The Commerce Commission is urging lower-tier lenders to get up to speed with consumer law after an Auckland-based finance company and its director were fined a total of $55,475 in the Auckland District Court on Thursday. The company has also refunded borrowers over $39,600 and written off loan balances.
eFeMCee Finance Limited (FMC) and its director, Albert Loots, each pleaded guilty to 40 charges under the Credit Contracts and Consumer Finance and Fair Trading Acts following a Commission investigation into the company’s lending practices. FMC admitted charging unreasonable fees and misleading customers. In particular, the company admitted:
charging unreasonable fees for a payment protection plan and for insurance
unreasonably requiring borrowers to take out insurance
failing to give borrowers copies of any policy documents
overcharging borrowers who paid back their loans early by not rebating insurance premiums.
FMC charged borrowers up to 31.5 per cent of the cash advance for insurance, and the same amount again for a payment protection plan. As an example, this meant that fees of $1,890 were added to a $3,000 loan. Both were charged at the beginning of the loan and therefore carried interest of 29 per cent per annum from that time.
The payment protection plan was in effect a bond designed by Mr Loots to ensure that borrowers met their repayments – which was both misleading and contrary to industry practice. Mr Loots had sole discretion in determining whether or not to offset this bond against the outstanding balance of the loan at the end of the contract.
According to Mr Loots the insurance was to cover the loan repayments if a debtor died or fell sick, but there was no policy document setting out the cover provided and payment was also at his discretion.
Commerce Commission Competition Manager Graham Gill said “These were deplorable business practices which took advantage of vulnerable borrowers. Borrowers were charged for services they didn’t need or didn’t know about. The fees were just included in the loan contracts when it was given to the borrowers to sign. They were not given insurance policies or given any written information about the payment protection plan or told how they could make a claim.”
“The way the fees were charged and the lack of explanation or information meant that customers were not able to make an informed choice about the need for either the payment protection plan or the insurance. Additionally, the impact of front-loading the fees was huge because of the compounding interest, and this often caused the loans to blow out, leaving FMC’s customers really struggling to repay their debt,” said Mr Gill.
Judge Thorburn was particularly perturbed at this lack of commitment to comply with the law and noted that the defendants had “utterly failed” in what had to be their minimum obligations under the law. “When Mr Loots came to an interview at the Commission and was asked about his knowledge of the Act which governs his business he said it was “fairly nothing,” said Mr Gill.
As a result of the Commission’s case, FMC has now reduced the loan balances of about 16 loan contracts belonging to debtors, and refunded $39,600 to six borrowers who paid unreasonable fees for insurance and payment protection policies between April and June 2008, as well as the compound interest that was applied to those fees. While it was standard practice for FMC to charge fees for both insurance and the payment protection plan prior to June 2008, the Commission was only able to lay criminal charges in relation to a small group of customers due to a three year limitation period under the Act.
A copy of the judgment will be available shortly on the Commission’s website at: www.comcom.govt.nz/consumer-credit-enforcement-outcomes