Media Release

New credit law ten days away

New credit law, which comes into effect on 1 April 2005, will provide better protection for consumers and create a simpler regime for credit regulation, says Consumer Affairs and Acting Commerce Minister Judith Tizard.

The Credit Contracts and Consumer Finance Act (CCCFA) regulates the provision of consumer credit, including home loans, personal loans, credit sales/hire purchase, credit cards, long-term leases and housing buy-back schemes. The legislation replaces the Credit Contracts Act 1981 and the Hire Purchase Act 1971.

“The new credit law provides greater protection for consumers from unfair practices by replacing outdated legislation that fitted awkwardly with many new credit products and industry practices,” said Judith Tizard.

The new law will make it easier for credit providers to operate in the market by clarifying their rights and obligations. By subjecting all consumer credit products to the same rules, it allows credit providers to be innovative and flexible and provide new products in response to customer demand.

Key features of the new credit law are:

• improved redress for consumers;
• new hardship provisions;
• strengthened enforcement;
• better information disclosure for consumers, and
• greater transparency on interest charges, fees and early repayment.

“The Credit Contracts and Consumer Finance Act provides greater incentives for credit providers to comply with the law and treat consumers fairly. There are stronger penalties for credit providers who breach the law,” Judith Tizard said.

The Commerce Commission, which will enforce the law, has been given the power to take action in response to breaches of the law. Consumers will still be able to seek their own remedies of up to $7,500 through the Disputes Tribunal.

Home buy-back schemes are also a focus of the new law. Tough penalties and new disclosure requirements, which came into effect in October 2003, creates a disincentive for operators to continue running such schemes.

“I look forward to the modernising changes this new law brings to the credit market, and the potential for growth and economic development to benefit consumers, credit providers and the New Zealand community,” said Judith Tizard.

Background material following.

Credit Contracts and Consumer Finance Act 2003 - background information

Introduction

The Credit Contracts and Consumer Finance Act 2003 (CCFA) regulates the provision of consumer finance and replaces the Hire Purchase Act 1971 and the Credit Contracts Act 1981.

The Act covers home loans, personal loans, hire purchase, credit cards, overdrafts, long-term leases and housing buy-back schemes.

Most provisions of the new credit law come into force on 1 April 2005. The provisions relating to housing buy-back schemes (buy-backs) came into force on 14 October 2003.

The new credit law replaces outdated legislation that now fits awkwardly with many new credit products and industry practices that have been developed since the old law was introduced. This has caused compliance problems for credit providers and gaps in coverage for consumers (some credit products and services, such as long-term leases, buy-backs, and home loans for amounts over $250,000 are not covered by existing law).

The Hire Purchase Act was introduced more than 30 years ago and the Credit Contracts Act was introduced more than 20 years ago. In that time, new credit products, such as revolving credit accounts, have become popular. There have also been changes in business practices, such as the introduction of online lending, as a result of new technology.

The existing law has not kept pace with these changes. Consumers and business need law that is relevant to the modern marketplace and the Credit Contracts and Consumer Finance Act will help achieve this.

Benefits for consumers

The new Act offers protection to consumers borrowing money and buying goods on credit because:

• Fair and flexible rules relating to fees and interest charges will protect consumers from unreasonable charges. The Act regulates methods for charging interest, fees and payments, designed to protect borrowers from unreasonable charges. Credit providers will not be able to charge consumers unreasonable fees and penalties, and will be prevented from using unfair methods of calculating interest or early repayment charges.
• Credit providers must disclose key information to borrowers in contracts, and other documentation, specifically about their costs and the terms of credit and what the borrower’s obligations are under any credit contract they are entering into. Information relating to the credit contract must be understandable and accurate.
• Improved information disclosure requirements for all consumer credit transactions means that consumers will receive meaningful information about the total cost and terms of credit. This will give consumers a clearer understanding of what they are signing up for so that they can make informed decisions when entering into financial transactions.
• Credit providers must not place unreasonable requirements on borrowers in relation to credit-related insurance, nor require consumers to take out insurance that doesn’t provide any benefit.
• Consumers have a right to repay their contract at any time. Credit providers can charge the consumer no more than the unpaid balance on the contract (including interest up to the date of repayment), plus a fee to compensate the credit provider if interest rates have changed.
• A consumer can ask for temporary relief or relaxation in the terms of their contract in case of unforeseen hardship, as long as they are up to date with their repayments.
• The Act sets up a penalty and enforcement regime, and enables oppressive credit contracts to be reopened by a court to remedy the oppression.

