Consumer NZ targets weekly and monthly interest rates, trigger points, interest free and fees in responsible lending submission

By Gareth Vaughan

It should be mandatory for lenders to disclosure annual percentage interest rates instead of promoting weekly or monthly rates, Consumer NZ says.

In its submission on the Responsible Lending Code the group also says clear trigger points, such as a debt-to-income ratio, should be set to alert lenders to borrowers' hardships. And there needs to be clear guidance on the use of terms such as "interest free." Consumer NZ also argues lenders shouldn't operate business models that rely on income expected from significant numbers of borrowers paying default or other penalty fees.

In terms of specific advertising practices lenders ought to follow, Consumer NZ says it supports the British and Australian approach whereby an annual interest rate must be disclosed.

"We are aware of companies advertising weekly or monthly rates which are likely to under estimate the amount payable. A requirement for an annual percentage rate would also make it easier for consumers to compare the cost of credit," Consumer NZ says.

"We also support the Code including clear direction to lenders that the use of advertising which states or implies there will be 'no credit checks' is unacceptable. This type of advertising is common. However, it is inconsistent with the responsible lending principles and the Code should make this clear."

'Interest free' term used by fee peddling lenders

Consumer NZ argues the Code ought to provide clear direction on the use of terms such as interest free.

"The term implies there will be no cost to obtaining credit. However, we are aware that it is used by lenders who impose significant fees. These fees are a form of disguised interest and we consider the term 'interest free' is misleading in these cases."

It goes on to say; "In our view, the basis for, and amount of these fees, is highly questionable. However, it is usually very difficult for an individual consumer to challenge them."

Consumer NZ also wants the Code to require lenders to have face-to-face or telephone conversations with borrowers before credit is provided enabling an opportunity for questions to be asked, and to help reduce misunderstandings.

And responding to a question in the Ministry of Business, Innovation and Employment's discussion document on the proposed Responsible Lending Code, Consumer NZ says there should be a "clear trigger point" to alert lenders to borrower hardship. It says this could be a debt-to-income ratio without specifying a specific ratio.

Meanwhile, Consumer NZ argues any increases in credit limits should be opt-in only with lenders required to give borrowers an explanation of additional costs associated with opting in to a credit increase.

"We would like to see lenders provide borrowers with information on how different repayment arrangements can affect the amount paid in interest and fees. We believe this would help borrowers select a repayment option that reduces the costs of servicing the debt and means it is repaid earlier," Consumer NZ adds.

'Fees should reflect actual administrative costs'

The group's submission also argues lenders should be required to set fair and transparent fees reflecting the actual administrative costs they incur.

"They should not operate business models based on the income expected from a large number of borrowers paying default or other penalty fees," Consumer NZ says.

"We believe the Code should set out the specific fees that may reasonably be expected to be included in a credit contract. The Code should also set out the types of administrative costs that may be taken into account when calculating a fee, and the costs which should not be included in the calculation," says Consumer NZ.

"We would have liked to see further analysis in the discussion document on the issue of fees and the approach the Code may take. We are aware the appeal in relation to the Sportzone/MTF case may have made this difficult. However, we believe the Code must address this issue in a substantive manner in order to provide certainty for both consumers and lenders."

The Responsible Lending Code is being developed by the Ministry of Business, Innovation and Employment (MBIE) following Parliament's passing of the Credit Contracts and Financial Services Law Reform Act in May. It follows the adoption of similar codes in Australia and Britain.

Although the Code will be non-binding, evidence of compliance with the provisions of the Code will be treated as evidence of compliance with lender responsibility principles set out through the Credit Contracts and Consumer Finance Amendment Act.

MBIE says it'll publish a draft Code for public comment late this year, with feedback from the submissions used to help its staff prepare the draft Code. The actual Code is then expected to be issued next March and come into force next June.

This story was first published in our email for paying subscribers. See here for more details and how to subscribe.