JARED NICOLL/STUFF

Consumer Affairs Minister Kris Faafoi plans to cap the amount high-cost lenders can earn from loans.

Consumer Affairs Minister Kris Faafoi has unveiled proposals to cap the amount lenders can earn off loans.

Faafoi is on a mission to reduce the damage "predatory" lenders do in poorer communities, and released a consultation document with three options for capping borrowing costs.

The first, dubbed "Cap Option A" would be to limit the total accumulation of interest and fees over the life of the loan to 100 per cent of the original loan principal.

This option would only apply to high-cost lenders, and would aim prevent unmanageable debt and financial hardship from accumulating large debts from a small loan, the minister said.

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Limiting the measure to high-cost lenders like payday lenders and truck shops would not disturb mortgage lending.

A $400,000 loan at an interest rate of 6 per cent paid off over 30 years would result in around $440,000 interest paid, which would be above the Cap Option A's limit.

Cap Option B would limit the interest rate and fees (calculated together) to 200–300 per cent per annum, as well as limiting total accumulation of interest and fees over the life of the loan to 100 per cent of the original loan principal. 

Cap Option C would set a low interest rate cap to prohibit high-cost lending. The interest rate and fees (calculated together) would be limited to 30–50 per cent per annum. 

Faafoi said possible measures identified in the paper to protect consumers include caps on interest rates and fees, increased licensing or registration for lenders, strengthening enforcement and penalties for irresponsible lending and introducing more prescriptive requirements for affordability assessments and advertising.

Faafoi said law reforms in 2015 failed to protect vulnerable borrowers.

"Clearly the 2015 amendments to the act did not go far enough and it is time now to finish the job and protect the most vulnerable consumers," he said.

"I've spoken with people who have been given loans that are clearly unaffordable for them, and others who have been lashed with huge penalties and fees. These practices trap people and whanau in an appalling debt spiral that is very difficult to get out of.

MBIE's discussion paper outlining the proposals said there were "unacceptable rates of non-compliance" with lending laws, particularly the responsible lending rules which are supposed to limit lenders to only lending to people who can afford repayments without falling into financial hardship.

Consumer groups, regulators, dispute resolution schemes and even some lenders have reported it is common for some lenders to perform only "superficial" testing of loan affordability and accept income and expense information provided by borrowers without checking it, even where it is plainly incomplete or incorrect.

And after a borrower is on board with a lender, further loans are often approved quickly, including by text without further checking of affordability, even months after the original loan was made.

There was aggressive advertising of high-cost loans to consumers who had previously repaid them, raising questions about whether some lenders are meeting their requirements to advertise responsibly.

"This includes upselling of loans," the paper said, for example borrowers being encouraged to borrow $2000 when they have applied for $1000.

Bewildered borrowers were often unaware when they had been sold insurance with vehicle loans, and there was evidence of guarantors for loans not understanding the risks they were taking.

Under the proposals, the Commerce Commission could be given the power to unilaterally ban a lender from making any new loans, if it is satisfied that the lender is causing or is likely to cause harm with their lending.

There could also be a "fit and proper" character test for lenders, which could mean some people running loans companies would be ejected from the industry.

And fines for breaching lending laws could be lifted to $200,000 for an individual, and $600,000 for a company."

Lenders would pay for expanded Commerce Commission policing of lending laws through annual levies on their businesses.

Faafoi said: "While agencies including our hosts today (Salvation Army and Newtown Ethical lending) are doing what they can to help people, we need to ensure the regulatory settings are right to stop the practices that get people into these terrible situations.

"As a Government we are tackling many of the issues that lead to financial stress, and by 2020 the Families package will see 385,000 families with children made better off by an average of $75 a week when the Package is fully implemented."

More to come.

 - Stuff