Consumer credit law reform – how will it affect lenders?

The Consumer Credit Bill tidies up the current regulatory framework protecting consumers against unfair lending practices. It applies to credit contracts for personal and domestic purposes. The Bill changes disclosure requirements for lenders and sets up an enforcement regime for breaches. Significantly, it removes the current $250,000 "safe harbour" non-disclosure threshold.

Background

In 1999, the Ministry of Consumer affairs undertook a review of consumer credit policy and legislation and concluded that the efficiency of existing consumer credit law is hindered by:

• unnecessary compliance costs for lenders and business borrowers;
• unfairness to consumers;
• difficulties in enforcing the law;
• complexity; and
• fragmentation across a number of statutes.

Objectives

The Bill aims to simplify the law and to protect the interests of consumers under credit contracts (including leases) by providing for:

• disclosure of adequate information to consumers;
• clear rules about interest charges, fees and payments; and
• prevention of oppressive conduct by creditors.
  

Legislation to be repealed

When the Bill becomes law, it will repeal the Credit Contracts Act 1981 and the Hire Purchase Act 1971, statutes that were conceived and drafted in the 1970s. In the last 20 years, there have been marked technological and economic changes, particularly computerisation and financial deregulation, which render many of the provisions in the existing legislation outdated in light of modern credit products.

Features

The Bill:

• applies to credit contracts entered into for personal, domestic or household purposes;
• imposes new rules for the charging of interest and fees (including where a loan is repaid early);
• does not apply to business loans;
• imposes new disclosure rules;
• specifies a clear regime of damages payable by lenders for breaches of the statutory requirements; and
• provides power for the Commerce Commission to enforce its provisions.

Implications for lenders

The Bill will affect any institution or person that lends money or leases goods to consumers. It will require lenders to review their documentation and lending procedures. In particular, the new legislation will affect:

• Disclosure requirements
  The Bill preserves most of the requirements for disclosure under the Credit Contracts Act 1981, but lenders will now have to make continuing disclosures (except where the interest rate is fixed for the life of the loan)
• Interest
  A lender will only be allowed to charge a default interest rate if the borrower has actually breached the contract.
• Fees
  Fees chargeable by lenders must not be "unreasonable".
• Prepayment
  Unless a contract explicitly prohibits prepayment, it will be allowed. Lenders can charge fees related to prepayment, as long as they are not "unreasonable".
• Enforcement
  The Bill establishes a public enforcement regime, and provides increased powers to the Courts to impose a range of simple remedies. The Commerce Commission will have independent powers to investigate lenders' activities and to prosecute breaches.
• Oppressive conduct
  The Bill preserves the Credit Contracts Act provisions for the reopening of oppressive credit contracts. These provisions have been updated, but are substantively the same and will continue to apply to business and consumer credit contracts.

Compliance costs

In the short term, there will be costs involved in complying with the new regulatory framework. These will generally relate to the revision of documentation and staff training.

The costs will impact on creditors mainly during the transitional phase from the old regime. However, in the long term, compliance costs are not expected to increase, and should decrease for commercial credit contracts of less than $250,000 (as the Bill removes the current requirement for disclosure if the total amount of credit outstanding between a borrower and lender is less than $250,000).

Lenders will no longer have to make disclosure to commercial borrowers, irrespective of the amount of the loan. This will in turn lower the compliance costs for banks and other financial institutions. Also, calculations such as the finance rate will no longer be required.

The Consumer Credit Bill has had its first reading and is currently before the Select Committee. Submissions were due on 3 April 2003 and have been reported on in the Select Committee News of 8 May 2003. The Bill's next reading is scheduled for 17 August 2003.

Enquiries and information

For more information on any of the cases, articles and features in Financial Services Quarterly, please email Rachel Gowing or call on 64 9 916 8825.