Commerce Commission says court ruling makes it clear a lender's credit fees should only cover costs closely related to a particular loan transaction

Commerce Commission says court ruling makes it clear a lender's credit fees should only cover costs closely related to a particular loan transaction

The Commerce Commission says the Court of Appeal's dismissal of an appeal in a long running credit fees case makes it clear a lender's credit fees should only cover costs closely related to a particular loan transaction.

The Court of Appeal has dismissed Motor Trade Finance Limited (MTF) and Sportzone Motorcycles Limited’s appeal in a case brought by the Commerce Commission.

The Commerce Commission says the Court’s ruling upholds earlier High Court judgments backing the Commission’s approach to assessing whether credit fees charged by lenders are reasonable as required by the Credit Contracts and Consumer Finance Act (CCCFA).

The Commission alleged that MTF and Sportzone charged unreasonable establishment and other credit fees on 39 finance contracts entered into between 2005 and 2008.

In September 2013 the High Court found the fees were unreasonable in breach of the CCCFA. In October 2014, it released a further judgment clarifying the practices lenders should adopt when charging fees. MTF and Sportzone appealed both decisions to the Court of Appeal.

Commerce Commission Commissioner Anna Rawlings says the Court of Appeal has now provided a clear statement on the approach lenders should take to the fees they charge.

“The Court’s ruling provides easy to understand guidance for lenders, making it clear that credit fees should only cover costs that are closely related to the particular loan transaction. The Court of Appeal agreed with the Commission that the purpose of the CCCFA is to protect borrowers, especially vulnerable borrowers, by ensuring transparency in the costs of borrowing. Fees should not be used to recover general business costs or to generate profits, that is what interest is for,” Rawlings says.

“The Commission will be publishing further credit guidance to reflect the judgments of the High Court and Court of Appeal, and to ensure that lenders are clear about what the law requires. These judgments and important upcoming changes to the CCCFA, which include new Lender Responsibility Principles, will help to shape our programme of work aimed at ensuring that lending practices comply with the law," says Rawlings.

The Court has told MTF and Sportzone to pay the Commission’s costs.

The companies have 20 days to seek permission to appeal the ruling to the Supreme Court. MTF says it's considering whether to appeal.

MTF 'disappointed', considering appeal

MTF notes in a statement the Court of Appeal has upheld both the High Court’s 'Liability Judgment', that some fees charged under the loan contracts were unreasonable in terms of the CCCFA, and the 'Quantification Judgment', which detailed specific costs that could be recovered by way of the relevant fee.

It said the High Court had rejected the Commerce Commission's claim that Sportzone and MTF failed to make proper disclosure of components of credit fees and that the labels used for establishment and account maintenance fees were misleading and deceptive in breach of the Fair Trading Act. Those aspects of the decision were not challenged by the Commerce Commission at the Court of Appeal. MTF says it has always fully disclosed the fees it charges and the level of those fees.

MTF says it's disappointed with the decision that the amount of some fees charged were considered unreasonable.

"A key purpose of the CCCFA is to assist consumers to distinguish between competing credit arrangements. MTF’s view is this judgment will not assist borrowers to identify any unreasonable fees charged by competing lenders. If two lenders charge exactly the same fee amount to establish a loan on the same terms, one of those fees may be unreasonable and the other not. The Court’s view is that the determination is to be made almost solely by a complex cost accounting analysis that depends on the structure of each lender," MTF says.

"It is highly unlikely that any borrower would be able to make such an assessment prior to taking out a loan. A borrower would not know whether a fee is unreasonable by simply looking at the dollar amount or any benchmark against commercial practice. The fees charged by MTF and Sportzone are similar to those charged by many finance companies and banks in the New Zealand market."

"While not in a position to finally quantify any potential implications at this stage, MTF is well advanced in this process and hopes to work with the Commission to ensure the current fee model is compliant," MTF says.

"This case is significant and has implications for the consumer lending industry generally, as the principles will be incorporated in the Responsible Lending Code, which will take effect from 6 June 2015. The Code sets out the processes, practices and procedures that a lender should follow to ensure that fees are not unreasonable and will apply to all consumer credit contracts written after 6 June 2015."

Here's the judgment, and here's MTF's statement.

Here's some background from the Commerce Commission, and see more on the Commerce Commission's website here.

