The Commerce Commission's enforcement branch manager Graham Gill says before the Commission's investigation in 2009, Southern Cross Finance had been charging customers an establishment fee that was generally about 1-2% of the loan advanced.
"In the Commission's view, establishment fees for consumer loans that are a percentage of the loan advanced are inherently unlikely to reflect the actual cost of establishing a loan and be reasonable," says Gill.
As part of the Commission's investigation, Southern Cross Finance had calculated its actual average reasonable cost of establishing or renewing a consumer credit contract at around $1,000.
"So a borrower who took out a $250,000 mortgage could have been charged $5,000 as an establishment fee and therefore overcharged by $4,000" says Gill.
Southern Cross Finance is contacting affected customers to arrange refunds and it has changed its fees in response to the Commission's concerns, now charging a standard $500 establishment fee on all consumer loans.
The Commission investigated Southern Cross Finance, under the Credit Contracts and Consumer Finance Act 2003 (CCCF Act).
Under the Act, establishment fees charged to customers in consumer credit contracts must reflect the creditor's reasonable costs of establishing a loan, which are costs associated with the loan application and processing, documenting the contract and advancing the loan.
Gill says the CCCF Act had been established to protect the interests of consumers, and enable them to make informed choices about using credit.
"Establishment fees are an important consideration for consumers when selecting loan products.
"The fee should genuinely relate to the cost of setting up a loan so that consumers can meaningfully compare competing products," says Gill.
Southern Cross Finance also lends to borrowers which are companies and trusts and where loans are used for business purposes - these borrowers can negotiate their own fees. However, under the Act, fees on consumer loans are required to be reasonable.
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