Last year the Commerce Commission won a case against Sportzone Motorcycles and MTF centred on lending fees.
The judgment confirmed the commission’s position that lending fees must be related to the activity that the fee is charged for. It also said the fee has to relate to the particular transaction it is being charged against, as opposed to being a cost charged against the general costs of doing business.
In the Sportzone case the Court found that the costs recovered were business costs as opposed to transaction specific costs.
“The issue with low equity fees or risk fees is that they are not transaction specific as there is no cost or loss relating to the specific transaction incurred at the time they are charged,” one legal expert says.
“They are, arguably transaction specific in that the specific loan falls within a pool of loans that has a particular characteristic which makes loans in the pool more vulnerable to credit loss.”
“All that is happening is that the lender has identified the specific loan as having a greater likelihood of that loss occurring.”
He says that if a lender wants to be recompensed for accepting a higher risk then that has to be charged by changing the interest rate rather than charging a fee.
One way around this is for lenders to insure against the potential loss that’s what LMI covered. But none of the LMI insurers are now operating in New Zealand.
RESIMAC removed its low equity fees last week as it believes they could be challenged following the court case.
RESIMAC New Zealand general manager Adrienne Church says “we don’t believe we can charge (the fees) anymore.”
However, yesterday BNZ removed its low equity interest rates, which were 50 basis points higher than standard rates, and now charges a low equity premium based on the LVR – the higher the LVR, the higher the premium.
The Commerce Commission said can’t comment on whether it would be unwise for banks to charge low equity premiums or fees on home loans.
“We can say though that banks should ensure that the fees they charge are not unreasonable,” it says in a statement.
It says the recent decision involving Sportzone and MTF sets out factors the Court may take account of when considering the reasonableness of these fees.
The Sportzone case is being appealed and also the CCCFA is being reviewed by Parliament.
