The days of vulnerable consumers falling victim to loan sharks, truck shops and other predatory lenders are numbered, following the Credit Contracts Legislation Amendment Bill passing its third reading tonight.
“Too many Kiwis are being given loans that are unaffordable and unsuitable, trapping them in debt and leaving their families in hardship,” Commerce and Consumer Affairs Minister Kris Faafoi said.
“Previous changes made to consumer credit law didn’t go far enough to protect our most vulnerable consumers from loan sharks. We reviewed the law and found that, across the board, there is a continued problem of non-compliance – including by truck shops and high-cost lenders.
“We’re making changes to ensure that anyone borrowing money from high-cost lenders won’t be crippled by punishing debt.
“We’re introducing a total cost of credit cap, which means a borrower will not pay more than 100 per cent of their loan – including interest and fees.
“This legislation also introduces a rate cap so that no one will have to pay more than 0.8 per cent in interest and fees per day for a high-cost loan.
“And we’re also putting in place clear new requirements for all lenders to ensure borrowers can afford to repay their loan without falling into hardship.
“In many cases, people are getting loans they’ll never repay. One example I’ve heard about is someone taking out a $600 loan on $10 weekly installments, and 18 months later owing $2,560 due to accumulated interest and default fees. This kind of debt-trap won’t be possible once the new rate cap and affordability requirements are in place,” Kris Faafoi said.
Other changes include:
- extending legal protections to credit provided by truck shops
- stiffer penalties for irresponsible lending
- enabling higher standards to ensure responsible advertising of high-cost loans.
All lenders offering consumer finance will also be required to undergo “fit and proper person” checks before they are allowed to operate.
Law changes will be phased in to allow lenders sufficient time to implement the changes.
The new legislation takes full effect on 1 April 2021.
The new measures:
New restrictions on high-cost loans
- A total cost of credit cap that means total interest and fees charged stop at 100 per cent of the first advance of the loan
- A rate cap that means no one will have to pay more than 0.8 per cent in interest and fees per day for a high-cost loan
- A ban on high-cost lenders entering into contracts with someone who has taken out two high-cost loans in the previous 90 days.
Other changes to consumer credit requirements include
- Extending responsible lending requirements to truck shops and other mobile traders
- Requirements for directors and senior managers of consumer lenders and mobile traders to pass a ‘fit and proper person’ test before operating
- Increased enforcement and tougher penalties for lenders who break the law
- Requirements for lenders to provide borrowers who are in arrears with details about accessing financial support services
- Enabling binding standards to be set for:
- affordability and suitability assessments
- advertising of consumer credit
- transparency of the information debt collectors must disclose to debtors.