Will high-cost loan interest caps really protect vulnerable customers?

by Ksenia Stepanova20 Mar 2019

Enforcement efforts against loan sharks have made some progress since Minister Faafoi’s October 2018 recommendations for the CCCFA review, but more emphasis needs to be placed on loan affordability, according to the Financial Services Federation (FSF) – an organisation representing responsible lenders.

Executive director Lyn McMorran says a 100% cap on high-cost loans will not necessarily provide the needed protection that customers need, and that the root causes which make payday loans necessary for many families need to be given more attention.

“What Minister Faafoi announced in October was unsurprising, and he’d said from the very beginning that a cap on interest and fees was something that he felt was necessary,” McMorran told NZ Adviser.

“While we don’t necessarily object to the 100% cap, the concern that I have is that when people are desperate enough to need to borrow money from a payday lender and they can’t pay it back, what do they do next? If they’ve taken out a $500 loan and it’s hit $1000, what’s to stop that payday lender from cutting off that loan and setting up a new loan until it gets to $2000?”

“Even if there is a mechanism within the law to say you could only have a certain amount of rollovers, how do you stop that person from refinancing through another lender?” she asked. “So ultimately, the cap doesn’t necessarily mean that they’re any better protected and it won’t solve the problem without really good enforcement. That enforcement needs to account for all of these factors.”

McMorran says it ultimately comes back to the issue of affordability, and that there needs to be a much stronger emphasis on thorough affordability checks before any loans can be granted to vulnerable customers.

“Customers should be required to show that they can repay any loan they take out, and show where that repayment is going to come from,” McMorran said.

“MBIE put out some very interesting information that came from one of the more reputable payday lenders, who stated that they actually declined four out of every five applications they get. It found that the reasons for taking out these loans were to do with meeting rental costs, food costs, health, car repairs, etc. So these are the problems that need to be addressed.”

“There has been quite a lot more movement happening in the enforcement space, which is good,” she concluded. “There have also been some comments from Minister Faafoi acknowledging that the enforcement price is important, and that the Commerce Commission needs to be well resourced in order to do their job.”

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