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Lenders have to charge fees that reflect the costs to the company.
Consumer finance firm Real Finance has agreed to repay $1.36 million to borrowers, after acknowledging it charged unreasonable fees.
It has entered a settlement with the Commerce Commission, admitting it entered into contracts with borrowers between April 2013 and March 2020 that breached the Credit Contracts and Consumer Finance Act (CCCFA).
The fees charged were more than what was reasonable for the loans to have cost the company.
Commission chair Anna Rawlings said the law had been clear for many years that fees must be reasonable, and lenders should only recover costs that were closely related to the matter for which the fees were being charged.
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“When people borrow money to buy goods on credit, the credit and default fees they are charged are not intended to be used to cover general business expenses or to make a profit,” Rawlings said.
“This case will help lenders to set fees in a way that is consistent with their obligations under credit law. It also shows that regularly reviewing your fees is not sufficient on its own. Lenders also need to act on the findings of any review.”
Real Finance conducted annual fee reviews but did not take action to stop the profits being generated by the fees it charged.
“If lenders find their fees are unreasonable, then the fees must be reduced. If borrowers are overcharged, the commission’s expectation is that a lender will provide a refund to affected borrowers,” Rawlings said.
The commission used an expert from KPMG to calculate reasonable costs for Real Finance, who determined the administration fee was going towards things such as advertising costs and staff expenses that were not closely connected with administering loans.
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Real Finance has accepted that the establishment, administration, and default fees of around 4000 individual loan contracts exceeded reasonable costs and has agreed to pay a total of $1.36m to 515 individual borrowers who were overcharged.
In April 2022, the High Court granted declarations sought by the commission, unopposed by Real Finance, that Real Finance had contravened its obligations under the CCCFA by charging unreasonable fees.
Real Finance will be contacting affected borrowers as part of the settlement and has agreed to set up a page on its website with information on the refunds owed to affected borrowers.
Following changes to the CCCFA, from December 1 last year, lenders must keep records for at least seven years demonstrating that their fees are reasonable and review their fees if there is a material change to the cost base. These records must demonstrate that each fee was not unreasonable at the time it was set or reviewed.
Real Finance is a Wellington-based lending company established in 2008. It operates online and from branches in Wellington and Christchurch.
The commission’s investigation into Real Finance was opened in 2018 after it received a request from the District Court to intervene in an application by Real Finance for summary judgment against a borrower. The District Court was considering whether the administration fees charged by Real Finance were oppressive.
