The Ministry of Consumer Affairs has recently released an exposure draft of a Bill amending the Credit Contracts and Consumer Finance Act 2003 (CCCFA). Submissions on the draft are due on 11 May 2012. While the changes have been highlighted as targeting "loan sharks", they apply more widely to all consumer credit contracts.
The stated purposes behind the amendments are to support responsible lending and "toughen up on lenders who don't follow the rules" (Tougher laws for loansharks, Chris Tremain, 2 April 2012, available here). In essence, "responsible lending" means that "lenders have a duty to look out for their customers" and "cannot be indifferent to the circumstances of their customers or the effect of the debt they are providing" (Explanatory Information to the draft Bill, page 1, available here). This is recognised to be a "change from the primary principle in existing consumer credit law, which is that consumer credit contract disclosure will empower borrowers to make the best decisions and ensure they understand the terms of the credit they purchase, and disclosure will also promote competition that will drive down the cost of credit and protect borrowers" (Explanatory Information to the draft Bill, page 1).
Key aspects of the draft Bill include the following:
The draft Bill specifies a series of responsible lending principles. The principles are quite general – for example, lenders will:
- "[E]nsure that the terms of the agreement are not unduly onerous and are expressed in a clear, concise, and intelligible manner"
- Be satisfied that the borrower can be reasonably expected to meet loan repayments without suffering substantial hardship
- Not advertise agreements, products or services in a manner that is, or is likely to be, misleading, deceptive, or confusing.
More detailed guidance is to be provided in a Responsible Lending Code. The Code is required to be published within two years (and there will be opportunity for consultation on it).
- Lenders who do not comply with the principles more than once (or, according to the Explanatory Note, more than twice) may be banned from the industry, and a breach of the principles will be an indication of an oppressive credit contract (which could be re-opened by the courts). However, it is not clear what the consequences of breaching the Code would be (e.g. whether it will necessarily constitute a breach of the principles).
- Disclosure of loan terms (i.e. initial disclosure) will need to be made upfront, rather than within five working days (or, in relation to credit-related insurance, repayment waivers or extended warranties, 15 working days). This is on the basis that disclosure after a contract is entered into is of limited use (even with a "cooling off" period, as the consumer has probably spent the borrowed money). However, whether, in practice, borrowers actually have, or take, the time to consider pre-contract disclosure is perhaps still open to question.
- The "cooling off" period for borrowers to cancel their loan will be extended from three working days to five working days.
- Lenders will be required to make their standard terms and conditions and cost of borrowing (including credit fees, default fees and interest) information available at their premises and on their website (if they have one), so as to improve transparency and competition. Details of what will be required is to be set out in regulations.
For lenders that offer a wide variety of loans (or loans which may comprise a number of components which customers can select) this could potentially be quite difficult to do "prominently and clearly" as will be required, and maintaining version control at multiple locations as products evolve could be challenging.
Public disclosure of costs of borrowing will need to contain prescribed information and be in a prescribed form. Where lenders' charges will vary depending on the credit assessment of an individual customer, those requirements could also be problematic. There may also be issues fitting disclosure for more complex products (e.g. off-set mortgages) into prescribed forms.
Similarly, the Bill seems to envisage that disclosure under the Act will be "made in the form prescribed by regulations". This may indicate that a mandatory form is required, which may not fit all circumstances.
In relation to applications by a borrower for relief due to hardship:
- On our understanding, the draft Bill is intended to provide that borrowers would be able to apply for relief for up to two months after they default, though there appears to be an error in the drafting of the Bill. (The current clause refers to an application being prohibited if the debtor has been in default for "2 months or less", however this appears to be a typographical error, where "less" should read "more"). Under the current law, a borrower cannot apply once he or she has defaulted – which will often be the case. This has meant that the provision has had limited application.
- The draft Bill imposes an obligation on a lender to properly consider an application by a borrower for hardship relief, notify the borrower of its decision within 20 working days of receipt of the application and to provide reasons for a decision to decline relief.
- An incentive is provided for lenders to register as a financial service provider, as lenders will not be able to enforce rights to recover the costs of borrowing while unregistered. This is intended to increase borrowers' access to a dispute resolution scheme.
- The draft Bill aims to provide clearer provisions in relation to what will constitute unreasonable fees/charges, so as to facilitate compliance and enforcement. In particular, the Bill provides a new statement of what will be "unreasonable", which no longer refers to "reasonable standards of commercial practice". Rather, for credit fees, the courts must have regard to the matters giving rise to the fee, the amount of the fee and whether that amount "exceeds the creditor's reasonable costs in performing and documenting the credit contract". In determining whether a default fee is unreasonable, the courts must consider whether the fee "exceeds a reasonable estimate of the creditor’s financial loss arising from the default (including the creditor’s average reasonable administrative costs)". Whether this will give rise to a stricter test in practice is uncertain. Also, it is perhaps unclear why there needs to be different tests for credit fees and default fees, which would require a clearer distinction between these fees than has been seen up to now. A recent Australian case about penalty fees indicates that many "default" fees charged by banks do not actually result from a breach by the debtor, and may not be "default fees" for the CCCFA.
- It also provides additional guidelines for the courts to take into account in determining whether a credit contract is oppressive, "in an attempt to make it easier for borrowers to meet the oppression threshold" (Explanatory Information to the draft Bill, page 6). For example, the Court must (to the extent applicable) take into account whether the borrower was reasonably able to protect his or her interests taking into account his or her characteristics, such as age and mental conditions; whether the borrower took legal or other professional advice; the terms of comparable agreements offered by other creditors (including whether the terms are "significantly more onerous"); and whether the agreement is expressed in plain language.
- Finally, section 44 of the Personal Property Securities Act 1999 states that a security interest in after-acquired consumer goods must be "specifically appropriated" by the consumer (i.e. acknowledged to be subject to the security interest). In practice, some lenders have been using a power of attorney to "specifically appropriate" goods on the consumer's behalf. The draft Bill clarifies that this is not lawful.
The Ministry is also seeking submitters' views on whether the above reforms will make it unnecessary to cap interest rates and/or the cost of finance.
The draft Bill and details on how to make a submission are available here. Full submissions can be made, but there is also an option to make a brief “quick submission" using a form on the website.
The Law Commission is due to release a report on the Credit Repossession Act 1997 and the Ministry has indicated that any comments on the Law Commission's recommendations would be welcomed as part of any submission. We will keep you updated on these.