Budget Loans pleads guilty to misleading - $500,000 returned to consumers
26 July 2010
Budget Loans Limited has pleaded guilty to 34 charges of breaching the Fair Trading Act in the Auckland District Court today. The charges relate to misleading claims made by Budget Loans that it was entitled to recover certain interest and fees from its debtors, when as a matter of law it was not. Budget Loans have been fined $30,750.
When Budget Loans took over National Finance 2000 Limited's loan book in 2006, it sent a 'welcome letter' to National Finance's debtors advising them that their loan was now owned by Budget Loans. Debtors who received the welcome letter were charged a $15 fee.
"Consumer credit contracts are regulated by the Credit Contracts and Consumer Finance Act (CCCF Act), which requires that all credit fees be disclosed to debtors. Appropriate disclosure of fees is a basic tenet of the CCCF Act and creditors cannot charge fees that have not been disclosed," said Graham Gill, Commerce Commission Enforcement Manager, Auckland. "The $15 'welcome letter' fee was not disclosed before it was charged and Budget Loans therefore misled debtors by representing that it was entitled to charge the fee, when it was not."
The Commerce Commission's investigation also found that Budget Loans misrepresented, in contracts, settlement statements, notices and letters sent to some debtors, that Budget Loans was entitled to continue to charge interest and fees after it had repossessed and sold consumer goods and applied the proceeds to the outstanding balance of the debt. However, the Credit (Repossession) Act 1997 allows creditors to only recover the balance still outstanding and prohibits further interest and fees from being charged after the sale of a security item.
Budget Loans also misled consumers as to its rights under the Personal Property Securities Act 1999. In some instances Budget Loans required debtors to secure loans against 'all present and after acquired property' - this clause is known in the industry as an APAAP clause. However, the Personal Property Securities Act requires that the debtor must specifically identify which after acquired property is to be subject to the security interest and that a creditor may only repossess that identified property. Budget Loans misled some debtors by claiming it had the right to repossess all personal properties of these debtors by virtue of the APAAP clause, including property that the debtor had not specifically identified.
"Consumer legislation such as the Credit (Repossession) Act and the Credit Contracts and Consumer Finance Act provide important protection to lenders and borrowers alike. All lenders need to ensure that their business practices and contracts comply with the relevant consumer legislation, as failure to do so means businesses run the risk of breaching the Fair Trading Act," said Graham Gill.
Budget Loans has reversed or refunded over $400,000 of the approximately $500,000 of overcharged interest and fees. The company has agreed to reverse or refund the remainder of the overcharged interest and fees as well. The Court recognised this reparation in setting a fine for the offending.
During the Commission's investigation Budget Loans also voluntarily reversed or refunded an additional $571,000 to its debtors in relation to credit fees that were not the subject of the current charges.
The Fair Trading Act
Section 13 (i)
False [or misleading] representations
No person shall, in trade, in connection with the supply or possible supply of goods or services or with the promotion by any means of the supply or use of goods or services, –
Make a false or misleading representation concerning the existence, exclusion, or effect of any condition, warranty, guarantee, right, or remedy.
Budget Loans Limited is a limited liability company, incorporated in November 2004. Budget Loans provides finance for consumers who might otherwise have difficulty accessing credit due to poor past credit history or limited financial resources. Budget Loans is a wholly owned subsidiary of Cynotech Finance Group Limited, which in turn is owned by Cynotech Holdings Limited.
Cynotech Holdings Limited is a NZX listed company which owns a number of subsidiaries involved in finance (commercial and consumer), food manufacturing, satellite communication and corporate advisory services.
In November 2006 Cynotech Holdings Limited acquired the loan book of National Finance 2000 Limited (NFL) for $7.7 million. The loans were initially managed by Budget Loans Limited and in December 2006 Cynotech Holdings Limited arranged to have the loans assigned to the Budget Loans Limited. Budget Loans Limited also entered into consumer credit contracts on its own behalf.