Consumer finance company Real Finance Limited has entered into a settlement with the Commerce Commission, after acknowledging that it charged unreasonable fees on its loans and agreeing to compensate borrowers.
Real Finance admits entering into consumer credit contracts with borrowers between April 2013 and March 2020 that breached the Credit Contracts and Consumer Finance Act (CCCFA) because the fees charged exceeded reasonable costs incurred by the company.
Commission Chair Anna Rawlings says credit law has been clear for many years that fees must be reasonable, and they should only recover costs that are closely related to the matter for which the fees were being charged.
“When people borrow money to buy goods on credit, the credit and default fees they are charged are not intended to be used to cover general business expenses or to make a profit,” says Ms Rawlings.
“This case will help lenders to set fees in a way that is consistent with their obligations under credit law. It also shows that regularly reviewing your fees is not sufficient on its own. Lenders also need to act on the findings of any review.”
Real Finance conducted annual fee reviews and yet did not take action to stop the profits being generated by the fees it charged.
“If lenders find their fees are unreasonable, then the fees must be reduced. If borrowers are overcharged, the Commission’s expectation is that a lender will provide a refund to affected borrowers.”
The Commission used an expert from KPMG to calculate reasonable costs. The expert undertook a fee review and determined that the base establishment, administration and default fees charged by Real Finance included expenditure that did not closely relate to the matter for which the fees were charged. For the administration fee, this included general overheads such as a portion of advertising costs and staff expenses that were not closely connected with administering loans.
Real Finance has accepted that the establishment, administration, and default fees of around 4,000 individual loan contracts exceeded reasonable costs and has agreed to pay a total of $1,360,010 to 515 individual borrowers who were overcharged.
In April 2022, the High Court granted declarations sought by the Commission, unopposed by Real Finance, that Real Finance had contravened its obligations under the CCCFA by charging unreasonable fees.
Her Honour Justice Grice noted that there is “a public interest in the Court declaring Real Finance’s conduct to be a breach of the CCCFA.” This is because “the facts giving rise to the declaration will provide a tangible illustration of a fee-setting methodology,” which “will provide useful guidance to the market on the practical application of those provisions, particularly in light of recent amendments to the CCCFA.”
Real Finance will be contacting affected borrowers as part of the settlement and has agreed to set up a page on its website with information on the refunds owed to affected borrowers.
Following changes to the CCCFA, from 1 December 2021 lenders must keep records for at least seven years demonstrating that their fees are reasonable and review their fees if there is a material change to the cost base. These records must demonstrate that each fee was not unreasonable at the time it was set or reviewed.
A copy of the settlement agreement and undertakings can be found on the Commission’s website.
Real Finance Limited is a Wellington-based lending company established in 2008. It operates online and from branches in Wellington and Christchurch.
The Commission’s investigation into Real Finance was opened in 2018 after the Commission received a request from the District Court to intervene in an application by Real Finance for summary judgment against a borrower. The District Court was considering, of its own motion, whether the administration fees charged by Real Finance were oppressive.
Following its investigation, the Commission filed civil proceedings against Real Finance in 2019, alleging it had charged borrowers unreasonable fees in breach of section 41 of the CCCFA.
Other unreasonable fee cases
Unreasonable fees have been a priority area for the Commission. In addition to this investigation, other unreasonable fees cases taken by the Commission include:
- Mainland Finance settlement over unreasonable credit and default fees
- Online lender, Harmoney agreed to repay $7 million over unreasonable fees
- UDC settlement with Commission on unreasonable fees
- Online lender Moola in $2.8m settlement with Commission over fees
- MTF and Sportzone for unreasonable fees.
The Commission may accept a written undertaking given by a person or business in connection with any matter relating to the enforcement of the CCCFA. If any term of the undertaking is breached, the Commission can apply to the court to enforce the undertaking, including applying for an order requiring compliance with it.
Changes to credit laws