Skip to main content
Inland Revenue
Inland Revenue
Inland Revenue

Tax Policy

Search tips
Significant policy matters

Overriding the Credit Contracts and Consumer Finance Act

Clause 214 and schedule 7

Issue: Retrospective legislation will undermine the purpose of the disclosure outlined in the Credit Contracts and Consumer Finance Act

Submission

(Commerce Commission, National Council of Women of New Zealand, NZ Union of Students’ Associations)

Disclosure under the Credit Contracts and Consumer Finance Act is required to:

  • enable a borrower to be able to distinguish between different credit arrangements;
  • enable borrowers to be informed on contract terms before they sign up; and
  • be able to monitor performance of the credit contract.

Also changing the terms of the loan undermines:

  • the initial disclosure requirements to the loan;
  • the choices the borrower made in entering the contract;
  • students’ understanding of the rights and obligations under the loan contact; and
  • increases the chance of confusion amongst borrowers regarding their rights and obligations.

Changing the consumer protections may undermine consumers’ confidence in the protections afforded by the Credit Contracts and Consumer Finance Act and may undermine voluntary compliance with the Act if creditors think they can obtain a retrospective exemption if they find they have breached the Credit Contracts and Consumer Finance Act. (Commerce Commission)

Comment

While student loan contracts made before 4 November 2010 are credit contracts in terms of the Credit Contracts and Consumer Finance Act, there are major differences between student loans and other credit contracts. These differences reflect the fact that student loans are a heavily subsidised form of Government financial assistance to students. For example:

  • Student loans are not secured.
  • Student loans are income-contingent (unless the borrower is overseas-based) and the loan may never be paid off if the borrower does not earn over the repayment threshold.
  • The repayment obligations of the loan are contained in legislation and not the contract.
  • Student loans are interest-free for New Zealand-based borrowers so using an interest charging mechanism to recoup the costs of administering the loan is not an option for New Zealand-based borrowers.

The Credit Contracts and Consumer Finance Act was enacted to protect consumers who enter into contracts where there is generally no other legislation present. However, student loan borrowers have the protections provided by an Act of Parliament through the Student Loan Scheme Act.

The Credit Contracts and Consumer Finance Act provides for hardship relief if a borrower cannot meet his or her obligations under a contract. This is required because contracts usually have a fixed repayment amount, which can cause hardship for borrowers if their circumstances change. However, student loan repayments are income-based and repayments are responsive to fluctuations in income. Relief is also available in the bill for borrowers in cases of serious hardship.

If the student loan continued to be subject to the Credit Contracts and Consumer Finance Act the Government would be limited in the changes that could be made to the scheme because any changes could not be applied to existing contracts without the consent of the borrower. Seeking the agreement of all borrowers could be difficult as Inland Revenue is unable to contact some borrowers without incurring significant administration costs – for example, some overseas-based borrowers.

Also, if all borrowers do not agree to the changes, different administrative treatments would be required for different groups of borrowers, making the scheme difficult and costly to administer.

Furthermore, working within the Credit Contracts and Consumer Finance Act to address student loan issues (by seeking limited exemptions each time issues arise) could lead to error and inconsistencies in that legislation over time. This could result in consumer confusion about the Credit Contracts and Consumer Finance Act and creditor compliance with that Act.

Although StudyLink and Inland Revenue disclose information to borrowers, officials have considered whether there should be greater requirements for disclosure. Accordingly, officials recommend that the following amendments be made to ensure the bill reflects the spirit and intent of the Credit Contracts and Consumer Finance Act:

  • that the loan manager be required to provide the borrower with a copy of the contract within six working days after the day on which the contract was entered into;
  • that Inland Revenue be required to disclose details of a loan balance to include:
    • the date and amount of any interest charged to the borrower, or any late payment interest or penalty imposed;
    • the date and amount of each fee charged to the borrower; and
    • a requirement for StudyLink or Inland Revenue, as appropriate, to notify borrowers of unilateral changes to either the contract or statute that increases the borrower’s obligations if the borrowers updated address information is known. This notification must occur within seven months of the change being made.

Recommendation

That the submission be noted and the above changes recommended by officials be made to the bill.