Sportzone was a Christchurch-based company that sold, serviced and repaired motorcycles. It offered financial services, through MTF, to customers that purchased motorcycles. Sportzone has since gone into liquidation. MTF is a co-operative company that provides financial services to the customers of its associated dealers. Sportzone was a shareholder in MTF.

The Commission began investigating MTF and Sportzone in 2006 after receiving a complaint about their lending practices. Both companies were subsequently charged with charging unreasonable establishment fees, account maintenance fees, and arrears fees on 39 specific loan transactions to borrowers of motor vehicle finance, in breach of section 41 of the CCCFA.

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mtf will appeal to the supreme court and will win. nowhere in the cccfa 2003 act does it refer to "closely". it refers to costs of establishment and this is likely to include both a mix of fixed, and variable costs. everytime the regulators pass on more compliance costs to the credit provider this by default leads to higher costs of establishment. If everyone pays and the credit provider can rely on information presented at face value then costs of establishment  would be zero. sadly this isnt the case and there is an enormous layer of compliance that needs to be absorbed, and passed on to the end user.  

When it says "costs of establishment" that is just what it is meant to be and not a line of profit, so no I dont think they will win and certainly should not.   Personally I also think the rort of a yearly fee on a multi-year timeframe charged up front on an "interest free purchase" is a rort as well. 
 
 

im not aware of the issue being "a line of profit".  most finance companies struggle to make a profit, and have done so for years.  This is an issue of cost recovery.
 
the finance company has to make a profit somehow. personally i dont have a probelm with it provided i am aware of the costs upfront. if i dont like the deal i can either pay in cash, or not buy the goods at that time.  
 
furthermore because i always pay when contractually obligated i dont worry about default costs or penalty interest. amazing that.

I you bother to read court case as above, this is what the case was about.   I dont disagree that they need to make a profit, the Q is to do it honestly and tranparently which is what the case is about.  Also your particular situation is moot to the above case.
 
 

think you are trying to say - have i read the case? yes i have - all 500,000 pages of it. that is the problem the cccfa 2003 is very confusing and open to interpretation. The commerce com. is therefore trying to set some precedent, and has come out and publicized that it would make a scapegoat of a participant. Commonsense would have said that the act sould provide some guidance, perhaps through some regs. They haven’t done that so credit providers have determined their own methodologies to determine costs of establishment, and credit fees. The upshot is that every credit provider will do this differently depending on their own set of circumstances, risk appetite, and efficiency. It’s not a one size fits all approach.

The costs are transparent – they are on the face of the contract, the credit default fees normally are too, and if they aren’t there is normally a reference to standard costs on a website. No different to what the banks do.

My point is that if you default, it is reasonable to expect additional costs will be incurred as invariably someone has to do some additional work. Manual intervention normally equals cost. So no my point isn’t moot, it should represent the norm (ie paying bills when they fall due), sadly it seems to be the exception.

Well that is why we have case law, that is quite normal.  I dont disagree on reasonable costs to cover say a default as long as it is just that, otherwise that is expolitation.  I also dont disagree on a setup cost, as long as when they say its a setup cost it is just that and not an un-reasonable or THE profit stream, so I guess we disgree.
 

It also depends on the wording of the contract. If it says we will recover reasonable costs and punitive damages of 300% then that is OK, if its reasonable costs only then it is a contract condition isnt it?

 

The cccfa 2003 has been in place for 12 odd years. Would hazard a guess that tens of millions of loans have been written in that time. I'm only aware of a couple of cases bought before the courts in respect of fees, prepayment losses, default fees. Issues can't be that extreme as logic would suggest the courts would have taken a harder stance before now. I doubt after reading the judgement much will change. The courts still have work to do to clarify the issues. 
 
Yes I do disagree.
 
until the courts sort out there affairs nothing will change.
 
 

In which case it looks like the few cases that have got to court must be pretty extreme outliers. 

nay. Avanti v Com. Comm. was over the way they calculated prepayment losses. Avanti from memory used the same expert cited here - Professor Bowman, only this time the Commerce Comm. have used him. Avanti came out pretty good in other words. The others cases related mainly breaching the Sec Act provisions on independent directors. Avanti. and Broadlands, and Pumkin Patch were slapped over the wrists here. ie they werent just targeting finance coys. any publicly listed entity is fair game.
 
so that only really leaves mtf, and frankly i doubt they are extreme outliers. I suspect its more to the point that they are big enough to make a point, and they have deep enough pockets to defend themselves.