Finance company to refund 1200 customers
Allied Nationwide Finance Limited has agreed to refund more than 1200 customers after they were charged an unreasonable
fee for repaying their loans early.
In an out-of court settlement with the Commerce Commission, Allied Nationwide Finance has agreed to refund approximately
$173,000 to more than 1200 customers who had been charged an unreasonably high prepayment fee when they repaid their
loan early between April 2005 and August 2007. The credit contracts were with Prime Finance Limited which amalgamated
with other entities to form Allied Nationwide in June 2007.
The affected customers were charged a prepayment fee that equated to 31 days' interest on the outstanding balances of
their loan at the time of full repayment. Allied Nationwide admitted that this conduct was in breach of the Credit
Contracts and Consumer Finance Act, (CCCF Act) which requires that the prepayment fee charged by a creditor must not
exceed a reasonable estimate of its loss caused by the early repayment.
Allied Nationwide stopped charging this prepayment fee in August 2007, following the commencement of the Commerce
Commission's investigation.
"The CCCF Act requires that credit fees must accurately reflect the costs incurred by the creditor in relation to the
matter to which the fee applies. Where the fee exceeds the creditor's costs, the Commission will continue to take
enforcement action to ensure the effectiveness of the consumer protection intended by the CCCF Act," said Ms Rebstock.
Commerce Commission Chair Paula Rebstock said "The issue of reasonableness of credit fees is a strategic priority for
the Commission. The Commission does not accept that a creditor can impose an arbitrary charge on consumers who repay
their loans early. The Act is clear that credit fees applied to consumer credit contracts must be reasonable."
The Commission has issued warning letters to other creditors whose formulae were not appropriate procedures for the
calculation of the creditors loss arising from full pre-payment under the Act.
Background
Full pre-payment
The Commission's position on full prepayment is that, as a general principle, a credit provider may not automatically
include an allowance for the time taken to re-lend funds. Any estimate of loss should be calculated on the basis that
credit providers take reasonable steps to mitigate their loss and re-lend money prepaid as soon as possible. Credit
providers choosing not to do so should be able to demonstrate that any delay in re-lending monies is unavoidable and be
able to justify the extent of the delay.
The Commission sets out its position relating to procedures used by creditors that include the time to re-lend the
repaid funds in the article "Compliance issues you should know about", which was distributed to the credit industry
groups on 20 September 2006. This is available on the Commission's website www.comcom.govt.nz at
ConsumerCredit/ConsumerCreditPublications
'Safe harbour'
Section 51 of the CCCF Act allows creditors to charge a prepayment fee which compensates the creditors their reasonable
loss arising from the full prepayment, if that is expressly authorised by the contract. A 'safe harbour' formula has
been provided in the Act's regulations. The formula calculates the difference between the present value of outstanding
loan repayments discounted at the prevailing interest rate and the lump sum repayment of the unpaid balance at the time
of full prepayment.
Creditors who choose not to use this 'safe harbour' formula must ensure that they provide an appropriate procedure in
the contract to calculate a prepayment fee that does not exceed the reasonable loss arising from the full prepayment. If
the safe harbour formula is used and applied correctly, then the amount calculated will be deemed to be a reasonable
estimate of the loss.
CCCF Act
Credit Contracts and Consumer Finance Act - A general guide for the credit industry can be downloaded from the Commerce
Commission's website www.comcom.govt.nz at ConsumerCredit/ConsumerCreditPublications
Gilrose Finance
In August 2007, the Commission entered into a settlement with Gilrose Finance. Gilrose Finance admitted it failed to
correctly rebate credit-related insurance to some clients who had paid back their loans early, and did not tell
customers about default fees that would be charged if they missed payments. Gilrose Finance returned over $50,000 in
overcharged premiums and other credit fees to over 2000 affected debtors.
Allied Nationwide Finance
Allied Nationwide is the result of the amalgamation on 29 June 2007 of Allied Prime Finance Limited and Nationwide
Finance Limited. Allied Prime Finance was the result of the amalgamation of Allied Farmers Finance and Prime Finance.
ENDS