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‘Loan shark’ money lenders cash in on Pacific communities

Shops offering easy finance in Onehunga. (Photo: Nicholas Jones.)

Loan sharks are preying with increasing ferocity on New Zealand’s poorest communities – comprising high numbers of Pacific Islanders and Māori – as the economy struggles to recover, and questions are being raised about the government’s response.

Pacific Scoop:
Report – By Nicholas Jones.

The devastating effects of high-interest loans in New Zealand are nothing new to Darryl Evans, but the chief executive of Mangere Budgeting Services says the recession has made a bad problem worse.

“Things are really tough. We keep hearing the rhetoric from the government that the recession is over. That may be the case for some people, but certainly not for the people we’re working with.

“I think it’s worse from the point of view that through the recession loan sharks are more aware of people’s vulnerability, and they’re exploiting it,” he says.

Pacific unemployment has risen to 14.1 per cent, with Māori unemployment even higher at 16.4 percent. The national rate of unemployment is 6.8 percent.

Loan sharks – also known as fringe lenders – charge high interest rates and fees, often to people who stand little chance of being able to meet their repayment obligations.

Evans says fringe lenders have increased their interest rates since the economic downturn to capitalise on people’s “desperation” for loans.

A 2007 research report by the Ministry of Consumer Affairs found the most common interest rate given by fringe lenders spoken to was 38 percent.

But Evans says when interest is compounded and penalty fees added many of his clients are effectively charged rates well into three figures.

A shop offering easy finance in Onehunga. (Photo: Nicholas Jones.)

A matter of need, not want

A quick glance at the comments section on articles about fringe lenders shows some of the public believe people borrow from fringe lenders to buy luxury items.

But the Ministry of Consumer Affairs report found Pacific people mostly use fringe lenders to meet “quite legitimate” needs for everyday household expenses and larger items such as cars, “without which families cannot function efficiently”.

The report found an inability to access credit from mainstream institutions like banks left much of the Pacific community exposed to high cost and exploitative credit contracts.

Felicity Tumua, budget adviser at Mt Roskill’s O Le Lafitaga Samoan Trust, says most of her clients are forced to use fringe lenders because of a tainted credit history.

“Over many years some clients have maybe missed only one payment, which might then be referred to Baycorp and that one collection payment makes them unable to get any loans from the bank,” she says.

Credit providers can only see a potential customer’s “negative” information like payment defaults. The Office of the Privacy Commissioner is currently considering allowing lenders greater access to people’s information.

NZ Federation of Budgeting Services chief executive Raewyn Fox says a move to “positive” credit reporting would enable people to rehabilitate their credit status and avoid fringe lenders.

‘Ripped-off twice’

Robin Child works as a part-time budget adviser at Panmure East Auckland Home and Budget Service Service, and says he has had clients who buy a car worth $3000, only to end up with a debt of around $9000.

“The car would break down and [the car yard] would take no responsibility for it, and they’d get another bill for $1000,” he says.

South Auckland barrister Catriona MacLennan says in this way families are “ripped-off twice”, and wants the government to establish second hand car yards to sell reliable cars at fair prices.

MacLennan has published articles outlining another nine measures she believes will rid New Zealand of fringe lenders.

Tithing and Fa’alavelave

The Ministry of Consumer Affairs report noted that Pacific people also take high-interest loans in order to meet social and cultural obligations.

Evans says the practice of giving money to extended family, called fa’alavelave (“burden”) in Samoan, causes many Pacific families to take out loans they cannot afford.

Another reason Pacific people get into financial difficulty is the practice of paying tithes to the church, Evans says.

“In some Pacific Island churches the practice is naming and shaming, where they read out a list of the tithes every week. These practices are just abhorrent.”

Evans writes a column about managing money in Spasifik magazine, which itself attempted to promote discussion about tithing and remittances with a feature titled “Young, gifted and broke”.

In the feature, reporter Peter Rees interviewed a number of young, “white collar” Pacific Islanders who were unable to save because they were expected to support their wider families.

While some told Rees they felt emotionally blackmailed to give, but others said they were happy to as it was part of their culture.

Attitudes changing

Deputy editor at Spasifik magazine Qiane Corfield-Matata says attitudes are changing among many younger Pacific Islanders, who have Western values instilled in them through the New Zealand education system.

“They see making a life for them and their family as more important than sending money back to Samoa for a funeral for someone they hardly know,” Corfield-Matata says.

She says she knows a Samoan couple with children who told their parents they would not contribute to fa’alavelave.

“At the time the parents were really offended and horrified. But the fact they did it to make a life for their children, the parents could understand in a sense.”

Another friend, who is single, set up a joint bank account and encouraged his family to deposit a small amount every week, so when the need arose they would have funds ready, Corfield-Matata says.

Action needed

Almost 80 percent of Evans’ clientele have English as a second language, and he says fringe lenders should be made to provide contracts in other languages such as Samoan and Tongan.

But even those with strong English fail to comprehend the details of their loans, he says.

“I’ve advocated for a long time contracts need to be in plain, simple English. Sometimes it says 8 percent, and people think that’s 8 percent over a 12 month period. But it may be 8 percent compounding on a 24 hour basis.”

According to the Ministry of Consumer Affairs report, small print and technical language mean people fail to realise the total cost of their loans, instead concentrating on the weekly repayment amount.

Evans says the wider problem of fringe lending will only be resolved when low interest loans are provided to people with imperfect credit histories.

“The difficulty now is if you have bad credit there’s virtually nowhere you can go other than the loan sharks. I think Kiwibank should be offering low interest loans in these cases,” he says.

Political disagreement

Evans supported Labour MP Carol Beaumont’s Credit Reforms (Responsible Lending) Bill, which would have regulated fringe lenders and capped the interest rates they could charge, but was voted down by the government in July.

The bill was rejected as unnecessary by then-Consumer Affairs Minister Heather Roy, who said the fringe lender problem would be covered by a review of the Credit Contract and Consumer Finance Act (CCCFA).

Policy outcomes from that review were due in July this year, but have been delayed until July 2011 – a development Beaumont says is “astounding” given the current economic climate.

In an emailed statement, new Consumer Affairs Minister John Boscawen said a current review of Consumer Law had been given a higher priority than the CCCFA review, and would also target fringe lenders.

Beaumont says she heard the same claim from Roy, but remains sceptical.

“There seemed to be some suggestion by the previous minister that the work that was going on in [the CCCFA review] is partially covered by her review of consumer law.

“If you look through that document there is some reference to it, but it seems to me that was a convenient thing to say – the reality is it means nothing’s going to be looked at until next year.”

Nicholas Jones is a Postgraduate Diploma in Communication Studies student on the Asia-Pacific Journalism course at AUT University.

1 comment:

  1. donna, 16. October 2010, 20:08

    Nice article. Hopefully someone will pay attention.
    The government’s response to this has been pitiful. And so disappointing (but not surprising) to see Bill English blather on about the economy recovering when it clearly is not, and the few sectors that are recovering are not having any impact on low income Maori and Pasifika communities where the need is greatest.
    In the US these bloodsuckers are known as predatory lenders and a number of states have introduced legislation to curb their worst excesses. In New Zealand a simple requirement that lenders would have to prove they ascertained borrowers were able to repay the money, and limits to how long lenders could let the the debt run on and accumulate additional charges would be a big leap forward.
    Still, while we’re so busy bailing out Canterbury finance company investors, i suppose we won’t have time to attend to this.