Finance companies say they shouldn’t have to be ‘fit and proper’ even though in some cases they charge more than the planned clampdown on high cost lending.
A group of finance companies that charges well over the government’s proposed cap on loan repayment costs is distancing itself from lenders who “cause the most harm to vulnerable consumers”.
Members of the Financial Services Federation (FSF) say they’re not in the business of offering payday loans or running fleets of high cost shopping trucks, so a planned crackdown on predatory lending should not apply to them.
While the industry body represents vehicle and equipment financiers and leasing firms like Orix, John Deere Financial and BMW Financial Services, its membership also includes truck shop operator Home Direct and several personal loan providers such as Instant Finance and Avanti Finance.
Still, the FSF has told lawmakers considering the changes that they would do better to define who the loan sharks really are and target enforcement at them.
Its members should be exempt from the proposal that directors and executives of companies offering consumer finance pass a ‘fit and proper persons’ test, executive director Lyn McMorran says. Instead of devoting resources to administration like this the regulators should be going after those lending to borrowers who can’t afford to repay it.
“It’s just an incredible waste of time, and really the point is to put out of business the people who are not behaving responsibly,” she says.
The FSF suggests that the government define payday or high cost lenders as those offering loans of under $5000, for terms of up to six months, at annual interest rates of 50% or more. “Our members are not in this market,” McMorran says.
However a quick crunch of the numbers provides a different view.
FSF members such as Avanti, Instant Finance and Geneva Finance are what’s known as non-prime lenders, and the clue is in the name – if a borrower could get a loan from a bank or building society they probably wouldn’t do business with these guys.
Avanti Finance offers unsecured personal loans from as little as $500 at a top annual interest rate of 28.95%. Let’s say Joe Bloggs borrows $1000 to go to his brother’s wedding in Australia. The setup fee is $195, and if Joe is having to borrow this relatively modest amount chances are he won’t be able to afford the setup fee either, so he’s likely to add it to the loan.
He also pays a monthly $10 loan administration fee. Joe then gets behind on his repayments, and is charged an extra 20% interest on the overdue amount and a $30 arrears management fee. He calls Avanti to rejig the loan to a more manageable level and pays a $125 restructuring fee.
Once all these fees and penalties are taken into account, Joe ends up paying Avanti in excess of $2000 over the course of a year – more than double the amount of his original loan.
The Credit Contracts Legislation Amendment Bill currently before parliament is designed to clamp down on rapacious lending practices and stop borrowers being caught in a spiral of unaffordable debt. As well as the ‘fit and proper’ test, it also caps the amount financiers can charge by limiting total interest and fees to no more than 100% of the original amount borrowed.
Paradoxically FSF members are not even captured by this proposed cap, because it only applies to ‘high cost’ lenders charging base interest rates of 50% and above. Nonetheless FSF is also opposing the repayment cap, claiming it won’t stop loans being rolled over or borrowers shifting their maximum debt to another finance company. It says these loans are still unaffordable, and what’s required is enforcement of the existing lender responsibility rules.
Even though a personal loan customer of Avanti or Instant Finance could end up paying more than double their original loan amount, McMorran is adamant these are responsible lenders. “They wouldn’t lend to somebody who couldn’t demonstrate that they could repay it.”
In fairness to FSF members, it has been reported they are shying away from customers who go to high cost lenders, and if they see names like Moola on a prospective client’s bank statement they will decline finance.
McMorran also defends shopping truck operator Home Direct’s membership of the FSF. In a recent Commerce Commission crackdown on mobile traders it was the only one found to be operating within the law. Unlike many of its competitors it doesn’t door-knock or sell food, she says.
“They’re not charging outrageous prices for their goods. They’re selling stuff that people want and need, and they’re charging perfectly reasonable interest rates.
“There’s a reason why we’ve allowed them to become a member and that is because we believe that they are reputable.”
Again, a look at the Home Direct site shows this view depends on your definition of a reasonable price and what people need. The trader sells a 100ml bottle of Chilliberry vape juice for $59, nearly $15 dearer than other retailers. It’s selling an XBOX One controller for $149, while The Warehouse has the same appliance for $89. The Home Direct shopper pays a $5 delivery fee, and if they make their purchase using its revolving credit Lifestyle Account they also pay 25.5% annual interest plus a $6 monthly account fee.
Budget advisers who deal with the fallout from unaffordable lending would rather shopping trucks disappeared from New Zealand’s streets altogether, but they concede Home Direct is the best of a bad bunch.
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FinCap is the body representing budgeting and financial capability services. It agrees with FSF insofar as it believes the 100% cap on repayment costs doesn’t go far enough in addressing the harm caused by usurious lending.
But the budgeting sector wants an overall interest rate cap of 50%, which FSF opposes. “Ideally we’d like to see no access to high cost, short term in the market,” FinCap chief executive Tim Barnett says.
It also says both fees and interest should be included in the definition of high cost lending. “So if Instant Finance had fees and interest that added up to over 50% per annum, they should count as high cost loans even if they are not seen as payday lenders,” Barnett says.
“We also think that ‘fit and proper tests’ should apply to all lenders, not just pay day lenders. There is irresponsible lending throughout the finance industry regardless of the interest rate,” he says.
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