Law to restrain loan sharks bites banks
The bankers' association is disappointed mortgages are included in tough new lending laws unveiled by Parliament this month while other lenders believe some tricks have been missed.
The Credit Contracts and Financial Services Law Reform Bill includes measures designed to end abuses at the lower end of the lending market where sky-high interest is the norm and debt collection can see the homes of defaulting borrowers stripped.
While acknowledging the bill delivers improvements, larger lenders are frustrated that their businesses will be affected by a code of responsible lending which all lenders - banks included - will have to adhere to.
The lenders fear they could find themselves challenged in court or before dispute resolution schemes when they seek to enforce rights such as selling security provided by defaulting debtors, such as homes.
Banks are already challenged frequently in courts by debtors attempting to stop mortgagee sales or seek damages after them. Responsible lending rules are likely to be tested there as well.
Bankers' association chief executive Kirk Hope said banks were never the target of the measures contained in the bill, which was aimed at reining in abusive loan sharks and dodgy debt collectors.
"The problems are with the bottom $200 million to $300m of the market and yet the whole of the market gets sucked into this as well," Hope said.
Like the large, established lenders he represents, Hope said the current credit laws were largely adequate, but never systematically enforced.
"The most vulnerable consumers could be protected by enforcing the existing laws," he said. "To its credit, the Commerce Commission has started to do quite a bit of work in this area."
Hope said lawmakers have missed a few tricks that would limit the damage loan sharks could do, such as limiting the length of very high interest loan contracts offered by the likes of "payday lenders" and how often they can be rolled over.
Richard de Lautour, chief executive of Instant Finance, said another effective move would be to outlaw taking second charges over household chattels.
He said where Instant Finance lends less than a person asks for because they think any more would be too hard for the borrower to pay back, they often find the borrower heads off to a lower tier lender and gets the money by providing a second security charge over their household chattels.
Second charges are an infallible sign of irresponsible lending, de Lautour said.
"If you really want to tidy up the bottom of the market, you should make it illegal for any finance company to take a second charge over household chattels," he said.
It is difficult to know how the as-yet-undrafted responsible lending code will affect lenders operating in markets where borrowers have trouble keeping up with loan payments and where family finances can be erratic.
Instant Finance's latest financial statement shows that of the more than $81 million of loans it had made at the end of March last year, just under a half were on track with their repayments.
About $30m was in arrears by up to 30 days. A further $3.42m was in arrears by 30 to 60 days, and $1.24m was in arrears by 60 to 90 days. The individually impaired figure was $4.93m.
But de Lautour said every borrower's ability to repay was analysed and they were required to complete a budget.
He defended Instant Finance's record, saying banks were winning customers from it by, in some instances, lending more and at higher interest rates than Instant Finance would.
LENDING LAW CHANGES
The law is designed to bring order and transparency to the bottom tier of lenders.
The main changes include: Lenders must make the terms and costs of loans "freely and publicly" available on their websites and at their premises to enable easy shopping around.
Disclosure of all relevant information must be made before a loan is made, instead of the current "within five days".
The cooling-off period during which borrowers may cancel the contract will be increased from three to five working days.
The hated and sometimes abused, "dragnet" clauses which allow lenders to claim security over "all of your present, future and after acquired personal property" are outlawed.
Instead security is limited to individually named items agreed as security by the borrower.
Some items cannot be named including bank cards, beds and bedding, cooking equipment and stoves, medical equipment, portable heaters, washing machines and fridges, passports, and drivers licences.
Within two years of the law coming into force, a responsible lending code to which all lenders must adhere will be created.
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