The Commerce Commission has reached a settlement with Cash Converters and its associated companies in New Zealand. As part of the settlement the companies accept they breached the Credit Contracts and Consumer Finance Act (CCCF Act) in relation to payday loan contracts, known as Next Pay loans.
A Commission investigation identified that the inclusion of certain costs within the set up fees for Cash Converters’ Next Pay loans may be unreasonable under the CCCF Act.
The loans which were investigated differed from most other types of payday loans in that no interest was payable. Instead, when the loans were taken out, fees called establishment and data management fees were charged to the customer.
Under the CCCF Act any fee charged by the lender when setting up the loan is an establishment fee. The Act strictly limits what lenders can recover through such fees. The fees must be equal to or less than the actual costs of setting up the loan and must only recover costs relating to set up.
When calculating loan set up fees, Cash Converters included the cost of bad debts and defaults. As part of the settlement Cash Converters accept that they have breached the CCCF Act as including such costs in set up fees is unreasonable as they are not costs relating to establishing a loan.
The Commission accepts that the breaches were not deliberate and Cash Converters cooperated fully with the investigation. Under the settlement, Cash Converters have agreed to redesign their Next Pay loans to ensure that future loans comply with the CCCF Act.
“Lenders need to be careful when calculating establishment fees to ensure that the fees relate only to the cost of establishing loans. For example, in the Commission’s view, default costs cannot be charged to customers at the time they enter into a loan. These costs can only be charged, by way of a default fee, to customers who are actually in default. Similarly, lenders cannot use a fee as a way to recover bad debts,” said Graham Gill , Commerce Commission’s Fair Trading Manager, Auckland .
“Fees should also be accurately described. In this case, Cash Converters charged default and bad debt costs as establishment and data management fees,” said Mr Gill. “All payday lenders need to comply with the CCCF Act and the Commission will continue to monitor compliance.”
“Payday loans are often entered into by people who may be in financially vulnerable circumstances so we are pleased that Cash Converters are making the necessary changes to ensure its Next Pay product is compliant with the law,” said Mr Gill.
As part of the settlement, Cash Converters have agreed to make donations totalling $60,000 to five community based groups that provide budget advisory services.