Dr Liz Gordon: Predators in our community

The big red truck with “Home Direct” on the side comes down my street quite frequently, and indeed I think the owner lives somewhere nearby.  It represents one facet of the predatory high-cost lending market for those with few assets.

If you own a home, or a reasonable car, it is relatively easy to get a loan or one of the many forms of consumer credit.  For those who do not have such security, and your income barely covers your direct outgoings (which is the case for more than a quarter of households), you might end up doing your shopping at Home Depot.

If you live alone and are without support or have a disability, Home Direct may also provide a needed service.  Some people just can’t get out to the shops and mobile traders fill a gap in the market.

These trucks have been around for about 50 years, I believe. They operate in an environment where their clients can rarely afford to pay for their goods up front, so they deal, in effect, in unsecured loans.

From a lender’s point of view, the kind of debt created in this way is high risk.  You can hardly take back the sweatshirt or trainers after they have been worn. Low income households tend to be transient and can move house very suddenly.  As those living below the poverty line rarely have disposable income, getting repayments can be difficult.

‘Risk’, of course, in the finance industry, equates with ‘cost’. The trucks have two potential ways of mitigating the risk.  The first is by loading up the up-front cost of the items they sell. So a $25 sweatshirt from the Warehouse might ‘cost’ $75 (or more) in the truck.  Or, the sweatshirt costs a bit less but there are high interest rates associated with repayment over time, including perhaps an establishment fee and penalty interest rates.  Or a mixture of both.

Either way, of course, people on low incomes are being gouged by excessive finance costs – they pay for their own lack of security and barriers to lending.  They pay big money for the privilege of owning a few clothes. They pay for the default of their neighbours.

The situation of these trucks was briefly considered in the recent review of credit contracts. Among the suggestions made in terms of improving the law is some kind of licensing arrangement in which mobile traders will have to pass a ‘fit and proper person’ test.  This is a good idea, in the sense that at least we can know that the people working in this field are not complete fraudsters (although the practices are still predatory). They will have to register on the Financial Service Providers Register, which won’t help your average family but may provide the basis for police checks.

A further proposal was to make ‘Do Not Knock’ signs legally enforceable, which essentially means to criminalise the practice. This seems to me to be a pretty daft suggestion.  What are the police going to do when a homeowner dials 111 and reports their sign has been ignored? Will the person be charged with improper knocking, go up before the court and be fined?  Will there be a three strikes law? Knock three times and you go to prison?

I am not in favour of the criminalisation of doorknocking in any form.  It would also make the role of the mobile traders much harder (and possibly push up prices further) if they cannot call in each week to collect payments because someone has slapped up a ‘do not knock’ sign.

Avid readers will notice a general equivocation in this article.  On the one hand I condemn the practice of high interest lending to impoverished households and that the poor have to pay more than the rich to get stuff.  On the other hand, these mobile trucks make life much simpler for some people. The service is a needed one.

The law proposals suggest that the ‘do not knock’ rule and other practices will give more power to consumers. But there’s the rub, too. Because it’s not really power.  All the studies done in this field show that, despite the high costs of borrowing, and difficulties in repayment, low-income consumers in these times really need access to credit in various forms to help ends meet. The mobile traders serve a crucial need. While it is not empowering to be the victim of price-gouging, it is even less so to keep your kids at home because they have no clothes for school.

High-interest credit in various forms has been rising exponentially in low-income households.  It is one of the ways that the poor ‘cope’ with life. With real interest rates up to 800%, according to the Commerce Commission, regulation is needed to reduce the maximum costs.  

But also we need to pull families out of poverty, and no lending rules are going to do this.  There has been a massive growth in low-income, high-interest lending over the past few years, which can be put down directly to incomes and benefits being squashed down at the lower end.  The fruits of Ruthanasia is poverty and rising household debt. Let us hope that the many working parties on this are going to find some solutions that work.