Mother of four warns against predatory lenders ahead of law change

Saturday, 27 July 2024

A mother of four who was loaned more than $22,000 from a finance company had to skip meals to repay the debt.

The 29-year-old said she needed the loan to repay car debt and finance a residency visa for her family.

Financial mentors fear cases like hers will increase when the government removes the regulation around affordability assessments at the end of the month.

A mother of four who was loaned more than $22,000 from a finance company is warning others against falling victim to predatory lenders, ahead of upcoming changes to lending laws.

The 29-year-old, who Stuff agreed not to name, applied for the loan in 2020 to pay off debt for two vehicles, as well as apply for a residency visa for her family, who had just moved to New Zealand.

However, when the bills came the mother, who was pregnant at the time, said she struggled to make the repayments, and was forced to go without food in order to service the debt.

“It was very difficult. I, as a mum, had to sacrifice a certain amount of meals just to make sure my family got food. It took an emotional toll on us,” she said.

Reducing her food went on for several years, according to the woman, until Christians Against Poverty found the lender had failed to conduct a proper affordability assessment, a legal requirement to thoroughly check a borrower’s expenses before approving a loan.

“We just did an online application and they were more than happy to approve the loan, they did not ask too much from us, I would warn others against doing it,“ she said.

The organisation said not only had the lender overestimated the family’s income, but it did not include the correct number of children the woman had, or the day-to-day expenses of the family.

Christians Against Poverty said it was then able to force the lender to write off the interest and fees of the loan, before it was taken any further.

Independent financial mentor Kathryn Burton said cases like the woman’s would only get worse from the end of the month, when the government removed the regulation that set out how lenders conduct affordability assessments.

“The major concern is that there will no longer be clarity around what a robust affordability assessment looks like. We will have different lenders applying vastly different processes to the way they approach affordability assessments,” Burton said.

The current system allowed budgeters to take cases through a dispute resolution scheme if an affordability assessments was not done properly. If the dispute was ruled in the borrower’s favour loans could be reduced by thousands of dollars.

Without it as a safeguard, Burton feared there would be “fewer mechanisms” to punish predatory lending, which was “out of control” since the Covid-19 pandemic.

“More and more people are feeling as though they have to borrow to pay for the basics. We have food being bought on buy now, pay later debt, we also have groceries and electricity bills being put on credit cards,” she said.

Labour’s commerce and consumer affairs spokesperson, Arena Williams, said she was particularly worried about the impact of unaffordable loans on Pasifika families in south Auckland, where home ownership was down 8%.

She said families were increasingly being forced into mortgagee sales to pay for unaffordable loans their children had taken out.

“Without having a large asset in the family they won’t be able to access credit for something like starting a business or getting an education,” Williams said.

The MP for Manurewa said she was seeing many young people getting into debt on their credit cards and accessing services like Afterpay, which was less culturally acceptable before the Covid-19 pandemic.

“Affordability checks meant that banks, credit card companies and lenders needed to check whether people could get into that debt. Those are sensible checks for young people,” she said.

But Commerce and Consumer Affairs Minister Andrew Bayly said the change would remove “overly prescriptive affordability regulations” and streamline the process to be “proportionate” to the risk of harm.

“Affordability requirements, developed under the Credit Contracts and Consumer Finance Act, created disproportionate compliance costs and lengthened processing times for lending applications,” Bayly said in a statement.

The regulation “stipulated arduous checks” he said, with small loans that used to take a short time to process instead taking “a whole day”. He said it meant it was no longer affordable for lenders to offer small loans.

“A whole cohort of people were effectively locked out of the market or encouraged to take on bigger loans, with more fees and higher interest than they would have otherwise,” he said.

In place of the affordability assessments, the government would update the responsible lending code to “provide guidance for lenders” he said, on how to make reasonable inquiries to assess the affordability of a loan.

The updated code would “helps manage the risk” of unaffordable lending, he said, while providing lenders with flexibility to assess affordability on a case-by-case basis.

The move was part of a raft of incoming changes to the CCCFA, that included a proposal to merge two of the four organisations that oversaw the dispute resolution scheme.