Changes to Credit Laws

On 2 April 2012, a draft of the Credit Contracts and Consumer Finance Amendment Bill (‘the Bill’) was released by the then Consumer Affairs Minister, Hon. Chris Termain. The Bill seeks to amend the Credit Contracts and Consumer Finance Act 2003 (‘the CCCFA’)by introducing the new principle of “responsible lending” in an effort to strengthen the legal rights and protection of consumers when they borrow money.

Reason for Reform

An impressive 250 distinguished members of the community, financial and business organisations joined forces during a Financial Summit last August to consider ways of addressing irresponsible lending. Law reforms were considered necessary in a bid to prevent unscrupulous lenders preying on desperate borrowers who are often further disadvantaged as a consequence of borrowing. On 31 October 2011, calls for reform were agreed to by the Cabinet.

The Principle of Responsible Lending

The principle of responsible lending will create a duty on lenders to take into account the circumstances of their customers and the effect the borrowing will have on their lives. The overall objective of responsible lending is to improve the standard of lending practices within the finance industry.

Proposed key changes to the CCCFA include:

• Making it illegal to lend money to someone whose loan repayments would be likely to result in substantial hardship. The responsibility of assessing whether hardship would ensue will be left to the discretion of the lender,
• Requiring more timely and complete disclosure of loan terms – lenders will be required to make all of their loan terms and fees readily available on their websites and in their business premises. The change is aimed at allowing borrowers to make informed decisions,
• Extending the ‘cooling-off’ period for borrowers to cancel their loan from three working days to five working days after signing,
• Better controls to prevent misleading, deceptive or confusing advertising,
• Introducing a new, mandatory Code of Responsible Lending under the CCCFA. This code will set out responsible lending principles,
• Extending the limitation period under the CCCFA on challenging fees as being unreasonable from one year to three years,
• Obligating lenders to properly consider applications by borrowers for hardship relief, and provide reasons for their decisions.

Unreasonable Fees

Section 41 of the CCCFA currently provides that credit and default fees must not be unreasonable. The Bill in its current form would further define the term “credit fees” along with proposing a new test for unreasonableness. Separate tests are proposed for determining what will constitute unreasonable credit fees and default fees.

According to the former Consumer Affairs Minister, the terms of the Bill will result in “the biggest changes to consumer credit law in a decade.” It is anticipated that the new laws will come into force by mid-2013.