Publication of CCCFA guide

The Commerce Commission has published an 80-page general guide for the credit industry on the Credit Contracts and Consumer Finance Act 2003.

The Credit Contracts and Consumer Finance Act 2003 (the CCCFA) came into effect on 1 April 2005, repealing the Credit Contracts Act 1981 and the Hire Purchase Act 1971. It establishes a new regime for the regulation of credit contracts, consumer leases and buy-back transactions of land.

This publication, produced by the Commerce Commission (which enforces the CCCFA), is intended as a plain English guide to the new legislation for those businesses that want to better understand the CCCFA and what it requires. To a great extent, it simply sets out the provisions of the legislation in "layman's terms", and the Commission explicitly recognises that its interpretation of the CCCFA remains to evolve alongside legal developments including court decisions and enforcement experiences.

However, the guide does provide a useful indication of the Commerce Commission's perspective on a few points of interest:

1. Default interest

   The Commission is of the view that charging default interest on the entire unpaid balance of the loan rather than the amount in default may amount to an unenforceable penalty, depending on the circumstances. Charging default interest on the entire unpaid balance is not expressly prohibited under the CCCFA.

2. Interest-free credit

   If credit is described as "interest-free" or "free credit", the credit amount should be the same as the cash price of the goods.

3. Fees and charges

   The Commission makes a few points about fees:

1. fees payable by the debtor to a third party in connection with the contract (but that are not specified as a term of the contract) and that provide the creditor with an indirect benefit are not, in the Commission's view, credit fees (except for insurance premiums payable to an insurer specified by the creditor);



2. establishment fees must only reflect costs directly attributable to processing, considering or documenting a consumer credit contract - fees calculated as a percentage of the credit are inherently unlikely to reflect actual costs; and



3. if a creditor charges the debtor any amount in anticipation of a fee from a third party, but the actual fee charged by the third party turns out to be less than expected, the creditor must refund the difference to the debtor - the CCCFA does not allow a creditor to pass on to the debtor more than any fee that the creditor pays to a third party.



4. Payments

   Under the CCCFA, a consumer credit contract may specify a schedule of payments and state that any payment will be credited in accordance with that schedule (regardless of when it is received). In this guide, the Commission advises that in order to avoid any misunderstanding creditors should let debtors know, when a payment is made outside the terms of the schedule, that the payment will still be credited according to the schedule.

5. Early repayments

   The CCCFA sets out a non-compulsory formula for calculating a creditor's loss from early repayment. The formula has proved difficult for some creditors to apply to their businesses, but the Commission states that:

   1. a creditor should not charge more than the amount calculated under that formula unless the procedure for calculating the creditor's loss is clearly set out in the initial disclosure statement and the result can be justified; and
   
   
   
   2. it is not appropriate for a creditor to take into account the length of time it may take to re-lend the amount prepaid.
   
   
   
6. Initial disclosure

   The publication provides more detail as to what key information is required to be disclosed to the debtor. For example, the Commission states that, if applicable, the debtor should be given information about how often continuing disclosure statements will be provided, and a statement that the creditor agrees to accept communications from the debtor electronically.

7. Fair Trading Act 1986

   The Commission notes that breaches of the CCCFA may also constitute breaches of the Fair Trading Act 1986. For instance, a creditor that fails to disclose information required by the CCCFA (or that makes false or inaccurate disclosure) will have failed to comply with its obligations under both Acts. The Commerce Commission also enforces the Fair Trading Act 1986.

8. Compliance programmes

   This publication sets out some of the elements that the Commission would expect to see in a creditor's compliance programme.

For more information, see www.comcom.govt.nz.

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.