Catriona MacLennan: Loan Sharks - Beware

New consumer laws which took effect on 1 April aim to provide better protection from unscrupulous credit practices.

The reforms are well overdue.

Existing consumer credit laws were out-of-date and confusing.

They failed to make adequate provision for the technological and economic changes which had occurred in the past 30 years, including an explosion in credit cards, flexible mortgages and electronic commerce.

The Credit Contracts and Consumer Finance Act 2003 covers student loans, mortgages, credit cards, personal loans, hire purchase, long-term leases and buy-backs.

The provisions relating to buy-backs came into force in October 2003, as soon as the legislation was passed, but the rest of the act was given a long lead-in to enable creditors to prepare for the change-over.

A key purpose of the act is to provide consumers with more information about the loans they are signing up to.

Disclosure provisions are accordingly beefed up under the new legislation.

Many consumers simply do not understand the loan documents they sign, and have little real appreciation of the total sum they will have to repay.

In the South Auckland Community Law Centre I work in, Nga Ture Kaitiaki Ki Waikato, debt is one of the most common problems we deal with.

Almost invariably, clients are shocked when we go through the documents with them and explain the full extent of their liability.

Recently we dealt with a contract which had an interest rate of 19.9 per cent, as well as security against a house and a car, and three debtors signed up to the agreement.

The closely-typed pages also contained a host of other oppressive conditions.

It is difficult to understand how such an exorbitant interest rate can be justified when the creditor has security against a house and a car, as well as three people to pursue if payments are not kept up.

In my submissions on the legislation I suggested that interest rates should by law be capped at a set percent above the inflation rate.

I also advocated that the front page of the contract should contain in large, black print only the total amount the debtor would be liable for under the contract.

These submissions were not accepted, and it remains to be seen how much better disclosure will operate in practice under the new regime.

However, a powerful sanction against creditors is a provision that, if proper disclosure is not made, the loan will not be able to be enforced.

In addition, the consumer may be entitled to penalties against the lender.

Those working with the victims of loan sharks will also be keen to speedily test the act’s provisions for reopening contracts in the event of a major change in the consumer’s life.

In future, borrowers whose relationships end, who lose their jobs or who suffer injury or illness, will be able to request changes to the loan contract.

It is unfortunate, however, that this remedy is only available if the debtor is not in default.

Few people are organised enough to plan ahead and make provision for unexpected eventualities.

A good information campaign will accordingly be required about the new legislation, to make people aware that they have this right and should take steps immediately they face financial difficulties.

Fees under the new law are required to be reasonable, which will hopefully lead to fewer cases of outrageous sums being added to contracts when the creditor has not really incurred additional expenses.

Another significant aspect of the law is the provision for enforcement by the Commerce Commission.

It is promising to come down heavily on oppressive practices, giving real teeth to the act.

In the past, individual consumers have had to take their own court actions to obtain remedies – an impossible task for most people.

* Catriona MacLennan is a South Auckland barrister

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