Lender to refund $1.36m

Real Finance Ltd will pay out $1.36 million to 515 customers for charging unreasonable fees on its loans, after reaching a settlement agreement with the Commerce Commission.

The Wellington-based lender admits entering into consumer credit contracts with borrowers between April 2013 and March 2020 that breached the Credit Contracts and Consumer Finance Act (CCCFA) because the fees charged exceeded reasonable costs incurred by the company.

The commission began an investigation into the company in 2018 after receiving a request to intervene in an application by Real Finance for summary judgment against a borrower. Civil proceedings were filed by the watchdog against Real Finance the following year, alleging it had charged borrowers unreasonable fees.

Anna Rawlings, commission chair, says credit law has been clear for many years that fees must be reasonable and should only recover costs closely related to the matter for which the fees were being charged.

“When people borrow money to buy goods on credit, the credit and default fees they are charged are not intended to be used to cover general business expenses or to make a profit,” she explains.

“This case will help lenders to set fees in a way that is consistent with their obligations under credit law. It also shows that regularly reviewing your fees is not sufficient on its own. Lenders also need to act on the findings of any review.”

Rawlings, pictured, adds Real Finance conducted annual fee reviews but did not take action to stop the profits being generated by its fees.

“If lenders find their fees are unreasonable, then the fees must be reduced. If borrowers are overcharged, the commission's expectation is that a lender will provide a refund to affected borrowers.”

The commission used an expert from KPMG to calculate reasonable costs and found the base establishment, administration and default fees charged by Real Finance included expenditure that did not closely relate to the matter for which the fees were charged. 

For the administration fee, this included general overheads such as a portion of advertising costs and staff expenses that were not closely connected with administering loans.

Real Finance has accepted the establishment, administration, and default fees of around 4,000 individual loan contracts exceeded reasonable costs and has agreed to pay back $1.36m.

In April 2022, the High Court granted declarations sought by the commission, unopposed by Real Finance, that the lender had contravened its obligations under the CCCFA by charging unreasonable fees.

Her Honour Justice Grice noted there is “a public interest in the court declaring Real Finance’s conduct to be a breach of the CCCFA”. 

This is because “the facts giving rise to the declaration will provide a tangible illustration of a fee-setting methodology”, which “will provide useful guidance to the market on the practical application of those provisions, particularly in light of recent amendments to the CCCFA”.

Real Finance will contact affected borrowers as part of the settlement and has set up a page on its website with information on the refunds owed.

A copy of the settlement agreement and undertakings can be found on the commission’s website.