Poor lending practices cost Auckland finance company over $55,000
3 October 2011
The Commerce Commission is urging lower-tier lenders to get up to speed with consumer law after an Auckland-based finance company and its director were fined a total of $55,475 in the Auckland District Court on Thursday. The company has also refunded borrowers over $39,600 and written off loan balances.
eFeMCee Finance Limited (FMC) and its director, Albert Loots, each pleaded guilty to 40 charges under the Credit Contracts and Consumer Finance and Fair Trading Acts following a Commission investigation into the company's lending practices. FMC admitted charging unreasonable fees and misleading customers. In particular, the company admitted:
- charging unreasonable fees for a payment protection plan and for insurance
- unreasonably requiring borrowers to take out insurance
- failing to give borrowers copies of any policy documents
- overcharging borrowers who paid back their loans early by not rebating insurance premiums.
FMC charged borrowers up to 31.5 per cent of the cash advance for insurance, and the same amount again for a payment protection plan. As an example, this meant that fees of $1,890 were added to a $3,000 loan. Both were charged at the beginning of the loan and therefore carried interest of 29 per cent per annum from that time.
The payment protection plan was in effect a bond designed by Mr Loots to ensure that borrowers met their repayments - which was both misleading and contrary to industry practice. Mr Loots had sole discretion in determining whether or not to offset this bond against the outstanding balance of the loan at the end of the contract. According to Mr Loots the insurance was to cover the loan repayments if a debtor died or fell sick, but there was no policy document setting out the cover provided and payment was also at his discretion.
Commerce Commission Competition Manager Graham Gill said "These were deplorable business practices which took advantage of vulnerable borrowers. Borrowers were charged for services they didn't need or didn't know about. The fees were just included in the loan contracts when it was given to the borrowers to sign. They were not given insurance policies or given any written information about the payment protection plan or told how they could make a claim."
"The way the fees were charged and the lack of explanation or information meant that customers were not able to make an informed choice about the need for either the payment protection plan or the insurance. Additionally, the impact of front-loading the fees was huge because of the compounding interest, and this often caused the loans to blow out, leaving FMC's customers really struggling to repay their debt," said Mr Gill.
Judge Thorburn was particularly perturbed at this lack of commitment to comply with the law and noted that the defendants had "utterly failed" in what had to be their minimum obligations under the law. "When Mr Loots came to an interview at the Commission and was asked about his knowledge of the Act which governs his business he said it was "fairly nothing," said Mr Gill.
As a result of the Commission's case, FMC has now reduced the loan balances of about 16 loan contracts belonging to debtors, and refunded $39,600 to six borrowers who paid unreasonable fees for insurance and payment protection policies between April and June 2008, as well as the compound interest that was applied to those fees. While it was standard practice for FMC to charge fees for both insurance and the payment protection plan prior to June 2008, the Commission was only able to lay criminal charges in relation to a small group of customers due to a three year limitation period under the Act.
A copy of the judgment will be available shortly on the Commission's website at: www.comcom.govt.nz/informed-consumers-enforcement-actions-register
eFeMCee Finance Limited (FMC) is an Auckland-based finance company established in 1996. It is run Albert Loots and specialises in bridging finance and personal lending. Loans advanced by FMC to borrowers were typically for a principal sum of less than $5,000 and for a term of around three years. Many borrowers were 'repeat' clients and had more than one loan contract with FMC.
The Credit Contracts and Consumer Finance Act 2003 regulates consumer lending, consumer leases and buy-back transactions, requiring the disclosure of certain information to consumers entering into consumer credit contracts and providing rules that relate to interest, payments and credit fees.
Under the Fair Trading Act 1986 it is an offence to make a false or misleading representation.
The following are examples of individuals affected by FMC's actions. Names have been withheld for privacy reasons.
Case study 1: Ms L borrowed $3,000 in June 2008. Fees of $2,265 were added to that balance at the start of the loan, and with interest, the total amount repayable over the loan term was calculated to be over $8,000. Ms L generally met her loan repayment obligations, making 117 weekly payments of $55 over the next 2 ½ years, a total of $6,435. However, the effect of the compound interest, particularly on the fees charged at the start of the loan was substantial. In November 2010, when the Commission first requested information about this loan, Ms L still owed $2,980 (only $20 less than the cash sum she had borrowed).
FMC and Mr Loots pleaded guilty to charging unreasonable fees of $950 for insurance and $950 for a payment protection plan on this loan. When these 'unreasonable' fees were removed, and the loan was recalculated, it was found that Ms L had completed repayment of the loan in April 2010. After the investigation, FMC and Mr Loots agreed to write off the balance of the loan and made a refund of $3,200 which was the amount overpaid by Ms L.
Case study 2: Mrs T borrowed cash totalling $10,500 over the period from August 2007 to June 2008. By mid-2010, Mrs T had made payments of $16,767 on the loans, but she still owed $15,600. Mrs T wanted to rearrange the payments on her loan, and reduce the payments to $125 per week. At that rate, the loan would continue until 2014, with payments totalling a further $26,000. Repayments would therefore total over $42,000 for the original $10,500 loan. One of the reasons the loans ballooned out was the 'unreasonable' fees. FMC and Mr Loots pleaded guilty to charging unreasonable fees of $7,900 for insurance and payment protection plans at the time when the loans were originally advanced. Mrs T received a refund of the amounts overpaid which was applied to an additional loan she was guaranteeing.
Case study 3: Mrs F borrowed $4,000 in April 2008. Despite her family being solely dependent on a sickness benefit as a result of a stroke Mr F had suffered, Mrs F was charged $935 for income protection insurance and $935 for a payment protection plan. Both of these fees were already in the loan document presented to Mrs F for signing, and as they were charged at the start of the loan they were interest-bearing at the standard rate of 29 per cent per annum. Mrs F made regular repayments of $60-$75 per week and by November 2010 had repaid $7,340. However, at that stage, FMC records showed that she still owed $2,985. When the 'unreasonable' fees were excluded it was calculated that Mrs F had paid off the debt and overpaid FMC by $1,830. Mrs F received a refund of the overpaid amount. FMC and Mr Loots pleaded guilty to charging unreasonable insurance and payment protection plan fees, and for unreasonably requiring Mrs F to take out insurance.