Money lenders should not be able to prey on desperate people, leaving them and their families trapped in a spiral of debt, Consumer Affairs Minister Chris Tremain said yesterday.
Soon after releasing the draft consumer credit legislation, Mr Tremain received a promotion to Internal Affairs Minister and will be replaced by Simon Bridges.
It was planned the minister would visit community and industry groups around the country to discuss the proposed credit Contracts and Consumer Finance Bill.
"The Government is getting tough on loan sharks and lenders who don't play fair," Mr Tremain said.
The draft legislation would be the biggest changes to consumer credit law in a decade, he said.
It was time for a significant shift in lending laws to increase protection for borrowers and target irresponsible lenders.
Some lenders were giving loans that borrowers would clearly struggle to pay back, he said.
They could also mislead customers who did not understand the real cost of a loan.
Other examples of unscrupulous behaviour by lenders included taking disproportionate security, such as security over all of a customer's present and future property for a small loan amount.
New Zealand Credit and Finance Institute president David Young, of Dunedin, said while the reform was a good idea, much hinged on the people taking out the loan understanding what they were being told.
"It just underscores the need for better financial literacy. You cannot legislate away the need to understand what you are signing."
Mr Young was also concerned that borrowers could take out loans that would not put them into financial hardship at the time, but a month later their overtime was reduced and financial hardship resulted.
"How do we get past that point?"
First Union finance secretary Andrew Casidy said the proposed reforms would not be complete without the introduction of interest rate caps.
"Irresponsible lenders profit because the poorer you are, the greater your need to use the lenders on the fringe charging extreme interest rates.
"These lenders need to be stopped from preying on the poorest and from charging extortionate interest rates - in many cases, hundreds of percent per annum," he said.
Mr Tremain said if the Bill passed into law, it would be illegal to lend money to someone whose loan repayments would be likely to result in substantial hardship.
Disclosure of contractual terms would need to be made up front, not with five days as at present, and the cooling off period for borrowers to cancel loans would be extended.
"Lenders will need to properly consider applications by borrowers for hardship relief."
The legislation applied to all credit providers. That included registered banks and other lenders. However, registered banks and lenders who were members of the Financial Services Federation were already committed to responsible lending, he said.
The objective of the responsible lending reform was to lift the business practices of lenders towards an industry best practice.
"The objective of the reforms is for lenders to behave more responsibility, not to eject lenders from the market. But if particular lenders fail to comply with the law, the changes in the Bill will enable courts to ban them from operating."
With such significant changes, it was important to get them right, Mr Tremain said.
The public could make submissions on the draft law. Submissions closed on May 11.
Proposed changes
• Making it illegal to lend money to someone whose loan repayments would be likely to result in substantial hardship.
• Requiring more timely and complete disclosure of loan terms and extending the "cooling off" period for borrowers to cancel their loan.
• Obligating lenders to properly consider applications by borrowers for hardship relief and provide reasons for their decisions.
• Better controls against misleading, deceptive or confusing advertising.
• Introducing a new Code of Responsible lending and allowing for lenders to be banned from the industry for non-compliance.
• Providing that borrowers will not have to pay the cost of interest or fees if their lender is not a registered financial service provider.