Issue: Prohibiting the charging of unreasonable credit fees

Submission

(Commerce Commission)

The Credit Contracts and Consumer Finance Act provides protections against lenders charging unreasonable credit fees. The bill introduces an administration fee which can be changed by regulation and there is no requirement for fees charged under the bill to be reasonable. Borrowers do not have the right under the bill to challenge these fees.

Comment

The administration fee is based on the costs associated with collecting repayments. The proposed fee is not unreasonable.

With regard to the removal of the protection for borrowers against the setting of unreasonable fees, in credit contracts the imposition of fees is imposed by the contract and the only protections available to the debtor, in the absence of the Credit Contracts and Consumer Finance Act, would be common law. However, under the Student Loan Scheme, the imposition of fees is prescribed in legislation, which can be changed by regulation or by Act of Parliament. The Government is ultimately accountable for imposing reasonable administration fees.

Recommendation

That the submission be declined.

Issue: Hardship rights

Submission

(Commerce Commission)

The Credit Contracts and Consumer Finance Act provides protections to borrowers who are unable to meet their obligations under the credit contract due to unforeseen circumstances (including ending a relationship, illness, loss of employment or injury). To provide relief, the creditor may agree to change the terms of the contract by postponing payment or by extending the term of the loan.

If the creditor does not agree with the debtor’s application, the debtor may apply to the courts for the terms of the contract to be varied.

Although the bill does provide hardship provisions, they are at the discretion of the Commissioner.

Comment

The Student Loan Scheme differs significantly from other loans. The Student Loan Scheme is income-contingent and therefore borrowers do not have to repay their loan until they reach a certain income threshold. This feature reduces the extent to which borrowers get into financial hardship.

Student loans do not have a fixed term. Some loans may never be paid off especially if the borrower has significant periods when they earn less than the repayment threshold.

The bill provides relief for borrowers who face hardship by decreasing their repayment obligations (including reducing repayments to zero).

Borrowers who are having difficulty meeting their repayment obligations can also apply to enter into an instalment arrangement for the repayment of debt.

Officials consider these features provide sufficient protection to borrowers who find themselves in hardship.

Recommendation

That the submission be declined.

Issue: Prohibition against oppression

Submission

(Commerce Commission)

Part 5 of the Credit Contracts and Consumer Finance Act provides protection if one of the parties has exercised or intends to exercise a right under the contract in an oppressive manner or uses oppressive means to get another party to enter the transaction.

In contrast, the ability for the debtor (or borrower) to challenge the decisions of the Commissioner appears to be more limited than under the Credit Contracts and Consumer Finance Act.

Comment

For part 5 of the Credit Contracts and Consumer Finance Act to apply, the contract, lease or transaction must be oppressive or a party must have exercised a right or power under the contract in an oppressive manner.

The repayment of student loan deductions is provided for by statute enacted by Parliament, which has the ability to change the Student Loan Scheme or its features if they are considered oppressive. There is also the judicial review process for the external review of a decision made by the Commissioner in order to safeguard individual interests against unreasonable administrative action taken without following proper procedures.

The bill also provides rights to challenge a number of the Commissioner’s decisions on whether a borrower is New Zealand or overseas-based, whether the Commissioner’s decision regarding any relief is fair and reasonable, and the Commissioner’s determination regarding whether a significant over-deduction was made.

Officials consider that there is adequate protection against the Government exercising a right in an oppressive manner or using oppressive means to get people to enter into a student loan.

Recommendation

That the submission be declined

Issue: Cancellation rights

Submission

(Commerce Commission)

Debtors have the ability to cancel a contract within three days of being given notification. A debtor has to be formally notified of the contract terms within five days of the contract being made. This protection would be removed as a result of the amendment in the bill to exclude the Student Loan Scheme from being subject to the Credit Contracts and Consumer Finance Act.

Comment

Currently applicants can cancel their student loan contract within seven working days after the date that the Loan Entitlement Advice letter was sent to them. This is consistent with the provisions in the Credit Contracts and Consumer Finance Act. Officials agree that the right to cancel the contract within a defined period should be included in the bill so that applicants continue to receive that protection under the law.

This would include the provision that if an applicant receives any loan advances within that period they must repay those advances (together with any interest) within that period.

Officials recommend that this process be incorporated into the bill.

Recommendation

That the submission be accepted.