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Communtity Law Manual | Credit & debt | Lenders: Their responsibilities to you

Lenders: Their responsibilities to you

Responsible lending requirements

The lender responsibility principles

Credit Contracts and Consumer Finance Act 2003, s 9C, Credit Contracts and Consumer Finance (Lender Inquiries into Suitability and Affordability) Amendment Regulations 2020

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 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. See “Challenging an unfair credit contract” in this chapter.
  • Meeting all legal obligations – The lender must meet all their legal obligations to you, including, for example, their obligations under the CCCF Act to provide you with necessary information, their obligations under the Fair Trading Act 1986 not to engage in false or misleading advertising, and their obligations under the Consumer Guarantees Act 1993 to provide their lending services with reasonable care and skill.
New rules on suitability and affordability

Credit Contracts and Consumer Finance (Lender Inquiries into Suitability and Affordability) Amendment Regulations 2020

From 1 October 2021 there are new rules coming into force covering what information a lender must consider and what questions they should ask before a credit contract is entered into or a major change is made to an existing contract. These rules set out the requirements on lenders for making reasonable inquiries about suitability and affordability. Suitability means that the loan meets your needs and affordability means that you are able to make payments under the agreement without suffering substantial hardship. Otherwise, the lender will breach the lender responsibilities of the CCCF Act.

What information does a lender need to look at?

S 4AA Credit Contracts and Consumer Finance (Lender Inquiries into Suitability and Affordability) Amendment Regulations 2020

A lender must ask you questions and consider all of the following aspects when assessing the suitability of your credit contract before one is entered into or makes a major change to an existing credit contract. These include:

  • 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 ask you questions to find out 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, if 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’ in the “Consumer Protection” chapter.
  • 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).

Affordability inquiries

S 4AD Credit Contracts and Consumer Finance (Lender Inquiries into Suitability and Affordability) Amendment Regulations 2020

The new rules also set out requirements for lenders to make reasonable inquiries about whether it is likely you’ll be able to make the payments without suffering substantial hardship.

If you are using your income to make payments

If you will rely on your income to pay back the lender, full income and expense estimates are generally required. This means the lender must make reasonable inquiries to estimate your likely income and expenses. The lender has to be satisfied that your likely income will be more than your likely expenses. They also have to include a reasonable buffer in case you experience unexpected expenses. They need recent, reliable and detailed information about your income and expenses and check this based on reliable evidence. This may include asking for your bank statements and evidence of your income.

Full income and expense estimates are also required for high cost contracts (see “High cost credit contracts” in this section).

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 have failed to make a payment (“been in default”) on a previous credit contract in the last 90 days, there is a presumption that you will not be able to make payments in a high cost credit contract without suffering substantial hardship.

If you are using funds other than income to make payments

If you will rely (wholly or partly) on means other than income to pay the lender, the lender must make reasonable inquiries, and be satisfied, on reasonable grounds, that it is likely that those other means will enable you to make those payments without suffering substantial hardship, for example taking out a loan and relying on the sale of a car to pay the loan back.

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. The investigation focused on whether lenders were complying with the responsible lending principles of the CCCF Act. One of the lenders contacted during that investigation was found to have breached the responsible lending principles. For this case study, we will call it ‘Lucky Lenders’.

Lucky Lenders was a company that 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 had overdue payments who 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. The Commission applied for a “declaratory order on admission of facts” which means 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, at www.consumerprotection.govt.nz

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 “Challenging an unfair contract though a dispute resolution scheme” in this section.

The dispute resolution scheme will deal with your individual case while the Commerce Commission takes action on industry wide practices. The courts can also order them to pay you compensation or can make various other orders. Lenders who repeatedly breach the responsibility principles can be banned from operating a credit business.

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