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consumer

Hidden fees in loans: What lenders must disclose

Key Takeaway

In New Zealand, lenders must disclose all fees associated with a loan under the Credit Contracts and Consumer Finance Act 2003. Misleading or deceptive conduct regarding fees is prohibited by the Fair Trading Act 1986. The Consumer Guarantees Act 1993 ensures loan services are provided with reasonable care and skill, including fee disclosure.

Hidden Fees in Loans: What Lenders Must Disclose in New Zealand

When entering into a loan agreement in New Zealand, borrowers are protected by several laws designed to ensure transparency and fairness, particularly regarding fees. These laws aim to prevent 'hidden fees' by requiring lenders to clearly disclose all costs associated with a loan. The primary legislation governing these obligations includes the Credit Contracts and Consumer Finance Act 2003, the Fair Trading Act 1986, and to some extent, the Consumer Guarantees Act 1993.

Lender Disclosure Obligations under the Credit Contracts and Consumer Finance Act 2003

The Credit Contracts and Consumer Finance Act 2003 (CCCFA) is the key legislation for consumer credit contracts in New Zealand. Its purpose includes protecting consumers by requiring the disclosure of key information [Source: Credit Contracts and Consumer Finance Act 2003, s 3]. A 'consumer credit contract' is generally a loan where a natural person borrows primarily for personal, domestic, or household purposes [Source: Credit Contracts and Consumer Finance Act 2003, s 11].

Lenders in New Zealand have specific obligations to disclose information about consumer credit contracts:

  • Initial Disclosure: Before a borrower enters into a consumer credit contract, or within specific timeframes, the lender must provide clear and concise information. This includes, among other things, the annual interest rate, the total amount of credit, the total interest payable, the total cost of credit, and critically, all fees and charges payable [Source: Credit Contracts and Consumer Finance Act 2003, ss 17, 18, 19, Schedule 1]. This ensures borrowers understand the full cost of the loan upfront.
  • Continuing Disclosure: Lenders must provide regular statements of account to borrowers, detailing transactions, current balances, and any fees charged during the period [Source: Credit Contracts and Consumer Finance Act 2003, ss 20, 21].
  • Disclosure of Changes: If any terms of the loan agreement change, such as fee structures, the lender must disclose these changes to the borrower within specified timeframes [Source: Credit Contracts and Consumer Finance Act 2003, ss 22, 23].

Failure by a lender to comply with these disclosure obligations can lead to various orders from a court, including varying the contract, directing compensation payments to the borrower, or even cancelling the contract in serious cases [Source: Credit Contracts and Consumer Finance Act 2003, ss 87, 88].

Misleading Conduct and Fees under the Fair Trading Act 1986

The Fair Trading Act 1986 (FTA) prohibits misleading and deceptive conduct 'in trade' which means in any trade, business, industry, profession, occupation, or activity relating to the supply or acquisition of goods or services [Source: Fair Trading Act 1986, s 2(1)].

  • Misleading or Deceptive Conduct: A lender must not engage in conduct that is misleading or deceptive, or is likely to mislead or deceive, in connection with the supply of loan services [Source: Fair Trading Act 1986, s 9]. This can include the failure to disclose fees, or presenting fees in a way that is unclear or confusing.
  • False or Misleading Representations: Lenders are prohibited from making false or misleading representations about the price of services [Source: Fair Trading Act 1986, s 13(e)]. This directly applies to loan fees. Representations about other characteristics, uses, or benefits of a loan that are false or misleading are also prohibited [Source: Fair Trading Act 1986, s 13(d)].
  • Unsubstantiated Representations: A lender must not make a representation in trade about their services if they do not have reasonable grounds for making that representation [Source: Fair Trading Act 1986, s 12A]. If a fee is charged without a clear basis or justification, this could be considered an unsubstantiated representation.

Breaches of the FTA can result in orders prohibiting the conduct, requiring disclosure, corrective advertising, and pecuniary penalties [Source: Fair Trading Act 1986, ss 41, 43, 44].

Services and Reasonable Care under the Consumer Guarantees Act 1993

The Consumer Guarantees Act 1993 (CGA) provides guarantees for goods and services supplied to consumers. A 'consumer' is a person acquiring services ordinarily for personal, domestic, or household use [Source: Consumer Guarantees Act 1993, s 2(1)]. While the CGA doesn't directly dictate fee disclosure, the provision of a loan facility is considered a service.

  • Guarantee as to Services: Where services are supplied to a consumer, there is a guarantee that the services will be carried out with reasonable care and skill [Source: Consumer Guarantees Act 1993, s 28]. This implies that a lender, as a service provider, should provide information about the loan, including all associated fees, clearly, accurately, and with reasonable care and skill. A failure to disclose fees transparently could be a breach of this guarantee regarding the standard of the service provided.

If services are not carried out with reasonable care and skill, a consumer may require the supplier to remedy the failure. If the failure is substantial or not remedied, the consumer may obtain damages for resulting loss or damage [Source: Consumer Guarantees Act 1993, ss 32, 37].

When to Seek Independent Legal Advice

Individuals who believe a lender has not adequately disclosed fees, or has engaged in misleading conduct regarding a loan, should seek independent legal advice. Information on legal rights and options can be obtained from organisations such as the Financial Dispute Resolution Scheme (FDRS), Banking Ombudsman, or by contacting a solicitor. Community Law Centres also provide free legal advice and assistance across New Zealand: https://communitylaw.org.nz/.

Key Resources