Payday lenders and excessive rates of interest
By Andrew Shann*
As the recession continues, increasing numbers of people seem to be approaching fringe/payday lenders to obtain funds to meet essential living expenses.
Payday lenders commonly charge rates of interest between 8% and 15% per week, which frequently effectively compound well into four figures. Some rates are noted to be as high as 35% per week. Meanwhile, mainstream annual rates have fallen to single figures.
Many short-term loans more than double their size every 90 days, and lenders very often require borrowers to pawn items of at least four times the value of the initial loan. Lenders operating as pawnbrokers are prohibited by s57(2) of the Secondhand Dealers and Pawnbrokers Act 2004 from charging fees, but extremely high rates of interest are charged in order to compensate. Many lenders promise money in five minutes with no credit checks.
New Zealand is now among the very few western countries that have not specifically legislated to restrict excessive rates of interest.
In July 2009, British Prime Minister Gordon Brown announced an intention to explore reintroducing interest rate restrictions. Britain is one of the last countries in the European Union to consider such measures. Restrictions also apply in Japan and Singapore, as well as many countries in Africa and almost all countries in South America. Three Australian states and the ACT have recently implemented payday lender interest rate caps at 48% per anum, and there are similar bills in the legislative process in South Australia and Western Australia. Nine of Canada’s 10 provinces have passed similar legislation and the last is in the process of doing so.
It is also part of Barack Obama’s economic plan to cap payday lender interest rates at 36% per anum right across the United States. US senator Dick Durban introduced such a bill in February 2009.
Although the Credit Contracts and Consumer Finance Act 2003 (CCCFA) does not specifically cap rates of interest, it could be argued that it does cover interest rates considered to be oppressive.
In the High Court decision of Taua v Glen Eden Holdings Ltd, CP 660-SD00 2002, the interest rate was regarded as oppressive and was reduced from 38.5% to 20% per annum. The legislation applicable to this judgement was the Credit Contracts Act 1981. Although s11 of this sct empowered the court to take the finance rate into account, it is very interesting to note that the judgment did not refer to s11. It instead relied on ss4, 9, 10 and 14, particularly s14(i)(d), which allowed the court to order that any obligation outstanding under the contract be extinguished, revised, altered, complied with or performed. The above sections of the Credit Contracts Act 1981 were carried over to the CCCFA as follows:
Credit Contracts Act 1981 Carried over to the CCCFA
s4 s119
s9 s118
s10 s120
s11 s124
s14 s127
Although the term "finance rate" does not appear in s124(b)(i) of the CCCFA, the provisions of the other sections of the Credit Contracts Act 1981 listed above have not been reduced in matters that could relate to interest. Accordingly, considering Taua, it is quite possible that a contract could be declared oppressive on the basis of there being an unconscionable rate of interest without having to refer to s124(b)(i), as the equivalent section in the 1981 act was not referred to.
In s124(b)(i) of the CCCFA, the term "finance rate" has been removed because it does not exist in the CCCFA as all fees/charges and interest are defined and dealt with individually. However, since s124(b)(i) stipulates "...the amount payable by a debtor...", these words could include interest since the word "amount" is a global term. Further, as s124(c) permits a court to consider any matter that it thinks fit, it would be empowered to consider rates of interest and the bargaining power of the parties and their vulnerability.
In Elia v Commercial & Mortgage Nominees Ltd (1988)
2 NZBLC 103, 296, the plaintiff was not able to understand English, and the lenders took advantage of this. This amounted to oppressive conduct.
In My Pay Day Loan Ltd v Lepou [2009] DCR 890, Judge Broadmore treated oppression provisions contained in ss118–124 of the CCCFA as covering unconscionable rates of interest, with the court being required to determine "oppressive" in the same way as it determines unreasonable fees.
Unlike fees, rates of interest could not be challenged on the grounds of being unreasonable, but they could be challenged on the grounds of being oppressive. Judge Broadmore accepted the lender’s argument that the earlier principles on harsh and unconscionable rates of interest under the Moneylenders Acts were to be applied when determining whether a rate of interest could be set aside as oppressive under the CCCFA.
Section 124(a) of the CCCFA requires the court to have regard to all the circumstances of a contract. In My Pay Day Loan Ltd, a 520% per annum interest rate was not considered oppressive as (applying principles in cases under the Moneylenders Acts) the lending was by way of short-term finance only (two months in this case), was a small amount, on an unsecured basis, and the proceedings were issued promptly.
The judge held that the lender was entitled to judgment for its loan and interest at the contract rate of 520% per annum to the date of judgment or to a date six months from the date of default, whichever was the sooner, and thereafter at the statutory rate of 7.5% per annum.
The judge stated (at para 897) that there was nothing in the loan agreements that would enable the lender to recover interest after judgment at any greater rate than the statutory judgment rate of 7.5% per annum. The position may therefore have been different had the loan agreement expressly required interest to be paid at the agreed rate until actual payment. In such a case, however, the lender would still have been caught by the limit of six months placed by the judge on high payday rates.
It remains undetermined what interest rate the judge would have allowed after the expiration of the six-month period, but logic requires that the interest rate allowed after that date would be limited to 7.5% per annum, except where there were special circumstances to justify the delay.
In this decision, it is clear that, had the loan been for a longer term, or had it been secured, only a relatively low rate of interest could have been justified – as with loans made against adequate security, the risk of non-payment is small.
It is also very significant to note that the plaintiff was not entitled to recover the even higher default rate of 728% per annum that was claimed. This effectively also restricts the rate of interest. The My Pay Day Loan case is of particular significance as a case providing an innovative way for the court to control lending at excessive rates after giving appropriate allowance to a reasonable rate of return having regard to the risk carried by lenders in this market.
After considering the above factors, I think that the decisions in all of the cases quoted could well serve as clear lines of authority for challenging excessive interest rates where loans are secured and/or continue for durations of more than two months. In April 2009, I appeared in a TV3 News item where TV3 alleged that a person had borrowed to buy a car for $3,000, then had it repossessed after two months and ended up owing $19,000. I think that examples like this could be successfully challenged.
A private member’s bill, the Credit Reforms (Responsible Lending) Bill, has been introduced into Parliament by Charles Chauvel MP. It was drafted along the lines of the conclusion in a research paper I wrote. It aims to crack down on the payday lending industry by imposing interest rate restrictions and by requiring lenders to assess properly a borrower’s ability to repay. This bill has the backing of four political parties, but National has yet to decide whether to support it.
This bill not only makes it clear that high interest rates will render a lending contract oppressive, but, in line with most other western countries, it also allows for the prescription of the maximum levels of interest payable by lenders rather than leaving it to the courts to determine.
In recent months, both John Key and Bill English have criticised banks for charging very high rates of interest of 22% on credit cards. However, 22% does not even compare with current payday lender rates.
I would welcome comment on this article to andrew.shann@paradise.net.nz
*Andrew Shann is a Fellow of the Financial Services Institute of Australasia and an Associate Chartered Accountant. He holds a Master of Laws.
LawTalk 745, 1 March 2010