Cash Converters settles with Commerce Commission

Cash Converters settles with Commerce Commission over payday loans

The Commerce Commission has reached a settlement with Cash Converters and its associated companies in New Zealand. As part of the settlement the companies accept they breached the Credit Contracts and Consumer Finance Act (CCCF Act) in relation to payday loan contracts, known as Next Pay loans.

A Commission investigation identified that the inclusion of certain costs within the set up fees for Cash Converters’ Next Pay loans may be unreasonable under the CCCF Act.

The loans which were investigated differed from most other types of payday loans in that no interest was payable. Instead, when the loans were taken out, fees called establishment and data management fees were charged to the customer.

Under the CCCF Act any fee charged by the lender when setting up the loan is an establishment fee. The Act strictly limits what lenders can recover through such fees. The fees must be equal to or less than the actual costs of setting up the loan and must only recover costs relating to set up.

When calculating loan set up fees, Cash Converters included the cost of bad debts and defaults. As part of the settlement Cash Converters accept that they have breached the CCCF Act as including such costs in set up fees is unreasonable as they are not costs relating to establishing a loan.

The Commission accepts that the breaches were not deliberate and Cash Converters cooperated fully with the investigation. Under the settlement, Cash Converters have agreed to redesign their Next Pay loans to ensure that future loans comply with the CCCF Act.

“Lenders need to be careful when calculating establishment fees to ensure that the fees relate only to the cost of establishing loans. For example, in the Commission’s view, default costs cannot be charged to customers at the time they enter into a loan. These costs can only be charged, by way of a default fee, to customers who are actually in default. Similarly, lenders cannot use a fee as a way to recover bad debts,” said Graham Gill, Commerce Commission’s Fair Trading Manager, Auckland.

“Fees should also be accurately described. In this case, Cash Converters charged default and bad debt costs as establishment and data management fees,” said Mr Gill. “All payday lenders need to comply with the CCCF Act and the Commission will continue to monitor compliance.”

“Payday loans are often entered into by people who may be in financially vulnerable circumstances so we are pleased that Cash Converters are making the necessary changes to ensure its Next Pay product is compliant with the law,” said Mr Gill.

As part of the settlement, Cash Converters have agreed to make donations totalling $60,000 to five community based groups that provide budget advisory services.

Background
Cash Converters originated in Australia, primarily as a trader of second hand goods. In late 1993 the Cash Converters business began operating in Auckland. There are currently 12 companies operating stores (via franchisee agreements) throughout New Zealand. The stores trade in second hand goods, undertake pawn broking activities and make unsecured, short-term cash advances called Next Pay loans.

Cash Converters have stores in the following locations:

Christchurch Central
Hamilton Central
Henderson
Linwood
Lower Hutt
Onehunga
Palmerston North
Panmure
Papanui
Porirua
Rotorua
Tauranga
Wanganui
Wellington

Next Pay New Zealand Limited provides support to Cash Converters franchisees for the purpose of making Next Pay loans.
Next Pay loans are payday loans offered by Cash Converters and its franchisees. Next Pay loans are generally for a term of four weeks. There is no interest charged, however, each Next Pay loan includes an establishment fee and a data management fee. Next Pay loans are for a maximum amount of $1,000. The average Next Pay loan is approximately $225.

The organisations receiving the donation from Cash Converters are:
Christians against Poverty (South Auckland);
Rotorua Budget Advisory Services;
Wanganui Budget Advisory Service;
Porirua Budget Service; and
Christchurch Methodist Mission.
Apart from ensuring that the donations have been made, the Commission has no role in the donations.

Payday loans are typically short-term unsecured loans that are advanced to borrowers who need money for bills or unforeseen circumstances until they receive their next pay.

The Credit Contracts and Consumer Finance Act (CCCF Act) applies to credit contracts, certain leases and buy-back transactions entered into after 1 April 2005. Among other things, the CCCF Act:
states what information about the transactions consumers must be given, when it must be given and what form the information should take;
sets minimum standards for some contractual terms; for example, the Act sets standards about the way in which interest is calculated and charged. There are also rules on credit fees and credit related insurance;
provides rules covering early repayment of debt including rules about how much a lender can charge in these circumstances; and
prevents lenders from enforcing contracts if they have not complied with particular provisions of the Act.

Only the courts can rule whether the CCCF Act has been breached and set appropriate penalties. The courts may order a lender to pay statutory damages to customers where they have failed to disclose adequately under the CCCF Act and can also impose fines of up to $30,000 per offence under the CCCF Act.

Consumers can contact the Commerce Commission on 0800 943 600 or contact@comcom.govt.nz if they think their rights under the Fair Trading or CCCF Acts have been breached. Community based organisations such as the Community Law Centres and budget advisory services can provide advice to consumers about their rights.

More information on the CCCF Act can be found on the Commerce Commission’s website at www.comcom.govt.nz under Consumer Credit.

ENDS

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