Take it or leave it : party not ending for payday lending. (2020)
Type of ContentTheses / Dissertations
Degree NameMaster of Laws
PublisherUniversity of Canterbury
This thesis analyses the effectiveness of the current New Zealand consumer credit protection legislation for third tier credit standard form contracts. This thesis argues that the current legislative protection under the Credit Contracts and Consumer Finance Act 2003, the Credit Contracts Legislation Amendment Act 2019 and the unfair terms provisions of the Fair Trading Act 1986 is not providing sufficient protection in the specific case of payday loan standard form contracts. This insufficient protection is allowing continued detriment to some particularly vulnerable users of these contracts, which often results in debt spirals, severe hardship and poverty. This thesis suggests that this is largely due to two factors: 1) ineffectiveness of categorising some users of payday loan standard form contracts as general consumers, and 2) inefficacy of the recently enacted Credit Contracts Legislation Amendment Act 2019.
The first factor is that it is not appropriate to class some users of payday loan standard form contracts as general consumers. With the exception of the Credit Contracts Legislation Amendment Act 2019, which has the purpose of protecting vulnerable users of third tier consumer credit contracts, the purposes of the current consumer credit protections is to protect the general consumer. The protection that these statutes provide, although likely adequate for the general consumer, are insufficient for some particularly vulnerable users of payday loan standard form contracts, which this thesis defines as payday borrowers. It is submitted that the payday borrower, due to their extreme external and internal vulnerability, their inevitable harm from entering payday loan standard form contracts, the severity of that harm, and unavoidableness of that harm, ought to be treated as a separate class of consumer for the purposes of consumer credit protection. As a separate class of consumer, they require increased consumer credit protection, beyond that required for the general consumer.
The second factor is that the recently enacted Credit Contracts Legislation Amendment Act 2019, which was enacted for the purpose of increasing protection to third tier borrowers by assisting them in obtaining credit for a fair price, will likely not achieve its purpose. This statute places a total cost of credit cap of 100% on all high cost loans, as well as an interest rate cap of 0.8% per day on all interest and fees. It is submitted that placing a cap on interest, fees and total costs recoupable upon the loan does not necessarily equate to a fair or correct cost of credit to the borrower. Not only this, but it also risks unfairness to the lender, which may cause the lender to respond in a detrimental way towards the payday borrower which will increase their hardship.
The current thesis found that the likely responses from payday lenders to the cost of credit caps imposed by the Credit Contracts Legislation Amendment Act 2019 are: 1) refusing to extend credit to some payday borrowers, and 2) increased use and reliance on wage garnishment.
Should lenders suddenly refuse to lend credit to payday borrowers, these borrowers will lose their only available line of credit. It is submitted that credit is a need for all consumers, including those financially excluded from mainstream credit and confined to third tier credit options, and without an alternative credit option available hardship and desperation will increase.
Should lenders choose to continue to lend credit with the imposed cost of credit restrictions, it is suggested that the lender response will be increased use and reliance on wage garnishment. Wage garnishment is a tool which lenders have available to them to recoup outstanding monies owed on a loan and is used through the inclusions of the wage garnishment term within their standard form contracts. The use of the wage garnishment term can, and often does, cause substantial hardship to payday borrowers. It is submitted that the use of this term ought to be restricted.
In summary, the current thesis advises that in achieving an effective form of protection for payday borrowers which will reduce problem debt and hardship, the focus of the protection must be on the objective fairness of the price of credit, rather than caps and maximum limits on the price of credit. It is submitted that a means of achieving this is through an amendment to the unfair terms provisions of the Fair Trading Act 1986 in allowing upfront price to be challenged for unfairness in the case of third tier credit contracts.
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