Law changes (the Credit Contracts and Consumer Finance Amendment Act 2014) coming into effect in 6 June 2015 will provide more protection for people borrowing money or buying on credit.
These changes include lenders having to act more responsibly, stricter rules about what can be repossessed and when, changes to what lenders have to tell borrowers and new rules about when borrowers in financial difficulty can apply for changes to their contract.
The law changes will apply to consumer credit contracts, such as store cards, bank and finance company loans and overdrafts signed on or after this date (some changes also apply to existing consumer credit contracts.
Responsible lending principles
One of the most significant changes is that lenders will be required to comply with new responsible lending principles. Some of these responsibilities include:
- making reasonable enquiries to ensure that the loan is appropriate for the borrower’s needs and that the borrower will be able to make payments under the loan without suffering financial hardship. If the loan has a guarantee, the lender must also make similar enquiries of the guarantor.
- providing clear, concise, plain English information to the borrower and guarantor about the loan.
- treating the borrower and their property in a reasonable and ethical manner at all times.
If a lender fails to act responsibly then they are in breach of the Act and can be prosecuted. A new responsible lending code provides much more detail about what it means for a lender to act responsibly.
Changes to disclosure requirements
Lenders will be required to be clearer and more open about their terms and the costs of borrowing. This includes publishing their standard terms and related costs on their website (if they have one), as well as displaying this information prominently in their office and making it freely available to any lenders who ask for it.
For loans for personal purposes:
- The lender must provide specific information about the terms of the loan before the borrower signs (rather than up to 5 days after entering the loan, for contracts entered into before 6 June 2015). This is called initial disclosure.
- The lender must provide a statement every 6 months, showing payments and charges. This is called continuing disclosure.
- For credit card statements issued on or after 6 June 2015, the lender must give a minimum repayment warning on the continuing disclosure statements (with some exceptions).
Extended cancellation period
For loans entered into on or after 6 June 2015 the borrower has 5 working days in which to cancel the loan (up from 3 working days).
Change to hardship application
If a borrower is in default, the lender can only apply default interest rate to the amount in default - not the whole balance of the loan.
If a borrower has problems with repaying their loan due to unforeseen hardship (e.g. unexpectedly losing their job), they can make a hardship application even if they are already in default. This is as long as they been in default for less than 2 months and have not missed 4 consecutive payments. (For contracts entered into before 6 June the borrower can’t make a hardship application if they are already in default).
Lenders may not repossess consumer goods while a hardship application is being considered, unless the goods are “at risk” (e.g. of being sold by the borrower).
Lenders must follow specified timeframes in processing hardship applications and cannot charge credit fees in relation to the hardship application. More about this is on this Commerce Commission factsheet.
There are now much stricter rules about what can be repossessed and when. For example only goods which are listed in the contract can be repossessed and then only by someone who is licenced or certified to do so.
There are also new limitations on what can be taken as security for a loan. Certain essential consumer goods can’t be taken as security, including beds, cooking equipment, medical equipment, heaters and refrigerator. A lender also mustn’t take documents such as travel documents or bank cards. Secured goods must be specifically identified – for example instead of just listing “television” the contract must describe it fully, for example including the make and model of the television.
If the lender has made a hardship application, repossession action can’t begin while the hardship application is under consideration.
Also, a lender can’t repossess goods that were acquired after the start of the loan unless both parties had agreed to change the contract to include these specific goods, and the lender provided a variation disclosure.