MTF/Sportzone ruling clears way for new consumer credit fee guidelines
Draft guidelines for lenders on consumer credit fees show the Commerce Commission will only accept those that are reasonable, related to actual costs and aren't being used to generate profits.
The regulator has released a set of updated draft guidelines for feedback. This follows the Supreme Court's dismissal in May of an appeal by Motor Trade Finance and Sportzone Motorcycles against rulings in a case brought by the Commerce Commission, that fees they charged in loan contracts were unreasonable. Car finance business MTF and Sportzone were found to have breached the Credit Contracts and Consumer Finance Act (CCCFA) in a 2013 High Court ruling.
"Following Sportzone, it is now beyond doubt that fees under consumer credit contracts cannot be used to recover general business costs or to generate profits," the commission said. The Sportzone/MTF litigation "has clarified important aspects of the fees provisions and is of general application."
The commission began investigating the two companies in 2006 in response to complaints about their lending practices and began its prosecution in the High Court in 2009, charging that they breached consumer protection law over fees charged in 39 loan contracts originated by Sportzone between May 2005 and July 2008. Sportzone was a motorcycle sales and repair business that has since gone into liquidation. It had an agreement with MTF allowing it to write credit contracts for buyers of motorcycles.
The CCCFA, which was amended in 2015 to include lender responsibility principles, sets rules restricting the fees lenders can charge over the life of a consumer credit contract. These include the type of fees, costs, and losses that can be recovered via fees and how the fees are disclosed and described. The guidelines have been further amended following the litigation. The central provision prohibits lenders from imposing "unreasonable" fees and the guidelines cover establishment fees, other credit fees, prepay fees, default fees, and third party fees.
The commission said the Supreme Court affirmed the intent of the parliament that the overriding objective of the fee provisions was to protect consumers entering credit contracts and make it easy for competing offers from lenders to be compared. The principles restrict fees that lenders can charge but not the revenue or interest rate, provided those are clearly disclosed and aren't "oppressively high".
Rulings in the Sportzone case referred to a "close relevance test" in determining whether fees were reasonable, meaning that costs the lender is seeking to recover through fees can only relate to the particular loan and couldn't include other items such as general operating costs.
The commission said the Supreme Court went further, by saying some fees shouldn't be charged at all, regardless of whether they were set at a reasonable level. It cited the case of a lender prosecuted for charging a "welcome letter fee" when it purchased loans from another provider.
The guidelines also say "deterrent fees" aimed at discouraging borrowers from certain conduct are likely to be unreasonable if they exceed the lender's costs. Fees should be regularly reviewed to ensure they remain reasonable and records should be kept that show how fees were determined.
Establishment fees can only cover costs incurred in the credit application and processing, documentations of a loan contract and advancing credit to the borrower. They can't include a profit margin, a share of marketing costs, bad or doubtful debt provisions or things such as entertainment. Other credit and prepayment fees must also reflect only the specific costs, be they actual or estimated.
Default fees must also meet a reasonableness test and default interest must not be oppressive. The commission has a document on its website that goes into the meaning of oppressive. The guidelines also cover payments to associated persons of the lender, third-party fees and commissions payable on credit-related insurance.
Submissions close at 5pm on Oct. 24.
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