Review of the Credit Contracts and Consumer Finance Act underway

Jenny Cooper, Partner and Nick Christiansen, Solicitor | Tuesday 20 October 2009

The Ministry of Consumer Affairs has announced a review of the Credit Contracts and Consumer Finance Act 2003 (CCCFA), which has now been in force for over four years with mixed results.

The Ministry has released a discussion document highlighting certain issues with the CCCFA and making a number of significant proposals for reform.¹ In this update we summarise the key issues and proposals most relevant to lenders.

The review provides an ideal opportunity for lenders to make submissions on the Act's operation to date, as well as on the proposals for reform.

Disclosure

• Tension between the five day disclosure period and the borrower's right to cancel.

• Additional disclosure of the terms of credit related insurance.

• Additional disclosure of prepayment fees and their calculation.

• Additional disclosure of the cost of making minimum payments.

A principal policy goal of the CCCFA is to promote efficiency and competition in the consumer credit market by requiring creditors to disclose certain information to borrowers so that they can compare loan products and make informed decisions. The Ministry has identified four issues with the operation of the current disclosure regime.

First, allowing a five day period for creditors to provide the required disclosure is seen as being in tension with the borrower's right to cancel the contract after receiving disclosure. The Ministry gives the example of motor vehicle finance where, because the lender and the vehicle trader are independent, the consumer enters into two separate contracts: one for the purchase of the vehicle and one for the finance to purchase, of which only the latter is subject to a right of cancellation. It is conceivable (indeed likely) that a borrower will enter into motor vehicle finance and take possession of the vehicle before the mandatory disclosure is given. Where the borrower has misunderstood the terms of the credit contract and subsequently exercises their right to cancel it, they are likely to have difficulty in trying to return the vehicle. To avoid this situation the Ministry proposes amending the CCCFA to require immediate CCCFA disclosure where purchasers of motor vehicles access credit at the time of their purchase.

Secondly, while the CCCFA requires a creditor to provide a borrower with a copy of the terms of any credit related insurance required and arranged by the creditor under a credit contract, it does not specify what constitutes disclosure, nor does it provide a basis for assessing the adequacy of that disclosure. The Ministry proposes extending the general disclosure requirements to cover the disclosure of credit related insurance.

Thirdly, the Ministry has noted that borrowers appear to enter into credit contracts without being fully aware of the potential cost of repaying their loan early and suggests that more extensive disclosure may be required. The Ministry refers to the Private Members Bill put forward earlier this year by Aaron Gilmore MP as once possible approach.² The proposal in that Bill would involve creditors disclosing a schedule or matrix of prepayment fees calculated over a range of possible interest rates over various points in the life of a credit contract, and would prevent the amendment of the prepayment formula after the credit contract is made. While this proposal would give further information to borrowers about the possible fees they could be charged, its effect would be to indirectly limit the formulae open to creditors under the CCCFA, given that the current CCCFA regime does not require that prepayment fee formulae be linked directly to interest rates. An alternative proposal is to require creditors to disclose a schedule of prepayment fees and an explanation for them, although there are questions about the necessary complexity of such information and therefore whether it would even be accessible (and useful) to borrowers. The Ministry does not provide any detail about how such proposals would be expected to work in practice.

Finally, the Ministry suggests that credit card users do not appreciate the true cost of the interest that accrues when they make only the "minimum payment", and proposes that credit card issuers be required to provide disclosure of that cost with each monthly bill.

Credit fees

• The meaning of an "unreasonable" fee.

• Frontloading of fees.

• Extending the time limit for bringing a claim to annul or reduce an unreasonable fee.

• Restricting third party fees to arm's length relationships.

The Ministry has raised four issues in respect of credit fees. First, the Ministry says that the credit fee provisions of the CCCFA are based on the principle that fees cannot be "unreasonable", and that this approach creates some uncertainty and lack of clarity about what is properly included in fees. The Ministry points to the Commerce Commission's draft guidelines³ on its approach to enforcing the fee provisions of the CCCFA as helping to provide clarity to the industry. However, the Commission's views on the proper interpretation and application of the CCCFA can be more restrictive than the CCCFA itself. The alternative is to impose more prescriptive requirements in the CCCFA.

Secondly, the Ministry has questioned whether the CCCFA should be amended to clarify that fees for services should only be payable when the service is due to be performed or once the service has been performed, rather than being "frontloaded" as an upfront cost at the inception of a loan.

Thirdly, the Ministry notes that an application to the court to annul or reduce a credit or default fee that is unreasonable must be made within one year of the day on which the fee is imposed. The Ministry has proposed either lengthening the limitation period or removing it and allowing the Limitation Act 1950 to apply.

Finally, in respect of third party fees passed on by a creditor to a borrower, the Ministry suspects that some such fees are not genuinely third party fees but are instead being used to avoid the unreasonable credit fees test, and proposes amending the CCCFA to require that third party fees may only be passed on to the borrower if they come from a third party that is in an arm's length relationship to the creditor.

Other issues raised

There are a number of further proposals made in the Ministry's discussion document, including:

1. Extending the hardship provisions of the CCCFA to allow borrowers to apply to vary a credit contract even when in default (by no more than two months).

2. Putting in place time frames within which creditors must respond to (five days) and process (20 days) applications under the hardship provisions.

3. Prohibiting fees for making hardship applications.

4. Requiring disclosure of information on the hardship provisions under the CCCFA initial disclosure regime.

5. Restricting unsolicited credit increases to "opt-in" only.

The Discussion Document also includes discussion of proposed amendments in respect of pawnbroking and the Secondhand Dealers and Pawnbrokers Act and the Credit (Repossession) Act 1997, and a review of fringe lending practices, none of which are covered here.

The deadline for making a submission to the Ministry is 16 November 2009.

Bell Gully has experience across the firm in dealing with CCCFA matters. Please contact us if you would like to discuss making a submission.

 

¹ Available at www.consumeraffairs.govt.nz

² Credit Contracts and Consumer Finance (Break Fees Disclosure) Amendment Bill.

³ Available at www.comcom.govt.nz