Dialogue: Fast law changes vital so buyers aren't ripped off

The Government proposes to offer consumers more protection by introducing fairer credit laws. It's about time, writes CATRIONA MACLENNAN*.

Changes to New Zealand's outdated and unfair credit laws should be enacted as soon as possible to stop consumers being ripped off. Vulnerable consumers are being exploited and practices which have been banned overseas are still flourishing here.

The Government last week announced sweeping proposals to update and improve the law after a lengthy review and public consultation.

There have been no major changes to our consumer credit laws since 1981, when the Credit Contracts Act came into force. Piecemeal development of the law over a lengthy period has meant that consumer protection is found in many laws: the 1971 Hire Purchase Act, the 1997 Credit (Repossession) Act, the 1967 Door to Door Sales Act, the 1998 Credit Contracts Amendment Act, the 1924 Chattels Transfer Act and the 1989 Motor Vehicle Securities Act.

Protection is inadequate and procedures for seeking redress are cumbersome.

My experience working with borrowers in South Auckland who have English as a second language is that many have little understanding of the contract when they enter into it. Once the papers have been signed, it is extremely difficult to assist people because the remedy is to bring a District Court action. This is expensive, time-consuming and stressful for clients.

The state of the law means that the borrower faces a high threshold to obtain relief.

Take the case of a man who bought a 1994 car for $28,000 on hire purchase. When he signed the credit contract, he did not understand that he would pay a total of $60,000, including a final payment of $10,000 at the end of the loan period.

After repaying $18,000 he got into financial difficulties but could not get out of the contract because the car by then was worth only about $12,000 and a further $27,000 was required to settle the loan.

The fact that there are two separate contracts - one with the caryard which sells the vehicle and one with the finance company - makes court proceedings extremely complicated for consumers. The caryard might no longer exist by the time the borrower is in financial difficulties, and representations about the credit contract are normally made by the vehicle salesperson and not the finance company.

Obtaining relief in law is most difficult because the consumer normally has to establish that there has been oppressive conduct. But finance rates of 30 or 40 per cent are not generally considered oppressive.

One of the worst aspects of the present law is the way in which interest payments are calculated when a consumer repays a loan early. The outdated and unfair Rule of 78, which has been banned in most other countries, still applies.

It means that even if people repay loans very early, they will still be liable for almost all of the interest. Consumers are, therefore, effectively trapped in loan agreements because even if they find a better deal they cannot afford to change finance companies.

The Government's decision to abolish the Rule of 78 is a positive step. In future, there will be limits on how lenders can charge interest and on the types of fees that can be imposed.

Interest will not be able to be charged in advance, and a formula will be provided for calculating any early settlement charges. This should mean that people who repay loans early will make significant interest savings.

Other changes announced by the Government include the setting up of a public enforcement agency to act on behalf of consumers, and greater powers for the courts to impose sanctions where lenders breach the law.

The Credit Contracts Act and the Hire Purchase Act are to be replaced by a single Consumer Credit Bill, designed to modernise the law and deal with the growing computerisation of banking and loan services. The bill is expected to be introduced to Parliament in the first part of next year. A single piece of legislation should make the law clearer and easier to understand.

Loan documents will in future provide more information so that consumers understand them better. For example, lenders will be required to state clearly whether there are penalties for early repayment. Model forms are to be provided in the legislation to assist lenders.

This is a crucial issue. For most people it is too late once they have signed documents. They will be stuck with the contract. They, therefore, need to be very clear about the full implications before they put pen to paper.

The starkest way to bring home to consumers the meaning of a credit contract would be to have nothing on the first page of the contract other than the total sum payable, in large black letters. Failing that, simple language should be used. Making independent legal advice mandatory for borrowers and guarantors would help to ensure better understanding, but there is no proposal to do that.

It is disappointing that the changes will not alter the definition of oppressive, which is difficult for consumers to establish. The vexed issue of assignments is also not dealt with.

Assignments should be restricted to cases involving family members, rather than taking place between strangers, as has been the evolving practice in Auckland in recent years.

Assignments were intended to allow family members to rearrange affairs if one member got into financial difficulties and another wished to take over the vehicle and the contract.

However, in Auckland assignments are now being used by car dealers when buyers return to the yard wishing to trade up and enter into a new hire-purchase agreement. Some borrowers do not understand that the wording of the assignment is likely to mean they also remain liable under the original contract.

The key will be to ensure that the legislation is passed and takes effect speedily. There must be no repeat of the situation 10 years ago when credit laws were reviewed but law changes were never made.

* Catriona MacLennan is a South Auckland barrister.