Christchurch-based finance company Acute Finance Limited (Acute) has been fined $22,000 and says it has taken steps to return $10,000 to borrowers, after pleading guilty to four charges under the Credit Contracts and Consumer Finance Act (CCCF Act).

The charges relate to the fee that borrowers paid for Acute’s repayment waiver, under which Acute agreed to meet a borrower’s obligations under the loan if they died, became disabled, or were made redundant. The repayment waiver was mandatory under the terms of the loan.

In sentencing in the Christchurch District Court, Judge Gilbert said the offending was careless and that Acute was “charging about three times more than it was entitled to and therefore generating profits not permitted by the Act.”

Acute charged borrowers a repayment waiver fee (RWF) which varied based on the size of the loan. Because the fee was mandatory, the CCCF Act requires that the fee must not be unreasonable.

In the Sportzone/MTF litigation the Supreme Court held that creditors cannot profit from fees. Acute’s RWF exceeded its costs of providing the repayment waiver meaning that it was in breach of its legal requirements.

The Commission’s General Manager, Competition, Antonia Horrocks said “the Commission welcomes today’s judgment which confirms that these fees were unreasonable. Acute’s RWF meant that borrowers paid three times more than they should have for the protection offered by the repayment waiver.”

“All Acute borrowers prior to May 2016 were likely to have been required to pay the fee, and we note that consumers were unaware of the conduct.  The case arose from the Commission’s proactive compliance work with the credit sector,” said Ms Horrocks.

Acute specialises in small personal loans, primarily to low income individuals. Its loans range between $300 and $5,000 for terms of up to three years.

During the 2014 financial year Acute entered into 430 loan contracts with debtors. The prosecution focused on a sample of 67 of those contracts.

Acute says it has taken steps to credit the accounts of existing customers and refund borrowers who are no longer customers.

Background

This case follows the Supreme Court’s ruling in favour of the Commission in the Sportzone/MTF case.

The Court’s ruling upheld earlier High Court and Court of Appeal judgments that backed the Commission’s approach to assessing whether credit fees charged by lenders are reasonable as required by the CCCF Act.

The Supreme Court held that credit fees can cover only costs that are “closely related” to the loan transaction.

The Supreme Court found that the CCCF Act “indicates a transaction-specific approach to the setting of fees. It is not permissible to take all operating costs (or virtually all) and allocate them to one fee or the other. The consequence of this is that any costs incurred by a credit provider will not be referable to particular credit transactions and will therefore have to be recovered in the interest rate”.