Hardship

• A consumer can ask for temporary relief or relaxation in the terms of their contract in case of unforeseen hardship, as long as they are up to date with their repayments.
• Where a consumer experiences hardship as a result of a change in their personal circumstances and they are up to date in their payments, the new credit law allows them to make a request to a credit provider for a reasonable variation to the credit contract.
• ‘Hardship’ may cover illness or injury, losing your job or ending a relationship. Consumers can only apply for this if they couldn’t have ‘foreseen’ the hardship when they entered the contract – eg, they had an accident six months after they took out the loan and because of the accident they had to stop working.
• Consumers can apply to spread the payments over a longer term, which reduces the amount of each payment or to postpone payment dates or a combination of these two options. A hardship variation will not reduce the consumer’s overall obligations, but will make it easier for the consumer to manage repayments.
• If the credit provider refuses to allow a variation, the consumer can apply to the Disputes Tribunal to have the contract varied.

Benefits for credit providers

• As well as benefiting consumers, the legislation also meets the needs of credit providers by simplifying the law and some administrative requirements.
• Business to business transactions are no longer covered by the legislation, except in relation to the contract re-opening provisions for oppressiveness. This reduces compliance costs and increases flexibility for commercial lenders.

Fees, charges and interest rates

• Under the Act credit providers will be able to charge a reasonable fee to compensate them for any loss if a consumer repays a credit contract early. The amount charged by the credit provider must be a reasonable estimate of the credit provider's loss. The regulations set out a formula that credit providers can choose to use to calculate the reasonable estimate, or because of the nature of the credit provider’s business or the particular contract, the credit provider can use a different procedure to calculate a reasonable estimate.
• The provisions dealing with early repayments give credit providers a formula for calculating the rebate of the unused part of any consumer credit insurance premium, for example where a consumer repays a loan early.
• Fair and flexible rules about what credit providers can charge not only protects consumers from unreasonable charges, it also provide credit providers with clarity on how they calculate those fees and interest charges, thus providing valuable information for them on the operation of their business.
• The regulations relating to these rules will help reduce business compliance costs, as credit providers can now access a clear formula to undertake calculations related to credit contracts.
• The CCCFA doesn’t limit the amount or rate of interest credit providers can charge. However, it does set out how credit providers must calculate interest, and this must be explained in a credit contract.

Information disclosure

• The Act allows credit providers considerable flexibility in how they go about disclosing key information on credit products to consumers, provided that the disclosure is clear, concise and likely to bring the information to the attention of the borrower. The manner of disclosure must not be likely to mislead a consumer.
• New model disclosure statements will help businesses meet the standard required by the Act. Credit providers who use the forms correctly can be sure the information has been disclosed in the manner required by the Act.
• The advantage of using a model disclosure statement is that businesses will be treated as having complied with the disclosure standards required by the Act, which will in turn help reduce their compliance costs. It will also provide a standard of disclosure that will become familiar to consumer borrowers and assist them to choose between different credit products on offer.
• Businesses also have the flexibility to adapt a model disclosure statement to suit their particular business needs.
• These model disclosure statements show the Government’s continued commitment to innovative and flexible business regulation while protecting the needs of consumers.

Other benefits

The Act also allows flexible ways for credit providers to provide information to their customers, such as by email. Information which affects a large number of customers, such as a change in the interest rate or fees, can be communicated in alternative ways such as publication in a newspaper or website.

Home buy-back schemes

• Home buy-back schemes are also a focus of the legislation. Tough penalties and new disclosure requirements create a disincentive for operators to continue running these schemes. This came into effect as soon as the legislation was passed by Parliament in October 2003.
• Home buy-back schemes claim to provide consumers with a means of raising finance from the equity in their current homes, but the terms of these arrangements are usually so onerous that the consumer ends up losing everything.
• These measures will protect consumers against further losses from buy-back schemes as well as providing remedies for those already involved in such schemes.
• It is expected that the attractiveness of buyback schemes – from both consumers’ and credit providers’ point of view – will be diminished to the point where these schemes will no longer be offered.

Enforcement

• The Commerce Commission will enforce the Credit Contracts and Consumer Finance Act and promote compliance with the law.
• The new Act empowers the Commerce Commission to take action in response to breaches of the law; it has strong powers and will use them to ensure standards are met.
• Credit providers who flout the law and exploit consumers face increased penalties and the prospect of rigorous enforcement.
• Having the Commerce Commission enforce the law is a means of reducing the power imbalance between credit providers and consumers. It will also provide an incentive for credit providers to comply with the law, because the chances of action being taken against them for breaches and oppressive conduct will be greater.

Further advantages of having the Commerce Commission enforce the new credit law include:

• Greater effectiveness in enforcing the law and obtaining redress in situations where consumers might be incapable of acting.
• Its ability to act in cases where many individual borrowers have each suffered a small loss (which amounts to a large aggregate loss), but are unlikely to take action themselves.
• It has flexibility to target those credit providers whose actions warrant most concern.
• Under the Act the fines/remedies range from $30,000 to $200,000 or up to one years imprisonment depending on the breach of the Act.
• Consumers will still be able to seek their own remedies of up to $7,500 through the Disputes Tribunal.
• The Credit Contracts and Consumer Finance Act also allows the District Court or the Disputes Tribunal to overturn or amend a contract which is oppressive.