Heartland Bank subsidiary Marac Finance has settled with the Commerce Commission after deciding to refund 1000 customers more than half a million dollars.
The finance company has paid out $567,000 to customers who had repaid loans early but had not been refunded premiums for their loan insurance.
The commission's view was that Marac had breached the Credit Contracts and Consumer Finance Act, which requires lenders to refund an appropriate portion of a premium if a loan is repaid early.
The commission said Marac was likely to have misled customers by telling them that their insurance would be rebated, potentially also breaching the Fair Trading Act.
The government watchdog's general manager of competition, Kate Morrison, said the settlement was "a timely and cost-effective way of achieving the right result".
"We are pleased that Marac has agreed to do the right thing by its customers and make these payments," she said.
The refunds apply to affected customers who repaid their loans early between 2006 and 2010.
The commission said Marac had immediately changed its practices when the matter was brought to its attention in late-2010.
Morrison warned that borrowers relied on the information lenders provided, and often had no way of knowing if the balance owing was correct.
"Borrowers should be aware that if a loan is being repaid early, insurance may be rebated, and they can ask the lender if there are any rebates due to them," she said.
Marac Finance merged with CBS Canterbury and Southern Cross Building Society in January 2011 to form Heartland, which became the country's newest registered bank last year.