Credit Contracts And Consumer Finance Act In New Zealand

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court-rulingPrior to 2003, a number of Kiwi borrowers were finding themselves on the short end of the stick in credit dealings and transactions in consumer borrowing. In a national reaction and intent to provide a clearer picture of what a consumer would be committing himself to in a loan, the New Zealand Parliament passed and enacted the Credit Contracts and Consumer Finance Act in 2003. The Credit Act and resulting business process regulations were drafted and passed to help the average person better understand what a loan would cost, how it would operate, and what obligations the consumer agreed to in signing. In doing so, the Act was intended to eliminate subtle oversights and sleight of hand in wording that hid onerous terms borrowers would later find out about the hard way.

Major Changes of 2003

The 2003 Credit Act was not the country’s first modern foray into redefining how consumer loans were provided. Two prior pieces of legislation had existed long before in the form of the Credit Contracts Act of 1981 as well as the Hire Purchase Act of 1971. Once passed, the 2003 Act took full effect by 2005 on all types of covered consumer credit lending.

At a fundamental level the 2003 Credit Act rewrote the legal definitions of credit lending. New definitions were provided in law for over-encompassing loan terms that had to be used in all loan agreements. New regulations authorized by the Credit Act were also drafted to redefine what information and cost figures had to always be provided clearly and in an up-front manner, to standardize how loan interest would be calculated under the new law, exceptions for hardship where a loan became unreasonable for a consumer, and loan insurance requirements on consumers that represented higher risk for default.

In a separate section, the Credit Act also imposed new penalties on lenders that would be overseen by the Commerce Commission. The law also allowed a retooling of loan agreements found to be onerous and professional unreasonable in expectations on the borrower for payment and interest. Further, the Commission was also given the power to ban a credit upon a court order finding the company to be an “unsuitable” lender.

Cancellation Protection or the “Cooling Off” Period

As a new feature required under the 2003 Act, customers had a new tool by which to make sure the loan was right for them. Titled the “right to cancel” a clause was required by the law change to be included in all loan agreement allows a new borrower a type of cooling off period. If exercised within the immediate time window just after the loan is agreed to, a consumer could cancel the entire agreement. The cooling off period per the law was defined to be three business days after receipt of the loan agreement paperwork. An electronic delivery was given a five-day cooling off period for a potential cancellation. Weekend mailing of documents extended the period to seven days. If a cancellation did occur, processing costs incurred by a lender could be charged to a prospective borrower for reversing the account and closing it out early. Additionally, interest could be charged for the short period of any funding of the loan, especially large loan amounts.

The Hardship Exemption

Where a loan already exists and turns out to be significant onerous or problematic for a borrower to continue paying, the 2003 Credit Act created a solution exit point for affected borrowers that didn’t exist before. Dubbed “hardship provisions” a borrower could exercise the option to either get an existing loan rewritten or extended for lower payments if a particular type of unexpected hardship occurred after the loan was initiated. Common examples could include situations where a person loses a fulltime job or becomes extremely sick for an extended period and can’t bring in income.

However, there are criteria that a consumer must meet before exercising a hardship option under the 2003 law. First, the consumer has to be current with all loan payments and charges before exerting the option. Those in default or past their credit limit already can’t then turn around and claim hardship. Second, the borrower then has to make a formal request to the lender for a loan modification to the existing contract, giving the lender a chance to redesign the loan prior to a hardship being forced. Finally, the consumer had to have suffered a hardship that was not predictable or foreseeable, i.e. it was entirely a surprise, and it can be proven somehow.

With the above criteria met, certain allowable hardships are also defined. As noted above, loss of employment, inability to pay a loan due to sickness or a serious injury, and the termination of a relationship such as a marriage are all allowable types of scenarios. Where a hardship is granted the types of relief that can be provided include 1) lengthening the loan contract to reduce the monthly payment amount, 2) temporary deferment of payments to provide a short relief period, and 3) combining extension and deferment. Other types of modifications can be requested by a borrower, but the above three are the most common types approved.

Complaining About Non-Cooperation on a Hardship

Granted, a borrower has to work through a lender under the 2003 Act to initiate the hardship change. However, where a lender doesn’t want to cooperate, the borrower can then take the issue to a court or disputes tribunal to force the review and approval of a given loan contract modification.

Where a complaint needs to be filed regarding a lender’s oppressive loan or behavior during the loan process, it can be done for free through a dispute resolution service. As noted above, the borrower has to try working through the loan lender first, giving the company a chance to change its own loan. The dispute resolution process is available to all types of borrowers including individuals, small businesses with less than 20 employees, and small organizations, such as non-profits. The lenders themselves have to participate in some kind of dispute resolution program to be licensed as a New Zealand lender.

The four major dispute resolution programs in New Zealand include the following:

1) Financial Services Complaints Limited (http://www.fscl.org.nz/)
2) Insurance & Savings Ombudsman (http://www.iombudsman.org.nz/)
3) Banking Ombudsman (http://www.bankomb.org.nz/)
4) Financial Dispute Resolution (http://www.fdr.org.nz/)



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