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COMMENTS ON THE BILL
Credit
is easy to obtain in New Zealand, and New Zealanders are keen borrowers:
Lenders are aggressive in their advertising; offering credit with
‘No Credit Checks!’ to people with ‘a credit history problem (no
matter how severe)’ with ‘Same Day Approval’. New Zealanders owe
$3.64 billion on their credit cards, up from $2.92 billion 2 years
ago [Reservce Bank credit card statistics, as at
February 2003].
We
acknowledge that the provision of credit is useful, and is generally
well managed by people. However, we are deeply concerned about the
huge problems caused at the less well managed end of the credit
market – which is characterised by unscrupulous loan sharks targeting
and exploiting desperate people. Some of the cases that Citizens
Advice Bureaux have dealt with recently demonstrate this end of
the market. Those cases include:
A
bureau client, recently migrated to New Zealand, was effectively
charged interest of 96% on a 12 year old car.
A
bureau client purchased a vehicle a year earlier with finance
of $11,000. She had paid over $3,500 on the loan and wished to
pay it off earlier. She discovered she still owed over $9,000.
A
bureau client purchased a vehicle on a weekend. She did not take
the car then because there were some repairs to be done. On the
Monday (in less than 3 days after the contract) she decided she
could not afford the car and sought to cancel the contract. The
dealer refused.
A
bureau client enquired about a loan online. After obtaining information
about interest charges and fees, she decided that she didn’t want
the loan. She was then billed for fees of $495.
A
bureau client, on the unemployment benefit, traded his car in
order to get another car. He still owed money on the first car
to the same dealer (who also provided the credit). He bought the
second car for $5,000 – he immediately then owed $8,500 because
of the money still owed on the first car. His credit contract
had him paying weekly instalments of $60 over nearly 5 years.
At the end of his contract he would have paid a total of over
$17,000.
In
making our comments we draw on the knowledge and experience from
bureaux’ client contact and the fact that annually, on average,
bureaux deal with 36,300 budgeting and financial-related enquiries
– that’s about 700 enquiries every week. Those enquiries include:
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10,554 enquiries and complaints about general financial matters,
including hire purchases, credit charges and loans
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8,926 clients facing financial difficulties including bankruptcy,
debt and repossession, and
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16,820 requests for budgeting assistance.
The
Association welcomes this Bill, and we commend the work of the Ministry
of Consumer Affairs in developing the Bill. We were involved in
the extensive consumer credit law review throughout 1999 and 2000,
and we are pleased to see that most of our concerns canvassed during
the review have been addressed in the Bill.
We
consider that this Bill is good law. It primarily seeks to do two
key things: the first is to ensure that potential borrowers are
provided with adequate, useful and accessible information in order
to help them make good decisions about borrowing; the second is
to ensure effective enforcement when things go wrong. We feel the
Bill requires some amendments in both these areas in order to give
full effect to the intentions of the Bill. Our comments cover the
following areas of the Bill; we also provide a summary at the end
of our submission:
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Required disclosure
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Reopening of credit contracts
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Debtor’s right to cancel
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Amount of security
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Role of Commerce Commission
Required
Disclosure
The
Association welcomes the disclosure provisions outlined in the Bill.
However, we do consider that amendments are required to strengthen
these provisions to ensure they are effective. Those amendments
include introducing mandatory disclosure forms, extending disclosure
provisions to guarantors, and requiring disclosure to be written
in the language that the credit was advertised.
Mandatory
disclosure forms
Many
credit contracts are written in a way that is confusing. Research
suggests that an increasing number of New Zealand adults are ‘functionally
illiterate’ – approximately 500,000 New Zealand adults have minimal
or nil reading capability, while a further 750,000 cannot comprehend
an everyday document [Ministry of Education, 1996,
Adult Literacy in New Zealand: Results from the International Adult
Literacy Survey]. Citizens Advice Bureaux see this manifest
every day in complex and technical credit contracts.
A
bureau client borrowed $150 from a finance company. He could not
understand why it was costing him so much each month – it was
going to take him 12 months paying at $42 per month (a total of
$504). The bureau read through his contract and found the interest
was 72%, and that contract had a huge range of fees.
Analysis
of the implementation of the Australian Uniform Consumer Credit
Code found that the complexity of credit documentation acted against
the objectives of the Code, and that large numbers of consumers
needed independent assistance to interpret their contracts. It also
found that a large number of consumers found the documentation difficult
and complex and therefore still entered into transactions where
they did not fully understand their obligations, i.e. some important
information, such as the interest rate, was often buried in the
middle of the contract documents. The report recommended that pre-contract
disclosure information be provided in a standardised form, and that
the most important information be provided in a one page summary.
We
recommend that the Bill introduce mandatory standardised disclosure
forms, i.e. the model form that will be prescribed by regulations
should instead be a mandatory form. These forms would include the
disclosure information set out in Schedule 1, and would contain
the most important information in a one page summary on the first
page of the form.
Disclosure
to guarantors
The
provisions for disclosure to guarantors remain virtually unchanged
from the current act. These provisions are inadequate. In our experience
guarantors often face the same issues as borrowers: they are not
given enough useful and clear information, and they are not fully
aware of their obligations.
We
recommend that the Bill adopt the disclosure provisions for guarantors
provided in the Australian code (on which this Bill is largely based).
That includes requiring a document, attached to the disclosure form,
explaining fully and clearly the rights and obligations of the guarantor.
