The High Court recently considered whether it is reasonable under the Credit Contracts and Consumer Finance Act 2003 (the CCCFA) for lenders to recover general business overheads or fixed costs through the imposition of establishment, other credit and default fees that are not closely related to the borrower's lending transaction.
The relevant loans provided for the payment of a number of credit fees, including:
- an establishment fee;
- a monthly account maintenance fee;
- a PPSR financing statement registration fee;
- a full prepayment administration fee; and
- a number of default fees.
Close Relevance Test
The High Court held1 that, to be reasonable, the cost a creditor seeks to recover must be sufficiently close and relevant to the establishment of the loan, the administration and maintenance of the loan, or to the actual consequences of the particular loan, such that it can be reasonably be said that the cost was incurred in connection with, or in relation to, the relevant matter (Close Relevance Test).
This test does not allow for the imposition of fees to recover costs generally referable to the business (i.e. in this case, selling goods or lending money).
The Court did not provide specific guidance on what would constitute a "close connection" and observed that there is no bright line test. It will be a matter for judgement in the circumstances whether the "connection" between cost and loan is sufficiently close and relevant to meet the statutory requirement of reasonableness.
The Court also observed that it may be reasonable to add other variable costs that have a causal link to the establishment of the loan.
It is expected that the decision will be appealed.
Credit Contracts and Financial Services Law Reform Bill
The Credit Contracts and Financial Services Law Reform Bill (the Bill) is currently before Parliament. Although the Bill does not amend the section of the CCCFA dealing with establishment fees (section 42) it does propose the following relevant amendments:
- the introduction of a Responsible Lending Code which may set out processes or practices for a lender to follow to ensure that it's fees are not unreasonable;
- mandatory disclosure of a lender's cost of borrowing; and
- a shift in relation to default fees to the lender's reasonable average costs that relate directly to the type of default involved.