Consumer Protection Against Predatory Lending in New Zealand
In New Zealand, consumers are protected against predatory lending practices by several key pieces of legislation. This article focuses on the protections offered by the Fair Trading Act 1986 (FTA) and the Consumer Guarantees Act 1993 (CGA), which address misleading conduct, unfair terms, and service quality in lending.
Fair Trading Act 1986
The Fair Trading Act 1986 (FTA) is a cornerstone of consumer protection, prohibiting misleading and deceptive conduct, false representations, and unfair practices by businesses in trade. It is highly relevant to addressing predatory lending due to its broad scope concerning business conduct and contract terms.
Misleading and Deceptive Conduct
Lenders are prohibited from engaging in conduct that is misleading or deceptive, or likely to mislead or deceive [Source: Fair Trading Act 1986, s 9]. This includes:
- Making false or misleading representations about the nature, suitability, characteristics, quantity, or uses of services [Source: Fair Trading Act 1986, s 13(a)]. For example, misrepresenting the true cost of a loan, the flexibility of repayment terms, or the impact of the loan on a borrower's credit score.
- Making false or misleading representations about the price of services [Source: Fair Trading Act 1986, s 13(g)]. This would cover misrepresenting interest rates, fees, or total cost of credit.
- Offering gifts, prizes, or other free items with the intention of not providing them or not providing them as offered [Source: Fair Trading Act 1986, s 17]. This could apply to promotional offers tied to loans.
Unsubstantiated Representations
Lenders must have reasonable grounds for making any representation about their services at the time the representation is made [Source: Fair Trading Act 1986, s 12A]. An 'unsubstantiated representation' is one where the person making it does not have reasonable grounds for doing so [Source: Fair Trading Act 1986, s 2(1)]. For example, a lender claiming a loan is 'easily affordable' without conducting proper affordability assessments could be making an unsubstantiated representation.
Unfair Contract Terms
The FTA allows for certain terms in standard form consumer contracts to be declared 'unfair' by a court [Source: Fair Trading Act 1986, s 46H, s 46I]. A term in a consumer contract is unfair if it meets three criteria:
- It causes a significant imbalance in the parties' rights and obligations arising under the contract [Source: Fair Trading Act 1986, s 46L(1)(a)].
- It is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term [Source: Fair Trading Act 1986, s 46L(1)(b)].
- It would cause detriment (whether financial or otherwise) to a party if it were applied or relied on [Source: Fair Trading Act 1986, s 46L(1)(c)].
Examples of terms that may be unfair include terms allowing the lender to unilaterally vary the interest rate or other terms without a valid reason, or terms that impose disproportionate penalties on the borrower for minor breaches [Source: Fair Trading Act 1986, s 46M (Schedule 2)]. If a court declares a term unfair, it is unenforceable [Source: Fair Trading Act 1986, s 46I(2)].
Unconscionable Conduct
The FTA prohibits any person in trade from engaging in 'unconscionable conduct' [Source: Fair Trading Act 1986, s 7]. 'Unconscionable conduct' refers to conduct that is against good conscience. When determining if conduct is unconscionable, a court may consider factors such as:
- The relative bargaining strength of the parties [Source: Fair Trading Act 1986, s 7(2)(a)].
- Whether a party was able to understand the documents relating to the transaction [Source: Fair Trading Act 1986, s 7(2)(c)].
- Whether undue influence or pressure was exerted on, or unfair tactics were used against, a party [Source: Fair Trading Act 1986, s 7(2)(d)].
- The amount for which, and the circumstances under which, the party could have acquired identical or equivalent services from a person other than the other party [Source: Fair Trading Act 1986, s 7(2)(e)].
This provision is crucial for addressing situations where a lender takes advantage of a borrower's vulnerability, lack of understanding, or limited options.
Consumer Guarantees Act 1993
The Consumer Guarantees Act 1993 (CGA) provides consumers with guarantees for goods and services supplied in trade. Lending is considered a service under the CGA, and therefore, lenders must comply with certain service guarantees.
Guarantees as to Services
When a lender provides a lending service, the CGA requires that:
- The service must be carried out with reasonable care and skill [Source: Consumer Guarantees Act 1993, s 28(a)]. This could relate to the lender's processes for assessing affordability, clearly explaining loan terms, and ensuring the loan is suitable for the borrower's circumstances.
- The service must be fit for any particular purpose that the consumer makes known to the supplier, and for which the supplier represents that they are fit [Source: Consumer Guarantees Act 1993, s 28(b)]. If a consumer specifies a purpose for a loan (e.g., debt consolidation to reduce financial stress), the loan offered should be suitable for that purpose.
- The service must be completed within a reasonable time if no time for completion is agreed upon [Source: Consumer Guarantees Act 1993, s 29].
- The service must be supplied at a reasonable price if no price is agreed upon [Source: Consumer Guarantees Act 1993, s 30]. While loan prices (interest rates, fees) are usually agreed, this clause applies if they are not explicitly set.
If these guarantees are not met, a consumer may be entitled to a remedy, which can include having the service remedied, or, if the failure is substantial, cancelling the service and obtaining damages [Source: Consumer Guarantees Act 1993, Part 3].
When to Seek Independent Legal Advice
If there are concerns about potential predatory lending, unfair contract terms, misleading conduct, or unconscionable conduct, it is important to seek independent legal advice. Information about consumer rights and obligations can be obtained from official government bodies such as the Commerce Commission and through organisations like Community Law Centres for free legal help.