Landmark Court of Appeal decision on credit fees

Lender credit fees should only cover costs closely related to the particular loan transactions, according to a landmark Court of Appeal decision.

Tuesday, April 7th 2015, 10:05AM

by Miriam Bell

In the final ruling on the long running Motor Trade Finance Limited (MTF) and Sportzone Motorcycles Limited credit fees case, the Court of Appeal has upheld earlier judgments backing the Commerce Commission.

After receiving a complaint about MTF and Sportzone in 2006, the Commerce Commission investigated their lending practices.

Both companies were charged with charging unreasonable establishment fees, account maintenance fees, and arrears fees on 39 finance contracts, in breach of the Credit Contracts and Consumer Finance Act (CCCFA).

In 2013, a High Court ruling found the fees charged were unreasonable and in breach of the CCCFA. Then, in 2014, the High Court released a further judgement clarifying the practices lenders should adopt when charging fees.

MTF and Sportzone appealed both decisions to the Court of Appeal which has now also found in favour of the Commerce Commission.

Sanderson Weir director Jonathan Flaws says the Court’s decision confirms that lenders can only make their profit from consumer loans by way of interest.

“While fees can be charged to recover specific costs that are close and relevant to the loan for which the fee is charged, all other costs of doing business are recoverable only from interest.”

The reason for this legislative approach is to ensure that, to the extent possible, consumers will be able to compare the offerings from lenders by comparing interest rates, he explains.

“Fees charged are therefore restrained so that they reflect only the costs incurred or the losses sustained by the creditor with respect to the matter for which the fees are charged.”

In the case of establishment fee and prepayment fees, Flaws says that, under the CCCFA, there is a scheme which limits these types of fees to those that are sufficiently close and relevant to the particular activity for which a fee of that type may be charged.

“The Court notes there is no restriction on the interest rate that lenders may charge - other than that it can’t be oppressive – and, in addition to the specified activities covered by establishment fees and prepayment fees, a lender may impose any other type of fee it chooses. The only proviso is that the ‘other fee’ cannot be unreasonable.”

In its decision, the Court defines what is unreasonable when it comes to establishment fees and prepayment fees and also sets a general standard for “other fees”.

This general standard requires a matching of the fee with the specific costs incurred in relation to the matter for which the fee is charged.

Flaws says the Court has laid out a close and relevant test for establishment fees. The test dissects costs into three categories as follows:

Variable costs that specifically relate to the particular activity. This is the establishment of the loan for which the fee is charged. While this can include indirect variable costs, a close connection must be made in the case of indirect costs – eg: the cost of obtaining a credit report.
Some fixed costs can be included provided they can be proved to be relevant and closely connected to the fee activity – eg: the staff time/cost in examining and underwriting the loan
General business costs and overhead that have no relationship with the specific activity, such as advertising, accounting and legal costs for the business as a whole.

“Costs that fall into the first two categories can be recovered via an establishment fee but costs in the third category are recovered, along with profit, from interest charges.”

The Court has provided a clear statement – and easy to understand guidance - on the approach lenders should take to the fees they charge, Commerce Commissioner Anna Rawlings agrees.

“The purpose of the CCCFA is to protect borrowers, especially vulnerable borrowers, by ensuring transparency in the costs of borrowing. Fees should not be used to recover general business costs or to generate profits – that is what interest is for.”

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