New Responsible Lending Code fails to cap high interest rates

The Responsible Lending Code released yesterday will not protect consumers against the sharp teeth of predatory lending, says Child Poverty Action Group.

CPAG spokesperson Dr M Claire Dale says, “Yesterday’s announcement should have been a reason to celebrate but unfortunately the ‘responsible lending principles’ do not address the issue of unreasonably high interest rates.”  

It is good that lenders will be required to take a much more active role when considering the ability of an applicant to repay a loan, and the suitability of the relevant product and any associated insurance contracts. However they are not required to refrain from charging usurious interest rates.

Dr Dale says “High interest debt rapidly becomes unmanageable. Unsustainable repayments on debt create stress among family members, take up money needed to buy essentials including food for the children, reduce any remaining assets the family might have, and diminish the wellbeing of the whole community.The consequences of unmanageable debt are an enduring and pervasive poverty trap.”

“The Code requires lenders to be ‘reasonable’, not to be ‘fair’. Reasonableness is determined by the current market, which is far from fair.”

The Code’s Glossary refers to high cost credit agreements where the annual interest rate is 50% or greater. While banks and credit cards charge between 5.5% and 25% annually for credit, poor families are kept poor because they have no alternative to borrowing from third-tier lenders. Payday lenders charge a minimum of 1.2% per day, which is 438% annually.

Dr Dale says “Borrowing $500 to repair the car so you can keep your part-time minimum-wage job, when you are charged an establishment fee of $100, and interest of 500% annually, quickly turns into an inescapable round of further borrowing and deeper entrapment. This is a living nightmare for families.”

Poor families and their children will continue to be the prey of loan sharks until the government provides adequate consumer protection. New Zealand needs what most of the rest of the world already has: an interest rate cap to protect the most vulnerable consumers.

Background: Responsible Lending Code released 17 March 2015. The Minister of Commerce and Consumer Affairs has today released the Responsible Lending Code. The Code elaborates and offers guidance to lenders on the lender responsibility principles introduced by the Credit Contracts and Consumer Finance Amendment Act 2014. The Code will come into force on 6 June 2015. Read the Responsible Lending Code.