This is in a mandatory form prescribed by regulations, and the guarantee
is unenforceable if this provision has not been compiled with. We
recommend that this Bill be amended to include a provision for such
a form.
In
addition to the disclosure provisions the Australian Code also allows
for:
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the guarantor to withdraw at any time before the credit is first
provided
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the guarantor to withdraw after the credit is first provided if
the credit contract differs in some material respect from the
proposed contract
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limits on the guarantor’s liability, specifically in regard to
the total amount for which the guarantor can be liable (for more
information see below under “Amount of security”).
Language
as advertised
The
current situation allows for lenders to advertise in the borrower’s
first language, and then to provide a very complex contract in English
(which, as evidence shows, often cannot even be understood by English
speakers!).
To
give effect to clause 29 of the Bill – “Disclosure must… express
the required information clearly, concisely, and in a manner likely
to bring the information to the attention of the person to whom
disclosure is made” – we strongly recommend that lenders should
provide disclosure (including to guarantors) and credit contracts
in the same range of languages used in their advertising.
Reopening
of Credit Contracts
We
welcome the provisions relating to reopening of credit contracts,
however we recommend that the Bill include the provisions from the
Australian Code that relate to contract changes on grounds of
hardship; this amendment would add strength to the Bill.
The
general principle of the Australian Code states a “debtor who is
unable reasonably, because of illness, unemployment or other reasonable
cause, to meet the debtor’s obligation under the credit contract
and who reasonably expects to be able to discharge the debtor’s
obligations if the terms of the contract were changed… may apply
to the creditor for such a change.” The borrower can seek to extend
the period of the contract and reduce the amount of their payments,
or postpone payments during a specified period, or a combination
of both. The lender is obliged to change the contract, and the court
can change the terms of the contract if the lender does not.
A
bureau client had purchased a car on a hire purchase 18 months
earlier. Recently her husband suffered a work-related accident,
putting him off work long term; she left work to care for him.
They fell behind in their payments, and were trying to catch up
with extra instalments. The finance company was beginning the
repossession process. The client wanted to know what they could
do.
Debtor’s
Right to Cancel
We
have always considered that the 3 day “cooling period” in the current
Credit Contracts Act 1981 is insufficient. The Bill also only provides
for a 3 day period, and a 7 day period if the disclosure is sent
electronically or by post. We strongly recommend that the 7 day
period apply in all cases, i.e. when the disclosure documents are
handed directly to the borrower.
Amount
of Security
In
our experience, lenders obtain security well in excess of the value
of the credit.
A
bureau client took a $4,000 cash loan from a loan shark. Her home
was used as security. She lost her job and fell behind in the
payments. She now owes $6,000 and risks losing her home.
We
recommend the Bill adopt the ‘amount of security’ clauses of the
Australian Code. That provides that the security is void if “it
secures an amount that exceeds the sum of the amount of the liabilities
of the borrower and the reasonable enforcement expenses of enforcement”.
That is, the security is proportional to the amount of the debt.
This also applies to guarantees.
Role
of Commerce Commission
We
welcome the provisions in the Bill that establish active enforcement
in cases of unreasonable contracts and poor lender practice. The
current law is generally extremely weak in this regard; there is
clearly a role for an enforcement agency to address parts of the
credit industry.
Citizens
Advice Bureaux have a good working relationship with the Commerce
Commission, and we welcome their role as the enforcement agency.
However, we are not clear as to how the Commission will give effect
to their role. We note that bureaux and the public generally are
disappointed that the Commission usually will not act on individual
cases of breaches of the Fair Trading Act. While we understand the
strategic approach the Commission has taken in regard to Fair Trading
Act enforcement, we do not consider that this should be the approach
for consumer credit enforcement.
Rather,
we strongly recommend that the Commission undertake active enforcement
on a case-by-case basis. This work should be done by a fully resourced
and specialist consumer credit unit. Further, we suggest that the
Commerce Committee invite the Commission to present a briefing of
its intentions for giving effect to this Bill.
There
will clearly be a strong need for education and awareness around
the Bill. We look forward to working with the Commission and the
Ministry of Consumer Affairs on this work.
SUMMARY AND RECOMMENDATIONS
The
Association welcomes the Consumer Credit Bill; it is a vast improvement
for consumers. However we have a number of concerns that should
be addressed. Specifically, we make the following recommendations
for amendments to the Bill:
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We recommend that the Bill introduce mandatory standardised disclosure
forms, and that these forms contain the important information
in a one page summary.
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We recommend that the Bill adopt the disclosure provisions to
guarantors provided in the Australian code (on which this Bill
is largely based). That includes requiring a document, attached
to the disclosure form, explaining fully and clearly the rights
and obligations of the guarantor.
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We recommend that lenders should provide disclosure (including
to guarantors) and credit contracts in the same range of languages
used in their advertising.
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We recommend that the Bill include the provisions from the Australian
Code that relate to contract changes on grounds of hardship.
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We recommend that the 3 day ‘right to cancel’ period be increased
to 7 days.
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We recommend the Bill adopt the “amount of security” clauses of
the Australian Code. That provides that the security is void if
it secures an amount that exceeds the sum of the amount of the
liabilities of the borrower and the reasonable enforcement expenses
of enforcement. This should also apply to guarantees.
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We strongly recommend to the Commerce Commission that it give
effect to its role through a fully resourced and specialist consumer
credit unit which undertakes active enforcement on a case-by-case
basis. Further, we suggest that the Commerce Committee invite
the Commission to present a briefing of its intentions for giving
effect to this Bill.
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