LAWFUEL – NZ Law Jobs, Legal Announcements – Loan customers described by a Judge as some of the “more vulnerable and desperate members of society” are to get a partial refund from a pawn broker after a successful prosecution by the Commerce Commission.
West Auckland credit provider Galistair Enterprises Limited, trading as xtraCASH Finance, has been fined $45,000 for breaching the Credit Contracts and Consumer Finance Act (CCCF Act) and the Fair Trading Act, in relation to 68 loan contracts.
In the Auckland District Court, Galistair Enterprises Limited pleaded guilty to 98 charges of breaching the CCCF Act and to one representative charge of breaching the Fair Trading Act. The charges related to:
Miscalculating interest payments, so that borrowers were overcharged a total of $23,935
Charging unreasonable credit fees; and
Failing to disclose to borrowers key information such as the annual interest rate, the method used to calculate full prepayment, and how and when customers could cancel their loans.
Galistair Enterprises has several franchises throughout New Zealand offering a pawn broking service trading as xtraCASH. The xtraCASH franchise in West Auckland began offering personal loans, using customers’ vehicles as security, when those customers couldn’t raise the money they needed by pawning their goods.
The Court found that Galistair Enterprises breached the CCCF Act by calculating interest on the total amount of the initial loans instead of on the decreasing unpaid balance. This resulted in Galistair Enterprises overcharging 55 customers a total of $23,935. The company has been ordered by the Court to refund $23,935 to those customers.
Commission Chair Paula Rebstock says, “The CCCF Act is quite clear as to how interest should be calculated. Lenders may no longer charge a flat rate amount of interest up front, but must calculate interest on the decreasing unpaid balance over the life of the loan.”
“This is a serious breach of the Act. Finance companies, whether big or small, are in a position of trust and overcharging, in this case amounts ranging between $25 and $2,658, can be hard for borrowers to detect,” says Ms Rebstock.
Galistair Enterprises also failed to comply with the CCCF Act when it included interest charges payable for the full term of the credit contract in the settlement amounts for two customers who repaid their loans early. By calculating the full prepayment in this way, customers achieved no benefit in early loan repayment. “The rule is simple, interest stops when the loan is repaid,” says Ms Rebstock
Galistair Enterprises also charged establishment fees ranging from $300 – $500 per loan and admitted that in setting these fees it included the cost of processing other customers’ unsuccessful applications. The Auckland District Court found that successful applicants were charged a fee which, in effect, covered the cost of processing up to five unsuccessful applications. Judge Aitken said that this was “palpably an unfair and inappropriate business practice where the client base comprises some of the more vulnerable and desperate members of society.”
Galistair Enterprises admitted breaching the CCCF Act by failing to disclose in contracts key information, including the annual interest rate, the method used to calculate full prepayment, and how and when customers could cancel their loans.
District Court Judge Aitken agreed with the Commission that Galistair Enterprises was “utterly reckless” when it provided top-up loans or additional advances to existing customers without entering into written agreements. Judge Aitken said that the potential for abuse was considerable, particularly as the company kept poor records.
“If a lender fails to provide the required disclosure, the CCCF Act prohibits the lender from enforcing the contract until disclosure is made,” says Ms Rebstock. Galistair Enterprises admitted breaching the Fair Trading Act by enforcing the contracts, issuing 15 pre-possession notices, repossessing 10 vehicles and, on one occasion, registering a default against a customer with a credit reporting agency.
The Commission is targeting credit providers who deal with the more vulnerable consumers to ensure they comply with the CCCF Act, says Ms Rebstock.
“Galistair Enterprises operates as a fringe lender in a market sector where borrowers may have fewer options to borrow money. It is even more important that these borrowers should be provided with the information that enables them to make the best decision for their circumstances. The documentation and processes used by Galistair Enterprises to manage its loans were wholly inadequate,” Ms Rebstock says.
Customers may also be able to claim further refunds by taking their own action under the Credit Contracts and Consumer Finance Act.
CCCF Act: Credit Contracts and Consumer Finance Act – A general guide for the credit industry can be downloaded from the Commerce Commission’s website at www.comcom.govt.nz
Previous CCCF Act prosecutions: This is the third conviction under the CCCF Act. In November 2006 Senate Finance was the first company to be fined for breaching the Act and was fined $59,000 for providing disclosure to borrowers that was not easily readable. In May the partners of Auckland car finance business Dolbak Finance were fined $100,000 for failing to provide adequate disclosure to borrowers. The pair was also ordered to pay $46,600 to customers in statutory damages.