NZ Commerce Commission settles with pawnbroker over interest rate misrepresentations
The Commerce Commission has settled with an Invercargill based pawnbroker over breaches of the Credit Contracts and Consumer Finance Act (CCCF Act) and the Fair Trading Act.
A Commission investigation into The Pawn Shop identified that payday loan and pawn broking customers had been charged annual interest rates that differed from that disclosed in the loan documentation. The Pawn Shop’s documentation also failed to meet other disclosure requirements of the CCCF Act.
As part of the settlement The Pawn Shop admitted to breaching both Acts by misrepresenting the interest rate it charged on payday loans and pawn broking contracts as 200 per cent when in fact it charged at a rate of 240 per cent. It also admitted to failing to meet the disclosure standards required under the CCCF Act. The Pawn Shop further admitted to incorrectly calculating interest when customers repaid their loans before the due date.
This case serves to highlight the importance of accurate information and proper disclosure. People who obtain loans from pawnbrokers and payday lenders can be particularly vulnerable due to financial stress. It is vital that creditors provide borrowers with the correct information when writing loan contracts so that consumers can make informed decisions, said Graham Gill, Commerce Commission’s Fair Trading Manager, Auckland. Creditors should also be aware that credit contracts cannot be enforced if they do not meet the standard of disclosure required under the CCCF Act. Businesses should have effective compliance programmes in place to ensure that they are meeting the requirements of all legislation which affects their business, including both the CCCF and Fair Trading Acts.
The Pawn Shop has cooperated with the Commission’s investigation and has agreed to remedy the breaches that have occurred. The Pawn Shop has assured the Commission that it is working to amend its loan documents and practices to ensure that it meets the requirements of all relevant legislation in the future.
As part of the settlement, The Pawn Shop has agreed to contact a number of their payday loan customers to arrange refunds of interest. Any customers who think they have been charged an incorrect interest rate can also contact The Pawn Shop directly to have their accounts checked and to see if any refund is due.
Consumers can contact the Commerce Commission if they think their rights under the Fair Trading or CCCF Acts have been breached. Community based organisations such as the Community Law Centres and budget advisory services can also provide advice to consumers about their rights.
Background
The Credit Contracts and Consumer Finance Act (CCCF Act) applies to credit contracts, certain leases and buy-back transactions entered into after 1 April 2005. Among other things, the CCCF Act:
- states what information about the transactions consumers must be given, when it must be given and what form the information should take;
- sets minimum standards for some contractual terms; for example, the Act sets standards about the way in which interest is calculated and charged. There are also rules on credit fees and credit related insurance;
- provides rules covering early repayment of debt including rules about how much a creditor can charge in these circumstances; and
- prevents creditors from enforcing contracts if they have not complied with particular provisions of the Act.
There is no regulation of the amount of interest a creditor can charge.
Only the courts can rule whether the CCCF and Fair Trading Acts have been breached and set appropriate penalties. The courts may order a creditor to pay statutory damages to customers where they have failed to disclose adequately under the CCCF Act and can also impose fines of up to $30,000 per offence under the CCCF Act and up to $200,000 under the Fair Trading Act.
Payday loans are typically short term unsecured loans that are advanced to borrowers who need money for bills or unforeseen circumstances until they receive their next pay.
Pawnbroking contracts are a similar type of loan, however, they are normally for a slightly longer term than payday loans. The borrower provides some form of security, usually personal goods, until the borrower repays the loan. If the loan is not repaid, the pawnbroker may sell the goods to recover the debt.
Payday loans and pawnbroking contracts often include high annual interest rates when compared with other types of consumer loans.
Payday lenders and pawnbrokers are required to comply with the CCCF Act.
Pawnbrokers are also required to meet the requirements of the Secondhand Dealers and Pawnbrokers Act 2004. This Act is administered by the Ministry of Justice.