Lenders: Their responsibilities to you
Responsible lending requirements
Lenders must be certified by the Commerce Commission
Credit Contracts and Consumer Finance Act 2003, Part 5A
From October 2021, lenders providing consumer credit or mobile trading services must be certified as “fit and proper” persons by the Commerce Commission. To meet this standard, a lender needs to be financially sound, honest, reputable, reliable and competent.
For more information, go to the Commerce Commission website, here (or go to: www.comcom.govt.nz and search: “Fit and proper person certification”).
The lender responsibility principles
Credit Contracts and Consumer Finance Act 2003, s 9C Credit Contracts and Consumer Finance Regulations 2004, ss 4AA – 4AO
All lenders have to comply with the “lender responsibility principles” set out in the Credit Contracts and Consumer Finance Act. These are:
- Reasonable care and skill – A lender must exercise the care, diligence and skill of a responsible lender at all times. This includes when they’re advertising, before they enter into a credit contract with you, and in all their later dealings with you that relate to the contract.
- Considering your borrowing needs and ability to repay – Before entering into a credit contract, a lender must make reasonable enquiries so that they’re satisfied that the contract will be suitable for you, likely to meet your needs, and that you’ll be likely to make your payments without suffering substantial hardship. The lender is entitled to rely on the information you give them, unless they have reasonable grounds to believe it’s not reliable.
- Helping you reach informed decisions – The lender must help you reach informed decisions, not only about whether to enter into the credit contract but also in all later dealings involving the contract, and they must help you to be reasonably aware of the contract’s full implications. As part of this responsibility, the lender must make sure that:
- their advertising and any information they give you aren’t misleading, deceptive or confusing, and
- the terms of the contract, and any later changes to those terms, are written in plain language and are clear, concise and understandable.
- Reasonable, ethical treatment – The lender must treat you and your property reasonably and ethically. This includes when problems arise (like you missing payments), or when you suffer unforeseen hardship, or when the lender is repossessing hire-purchase goods or any property that you’ve put up as security for a loan. During any repossession process, the lender must take all reasonable steps to make sure that no damage is done to the repossessed items, that the repossessed items are adequately stored and protected, and that the people carrying out the repossession don’t act unreasonably when they enter your home.
- No oppressive terms or conduct – The lender must make sure that the credit contract isn’t oppressive, that they don’t use oppressive means to pressure you to enter into it, and that they don’t exercise any of their rights or powers under the contract in an oppressive way. Oppressive means that the contract or the lender’s conduct is extremely unfair or unreasonable. For more information, see: “Challenging an unfair credit contract”.
- Meeting all legal obligations – The lender must meet all their legal obligations to you, including their obligations under:
- the CCCF Act to provide you with necessary information,
- the Fair Trading Act 1986 not to engage in false or misleading advertising, and
- the Consumer Guarantees Act 1993 to provide their lending services with reasonable care and skill.
What information does a lender need to look at?
Credit Contracts and Consumer Finance Regulations 2004, ss 4AA – 4AO
Before you enter into a credit contract (or make a major change to an existing credit contract), a lender must ask you questions and consider all of the following aspects when assessing if that credit contract is suitable:
- the amount of the credit contract
- the purpose of the credit contract
- how long it’s for, or if it is a revolving credit contract (for example a credit card).
The lender also has to consider whether the agreement:
- requires you to make any lump sum payment instead of, or in addition to, any regular payments
- is a credit sale of property and you will not be given or sent the property within 20 working days of the agreement
- is a refinancing agreement (where you pay off all or part of an unpaid balance on an existing agreement)
- is for a reverse mortgage (where you use your home as security for a loan)
- is a repayment waiver (where the lender agrees not to pursue the debt if you are unable to repay the loan due to a specified cause such as redundancy, illness or death. A fee is charged by the lender for the waiver)
- is an extended warranty (see: “Extended warranties”)
- is for a relevant insurance contract
- has any extra fees or charges that could be paid for separately (for example, credit insurance, extended warranties or repayment waiver that could be paid separately).
Lenders have to make reasonable inquiries about whether it is likely you’ll be able to make the payments without suffering substantial hardship. If they do find there will be substantial hardship, the lender should not make the agreement.
When will I have to provide my income and expenses?
If you will rely on your income to pay back the lender, or if you are entering into a high cost contract (see: “High cost credit contracts”), the lender has to ask you about your income and expenses. They’ll need recent, reliable and detailed information about your income and expenses, and they’ll have to check this based on reliable evidence.
They have to make reasonable enquires to check:
- your estimated income and expenses, and
- if your income is likely to be more than your expenses (taking into account a reasonable buffer in case you have unexpected expenses).
For high cost credit contracts, reasonable enquiries mean the lender must get a credit report and three months of bank statements. For other contracts, lenders must get a credit report and assess if there have been any material changes to your circumstances since the date of the last contract. If you’ve failed to make a payment (“been in default”) on another credit contract in the last 90 days, there’s a presumption that you won’t be able to make payments in a high cost credit contract, without suffering substantial hardship
If you’re relying on other funds to pay the lender (for example, if you’re relying on selling your car to pay the loan), the lender has to make reasonable enquiries and believe on reasonable grounds that these funds will enable you to make the payment, and that you won’t suffer substantial hardship.
Case Study: Lucky Lenders breach lender responsibilities
In 2016, the Commerce Commission conducted an industry wide investigation into a number of high cost short term lenders to check if they were complying with the responsible lending principles in the CCCF Act. They found that one of the lenders, who we’ll call “Lucky Lenders,” had not complied with these principles.
Lucky Lenders lent borrowers between $100 and $1,000 and charged interest ranging between 52 % and 803 % per year. Loan terms ranged between seven and 45 days. The loan and all interest had to be paid at the end of the loan period. A significant portion of Lucky Lenders’ loans were made with existing borrowers – some of whom had overdue payments and were encouraged to reapply for further, sometimes larger loans. One allegation highlighted that during September 2015 over half of Lucky Lenders’ loans were approved within ten minutes of an application being made.
As a result of the investigation, the Commerce Commission and Lucky Lenders reached a settlement. As a part of the settlement, Lucky Lenders admitted that they had breached the responsible lending principles of the CCCF Act to a number of borrowers, for:
- failing to make reasonable enquiries as to those borrowers’ requirements and objectives
- failing to exercise reasonable care in advertising loans
- failing to assist those borrowers to reach informed decisions as to whether or not to enter into loans.
Lucky Lenders also repaid the cost of borrowing to a number of borrowers, totalling over $80,000.
Note: A Responsible Lending Code issued by the government expands on the lender responsibility principles and gives guidance to lenders on how to put those principles into practice. The Code isn’t law, and doesn’t legally bind lenders. However, if a lender is taken to court and they can show that they complied with the Code, this will be treated as evidence that they complied with the lender responsibility principles. That fact won’t decide the issue, however, as it can be weighed against other evidence. The Code is available on the Consumer Protection website, here (or go to: www.consumerprotection.govt.nz and search: “What lenders must do”).
What happens if a lender breaches the lender responsibility principles?
Credit Contracts and Consumer Finance Act 2003, ss 9C, 93, 96, 108
If a lender breaches the lender responsibility principles, you can complain to one of the dispute resolution schemes as well as the Commerce Commission (see: “Dispute resolution schemes”).
The dispute resolution scheme will deal with your individual case while the Commerce Commission takes action on industry wide practices. The courts can also make various orders against lenders who have breached the principles, like ordering them to pay you compensation or to stop doing certain things. Lenders who repeatedly breach the responsibility principles can be banned from operating a credit business.
