New Zealand Law Society - Be careful with Credit Contracts Legislation says DLA Piper

Be careful with Credit Contracts Legislation says DLA Piper

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The Government needs to beware of unintended consequences with its bill to curb "loan shark" lending, DLA Piper partner Iain Thain says.

The Credit Contracts Legislation Amendment Bill had its first reading in Parliament on 30 April.  It proposes to cap the total cost of credit that must be paid back to a finance company at 100% of the amount loaned on high-cost loans.  However, there have also been calls for a limit on interest rates themselves.  

"It's important that there are protections for borrowers, but it's also important to ensure efficient and accessible credit markets", Mr Thain says.

"Even for those who may have existing debt and poor credit histories, access to further borrowing is not necessarily bad - it may actually be the way out of the debt trap". Such as, where someone already in debt has to borrow more for important reasons, like fixing the car so they can get to work and keep their job, or being able to afford a training course that will help them earn more money.”

Mr Thain says the credit markets are important contributors to our economy and says that lending regulations can have unintended consequences.  

For example, he says, "the effectiveness of interest rate caps can be undercut by increased use of things like non-interest charges and commissions, especially for those with limited financial literacy or ability".

"Or caps well below what the market would normally set can reduce overall credit supply, which can have the greatest effect on those who already have difficulty in accessing credit when they need it. Blanket caps can have wider effects on the economy as they can affect the distribution of credit, disproportionately reducing the volume of unsecured and small loans, or credit to SMEs and riskier industries.  This can lead to a redistribution from smaller to larger borrowers or reduce the scope for innovation".

Iain Thain says protecting vulnerable people in and from debt is “a hard puzzle that many countries have grappled with, without entire success. International policy on this can sometimes look like a sine wave over time as jurisdictions swing between full regulation on the one hand and improved transparency to help borrowers protect themselves on the other.”

The important thing, he says, "is that any changes to lending laws are well thought through before they are made, so that access to credit is maintained for those who need it, at all levels in the community, and unintended economic effects are avoided."