More Crunch for Credit

February 17 2017

Changes to the Credit Contracts and Consumer Finance Act 2003 have tightened the rules and regulations for lenders. The CCCFA Amendment Act came into full effect in 2016, putting greater focus on lender responsibility and accountability, such as firmer disclosure requirements and rules around cost recovery. Here’s what that will mean for you.

The purpose of the CCCFA is to regulate the rights and responsibilities of borrowers and lenders in a consumer contract arrangement. Consumers are generally people who have entered into a credit contract for household, domestic or personal benefit. The new amendment has increased responsibilities and regulation compliance for lenders under the CCCFA including:

  • New lender responsibilities
  • The development of the Responsible Lending Code which sets out the new lending principles
  • More rigorous initial disclosure requirements by the lender before entering into a contract
  • Greater consequences for failing to meet the initial disclosure requirements
  • Further restrictions for lenders on recovering costs from borrowers

What are the new lender responsibilities to borrowers?

Transparency has been a key driver in making amendments to the CCCFA. For borrowers, this means better protection and parameters for lending in terms of fair interest rates, disclosure and rights of recovery.

Lenders will be required to follow the new Responsible Lending Code. This means they must take extra care when disclosing a credit contract to a borrower, ensuring all relevant details are simple and easy to understand. This extra level of care applies to credit-related insurance contracts, guarantees and buy-back transactions as well as loans.

A lender’s responsibility is to assist a borrower and any guarantors in making informed decisions throughout the term of the credit, to act ethically and ensure the contract is not oppressive in nature. The latter specifically addresses loan sharks wanting to charge higher interest rates. In any credit contract, if you think the interest rate is too high, do not sign the contract and seek professional advice.

The cost of incorrect disclosure

The CCCFA Amendment Act further restricts lenders from recovering costs from a borrower where initial or ongoing disclosure has not been completed in accordance with the legislation. In a consumer credit contract, costs for borrowing are defined as interest charges, credit fees and default fees. Lenders are required to disclose all costs, including any unexpected costs, which sometimes have been glossed over in the past.

The amendments go one step further, now stopping a lender from recovering costs for any period during the credit contract where disclosure has been incorrectly completed. This hasn’t been tested in court, but expect to see lenders updating internal practices and educating staff in order to comply with the new legislation. Online lenders who discharge their obligations by automatic approvals will need to be especially vigilant, and borrowers need to question any unexpected costs that arise.

The Commerce Commission has made it clear that the rights and obligations set out in the CCCFA Amendment Act are mandatory for all lenders. The Commission is enforcing these regulations, as demonstrated in a recent case[1] where a lender was ordered to pay $135,000 for a breach of disclosure requirements. Ouch.

Money lending is as old as money itself, but the same advice holds true for borrowers now as it did then: make sure you are well informed and understand the terms of the contract you are signing. If you have any questions or doubts, speak to our legal champions before you feel the credit crunch.

[1]    R v Smart Shop Limited [2016] NZDC 1937


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