MBIE calls for views on proposals to extend laws on what lenders must pay borrowers who repay loans in full early

By Gareth Vaughan

Changes to consumer credit laws will introduce new obligations on lenders when borrowers pay off loans in full early.

How these will be implemented is discussed in the Ministry of Business, Innovation and Employment (MBIE) discussion document issued this week on changes being introduced by the Credit Contracts and Consumer Finance Amendment Act. (Also see yesterday's story with further detail of what's in the MBIE paper).

One issue the proposed regulations cover is, - how proportionate rebates should be calculated for extended warranties and repayment waivers when consumers repay early.

As MBIE sets out, consumers can pay off the full amount owing under a consumer credit contract at any time, which is referred to as "full prepayment." The Credit Contracts and Consumer Finance Act currently requires, upon prepayment, that a lender must refund to the borrower a proportionate rebate of any amounts paid for consumer credit insurance.

"Under the Amendment Act, the creditor will also be required to refund to the debtor a proportionate rebate of any amounts paid for a repayment waiver or an extended warranty agreement between the creditor and debtor," MBIE says.

MBIE goes on to say this is because repayment waivers cease to have any benefit to the borrower after full prepayment, and the refund on the extended warranty amount winds up the relationship between the creditor and debtor when the loan is fully prepaid.

"Changes made by the Amendment Act provided for a more consistent treatment of consumer credit insurance, repayment waivers and extended warranty agreements."

MBIE is proposing the formula set out below for calculating the proportionate rebate for repayment waivers. It notes this formula is used in Australia for the proportionate rebate of consumer credit insurance premiums. MBIE asks submitters to its discussion document whether they agree with its proposed formula, or whether they wish to propose an alternative formula.

MBIE's also proposing the formula below for calculating the proportionate rebate for extended warranties. An extended warranty is an agreement between the creditor and debtor under which the creditor agrees, for an additional payment, to repay or replace defective goods outside of the warranty period that would otherwise apply.

MBIE is seeking submissions on the discussion paper by 5pm on Monday December 1.

The latest Reserve Bank sector credit data figures show consumer debt rose 6.7% in the year to September to $14.567 billion.

Here's the MBIE discussion paper.

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