Loan sharks must be muzzled

The John Key government has done well to address the rising menace of loan sharks by equipping common people with the knowledge of their rights and the prevailing practices. A new free phone service, launched last week, would hopefully help people not only to access appropriate information on loans and the interest rates that they attract but also to complain against unscrupulous moneylenders and finance companies.

The government is also due to introduce to Parliament later in the year, ‘The Credit Contracts and Consumer Finance Amendment Bill,’ which would eliminate the existing loopholes and lacuna and protect common people from falling prey to loan sharks.

Such a bill was earlier proposed by former Labour MP Carol Beaumont but was shot down mainly because it emanated from the opposition camp. Nonetheless, the prospect that it would see the light of the day is reassuring.

Stories of victims of predatory lenders, typically low-income minority families, single mothers and the old, are awful to read and hear.

People are persuaded to take loans priced way beyond their means, usually secured on their homes; eviction is often the price of default.

We have heard reports of even elderly people thrown out of their homes and of people caught in a debt trap of $10,000 on an initial loan of $1000.

Such incidents occur all over the world but in the US, they inspired Aurelia Greene, a New York state lawmaker, to sponsor a bill to tackle predatory lending. Ms Greene’s bill is just one of many. In the past few years, tough laws have been passed in North Carolina, Georgia, California and Ohio, and more are on the way elsewhere. Bills loom in both houses of Congress.

Financial Services Federation (FSF), a grouping of Non-Bank financial institutions issued a new set of guidelines on May 2, 2011 to offer greater protection to consumers and lift the standards of consumer credit.

Experts believe that these new guidelines could be a deterrent against loan sharking practices, enabling consumers to lodge complaints against lending companies, even if they are not signatories to the guidelines.

Welcoming the move, Susan Taylor, Chief Executive of the Financial Services Complaint Limited (FSCL), an independent, not-for-profit External Dispute Resolution body, said 36 members of FSF, including major lending companies such as GE Money and DTR will be obliged to follow the guidelines.

“As of December 2010, any person or organisation that provides financial service to a member of the public has to register with the Companies Office as a financial service provider and belong to an approved dispute resolution scheme like the FSCL,” she said.

As with pornography, consumer activists and legislators say they know predatory lending when they see it. In fact it is tricky, some say impossible, to define particular types of lending as predatory.

Most of it is sub-prime, meaning to people with bad or non-existent credit records. The loans carry a higher rate of interest than do prime loans, to compensate for the higher credit risk. What calls itself the sub-prime industry argues that a practice that seems damaging can actually help some borrowers: you have to look at each case, they say, not apply blanket bans.

Some people, indeed, argue that except for fraud (false information or faked signatures) there is no such thing as predatory lending, since borrowers are not forced to take the loans.

For years, these arguments kept tough legislation at bay, and the sub-prime market has reportedly grown to more than US$500 billion. In recent years, however, regulators and politicians have been hearing ever more stories of people trapped in debt because of crippling rates and fees.

Sub-prime lenders are particularly strong in black and other minority areas.

According to a study, sub-prime loans are five times as common among some minority ethnic groups as among mainstream New Zealanders.

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