Minister of Commerce Kris Faafoi has three options for capping the cost of high-interest loans.

An interest rate cap of 30-50 per cent would have driven the country's largest payday lender out of the short-term loans market.

Minister of Commerce Kris Faafoi has chosen to limit the total accumulation of interest and fees on high-cost loans to 100 per cent of the original loan principal, over the life of the loan.

Payday lender Moola, which has made over 160,000 short-term "payday" loans, and employs 35 staff, told the minister: "If interest and fees are capped between 30 per cent and 50 per cent per annum, Moola would effectively be required to move out of the small loan market."

Other payday lenders, which market their loans as short-term emergency finance to tide people over until they are paid, would likely have followed suit, Moola said, potentially driving desperate borrowers to underground, illegal moneylenders.

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Faafoi initially put forward three options for capping high-interest, short-term loan interest and fees, part of proposed changes to lending laws designed to reduce the harm done by high-interest "predatory" lenders in low-income communities.

Moola was ranked tenth on the Deloitte 50 list of the country's fastest-growing companies in 2018, with revenue growth of 557 per cent.

Moola's directors Edward Recordon, Stephen Brooks, and Erin Foley told Faafoi in their submission on the capping proposals: "If a cap option will be introduced, Moola prefers Option A over Options B and C."

But they wanted the Option A cap to be set at 200 per cent, not the 100 per cent suggested.

"Moola already has processes in place that effectively implements Option A, albeit to a greater extent (200 per cent compared with 100 per cent as suggested in the discussion paper)," the directors said.

123RF The payday loans market is threatened by interest-rate capping.

Moola argued loan costs could fall, if the government made it easier for payday lenders to collect on defaulted loans.

"There is a significant proportion of customers of the short-term loan market who do not repay the loans they have taken out, they in fact, do not make any payments or contact, essentially stealing the funds. Because they are unsecured and traditional court processes are cost prohibitive the borrower knows, they will not be chased," Moola said.

The result is the honest borrowers end up paying higher interest rates and fees to cover the loss of the amounts of those loans, it said.

"If there were a streamlined, cost-effective process for collecting unpaid loans, for example, through a simplified process for wage deductions through attachment orders, short-term lenders would be able to reduce their interest rates, and grant loans to more customers.

Moola is not the only small loan lender to raise the spectre of loan capping leaving desperate borrowers turning to illegal lenders.

Russell Birse, executive chairman for Rapid Loans NZ, which offers loans at 39 per cent, asked: "Has the Minister investigated the capacity of the criminal gangs to move in if the changes to the Credit Contracts and Consumer Finance Act regime force the majority of targeted current ("high cost") commercial lenders to exit the market sector?"

Some lenders feel they are being scape-goated for societal failures, and that the issue of harm to vulnerable consumers had been talked up.

There was "a tendency for consumer advocates and financial counsellors to emotively present their clients' circumstances, Birse said, with "a continuing implication that such difficulties are all the fault of the lender and extend to many other borrowers."

But, he disputed this, saying the "significance level" of complaints was nowhere near what some stakeholders were implying.

*This article has been updated. An earlier version of this story contained out-of-date information. This error is regretted.

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