finPOWER Newsletter 28 July 2010
XYZ Finance Limited (name changed) has pleaded guilty to 34 charges of breaching the Fair Trading Act in the Auckland District Court today. The charges relate to misleading claims made by XYZ Finance that it was entitled to recover certain interest and fees from its debtors, when as a matter of law it was not. XYZ Finance have been fined $30,750 in the Auckland District Court today.
When XYZ Finance took over a loan book in 2006, it sent a ‘welcome letter’ to the existing debtors advising them that their loan was now owned by XYZ Finance. Debtors who received the welcome letter were charged a $15 fee.
“Consumer credit contracts are regulated by the Credit Contracts and Consumer Finance Act (CCCF Act), which requires that all credit fees be disclosed to debtors. Appropriate disclosure of fees is a basic tenet of the CCCF Act and creditors cannot charge fees that have not been disclosed,” said Graham Gill, Commerce Commission Enforcement Manager, Auckland. “The $15 ‘welcome letter’ fee was not disclosed before it was charged and XYZ Finance therefore misled debtors by representing that it was entitled to charge the fee, when it was not.”
The Commerce Commission’s investigation also found that XYZ Finance misrepresented, in contracts, settlement statements, notices and letters sent to some debtors, that XYZ Finance was entitled to continue to charge interest and fees after it had repossessed and sold consumer goods and applied the proceeds to the outstanding balance of the debt. However, the Credit (Repossession) Act 1997 allows creditors to only recover the balance still outstanding and prohibits further interest and fees from being charged after the sale of a security item.
XYZ Finance also misled consumers as to its rights under the Personal Property Securities Act 1999. In some instances XYZ Finance required debtors to secure loans against ‘all present and after acquired property’ – this clause is known in the industry as an APAAP clause. However, the Personal Property Securities Act requires that the debtor must specifically identify which after acquired property is to be subject to the security interest and that a creditor may only repossess that identified property. XYZ Finance misled some debtors by claiming it had the right to repossess all personal properties of these debtors by virtue of the APAAP clause, including property that the debtor had not specifically identified.
“Consumer legislation such as the Credit (Repossession) Act and the Credit Contracts and Consumer Finance Act provide important protection to lenders and borrowers alike. All lenders need to ensure that their business practices and contracts comply with the relevant consumer legislation, as failure to do so means businesses run the risk of breaching the Fair Trading Act,” said Graham Gill.
XYZ Finance has reversed or refunded over $400,000 of the approximately $500,000 of overcharged interest and fees. The company has agreed to reverse or refund the remainder of the overcharged interest and fees as well. The Court recognised this reparation in setting a fine for the offending.
During the Commission’s investigation XYZ Finance also voluntarily reversed or refunded an additional $571,000 to its debtors in relation to credit fees that were not the subject of the current charges.