.

    Anyone keen on starting it up?

    As for the Bill – every Private Members Bill should go to Select Committee. Any drafting errors can be addressed there, via the “wisdom of crowds”.

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  32. BlairM (2,288 comments) says:

    To paraphrase Penn Gillete: Hey, I have an idea! Why don’t we try “freedom”? How does “freedom” sound?

    This nonsense that one has to prove one doesn’t need a loan in order to obtain it needs to be eradicated. If there is someone willing to take the risk of lending, and someone willing to take on the interest rate PROVIDED it is clear exactly how onerous that rate is, then why interfere?

    Sure, people may get ripped off. Sure, people may become trapped in potential debt. But there are also some people who have fallen on hard times, with bad credit, who can’t make ends meet any other way. A high interest loan may be their only ticket out of poverty and their only way of getting back on their feet. And we want to stop those people from getting out of the hole they are in? We would rather they were declared bankrupt, or put on a WINZ benefit to the detriment of hard working New Zealanders? No. Vote the Bill down. It will not help our poorest and most vulnerable citizens.

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  33. Falafulu Fisi (2,176 comments) says:

    Blair said…
    Why don’t we try “freedom”? How does “freedom” sound?

    Blair, I think it sounds like this favourite classic from the 1970s.

    Freedom come, freedom go

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  34. Nicola Wood (57 comments) says:

    David, re: ceilings becoming targets. I really can’t see how a handful of people who would have otherwise been charged 35% interested now being charged something like 40% or 45% interest comes anywhere NEAR being as bad as scenario as the status quo where some people are being charged upwards of 1000% interest…

    @NickB “Why not stop living beyond your means, and thinking twice before signing up to a 100% per annum loan? Then these bastards would be out of business.”
    I think the crucial point you fail to see is that some people have so few means that they aren’t even able to get from one day to the next… so borrowing isn’t a choice they make to “live beyond their means”, but rather something they must to if they are to live at all.

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  35. Maggie (674 comments) says:

    It is easy to find excuses not to support this bill. It should at least have been allowed to a select committee, people would be shocked at the depth of the problem. National and ACT should be ashamed of themselves.

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  36. wikiriwhis business (3,883 comments) says:

    Yes David, this bill is well intenetioned

    It’s a show of concern such as the whaling debacle to show a facade.

    We know this because the govt won’t take GST off healthy food

    Lumping us with even more GST and the ETS

    People are going to feel the effects soon and our tourism reputation will be in tatters after the world cup

    I really believe National is in danger of losing the next election.

    Unfortuantely, Liarbour won’t repeal either.

    Who started loaning 250m a week off China???

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