Are repo men toeing the line?

BY ROB STOCK

LENDERS ARE up in arms over proposals to limit their ability to carry out repossessions despite concerns at the Ministry of Consumer Affairs that vulnerable indebted families are being abused.

Cases have come to light involving even children's toys and paintings, being repossessed under potentially illegal "dragnet" security clauses in loan agreements, and the ministry believes one way to end such unsavoury behaviour is to make lenders get repossessions signed off by independent authority, such as justices of the peace, before they can send around the repo man.

But Justin Kerr of the Financial Services Federation, a grouping of private finance firms, said evidence from cases involving fringe lenders should be examined carefully before being used to justify rules that would add cost and complexity for organisations such as banks and reputable finance companies.

Changing the rights of a lender to "look to their security" threatened the viability of lending, said Kerr.

Claims of abuses during repossessions have come to light as part of a review of the Credit Contracts & Consumer Finance Act (CCCFA) which has highlighted some of the dirty secrets of lenders and put the spotlight on some worrying trends.

The ministry highlighted growth in so-called PAAP clauses under which "all present and after acquired property" is considered as security for a loan, clauses that purport to allow lenders to take possession of any and all of a borrowers' goods in lieu of missed loan repayments, a threat the ministry said may contradict laws set out in the Personal Property Securities and the Credit (Repossession) Acts.

"Case files and anecdotal evidence from community organisations, the Insolvency and Trustee Service and, in one case, from a repossession agent, indicate what would appear to be an increased use of dragnet clauses which are causing considerable financial hardship, fear and distress for some consumers," the ministry said.

But before a lender can do a repossession, it is supposed to send a "pre-possession" notice telling the defaulting borrower what property the agent can repossess, and, the ministry said, "all personal property" was not a good enough discription. "If they cannot properly describe the goods, they cannot take them," the ministry said, adding consumer credit contracts were specifically prohibited from including PAAP clauses by the Personal Property Securities Act.

By including them, said the ministry: "Creditors are likely to be in breach of... the Fair Trading Act 1986, as they have misrepresented their rights and remedies to the borrower."

Bringing in JPs to sign off reposessions could help police the process and prevent children's toys and flatmates' possessions being seized. The suggestion, which the Royal Federation of Justices said would be a natural extension of JPs' role, would also remove the emotional threat some lenders are using of taking the kids' toys and beds.

One of the problems with repossessions is that no one is policing them, and the ministry is suggesting the Commerce Commission take on that role. That would put the credit repossession industry on notice, the ministry said, though it acknowledged that might not lead to an increase in complaints as poorer Kiwis, those most likely to be subjected to a repossession, do not know their rights.

The dragnet clauses are not the only cause of concern for the ministry. It reports evidence, once again anecdotal, that repo agents are "pushing the boundaries when exercising the power to reposses" including entering homes without knocking, abusing household members, and even requesting "sexual favours".

Debtors are supposed to be able to challenge lenders' valuations of repossessed property and that lenders' have a duty to get the best price they reasonably can, as any balance left on the loan is still owing from the debtor.

But it appears, particularly when it comes to repossessed cars, that borrowers are getting a raw deal.

The ministry identified an instance where a car valued at $17,000 at the point of sale was sold two years' later after a repossession for $1000 minus $1000 of repair costs, equating to a sale price of $0.

The Insolvency and Trustee Service is also complaining that repossession tactics are undermining the recently introduced No Asset Procedure, colloquially known as bankruptcy-lite. NAPs were introduced to provide a shorter way than bankruptcy for those with smaller, unsecured debts to put them behind them, but the ministry said: "The Insolvency and Trustee Service is concerned that while the NAP provisions aim to enable debtors to have a fresh start financially and be able to return to contributing to the economy, the actions of creditors in continuing to pressure debtors to repay for fear of losing household effects means the objective of the NAP legislation is being undermined."

LENDERS' DIRTY DOZEN TRICKS (AND THE PROPOSALS TO BRING THEM TO AN END)

SHAME PHOTOS: Some cultures rely on shame to keep people in line. Tongan lenders, for example, publish details, including photos, of borrowers who fall behind in their repayments. This is illegal in many other developed countries, but not in New Zealand because there are no "unfair" contract terms' laws here.

Proposal: Ministry of Economic Development is studying whether to introduce unfair contract terms' laws.

HARDSHIP FEES: Under the Credit Contracts & Consumer Finance Act, borrowers who are not behind in repayments, but are in financial trouble, can ask lenders to consider altering their loan terms so they can keep their heads above water. The CCCFA did not anticipate lenders charging fees to hear applications. Some have been doing so. One lender charges $150 to borrowers asking to have a hardship case considered. Another agreed to vary the loan contract and then charged a $450 "refinance fee".

Proposal: Outlaw fees for hardship applications, as well as default interest, and fees when a borrower has applied under the hardship rules.

SLOWLY, SLOWLY ... THEN THE BIG FEES: Budgeting services claim some lenders drag their feet on accepting hardship applications, resulting in borrowers missing repayments and becoming ineligible. Others intentionally frustrate hardship applications by delaying their assessment.

Proposal: Allow people to make hardship applications up to two months after falling behind in repayments and put in time frames for resolution.

THE CAR LOAN CATCH-22: Lenders have to provide disclosure of all fees, costs, terms and conditions of credit contracts within five days of a borrower signing up. That lag was designed to make it easy for people to take out on-the-spot finance for buying things like cars. The borrower then has three working days to cancel, if they change their mind. Trouble is, they've bought a car under a different contract and the seller – the same person who sold the finance – won't let them out of that.

Proposal: Require up-front disclosure on car loans.

TAPA RANSOMING: Fringe lenders sometimes require people to leave items with them, like family heirlooms. Pacific Islanders are often required to hand over tapa cloths, eftpos cards or passports.

Proposal: Cover by unfair contract terms legislation.

IMMOBILISERS: Lenders sometimes get the borrower to pay to have an immobiliser fitted into cars. Should they miss payments, the lender can then remotely disable the car. Fees for fitting these devices and ongoing fees for "supplying the immobilisation service" are loaded onto people's loans when they take them out, so they pay interest on them.

Proposal: Legislate so such fee-for-service costs can be charged only as they fall due and not front-loaded onto contracts.

DODGY INSURANCE SELLING: Borrowers are often sold over-priced insurance they don't need.

Proposal: Force lenders to give better information about their insurance to borrowers.

"CREDIT BROKER" FEES: Some lenders are beating the "reasonable" fees laws by paying "brokerage" to so-called credit brokers, who are, to all intents and purposes, not "genuine, independent" parties.

Proposal: Allow brokerage only for true third parties.

LOADING INSURANCE "PREMIUMS" ONTO DEBT: Borrowers can't be required to take out repayment loan insurance, but often they are persuaded to do so. These policies are often expensive and there's a one-off premium. Instead of it being paid upfront, it is often loaded onto the borrower's total debt, so they pay interest on it over the lifetime of the loan, making it even more expensive.

Proposal: Define what the buyer needs to be told.

DODGY WARRANTIES: Many used car buyers are sold warranties that require them to keep their car serviced. Many can't afford to, or won't, and so high numbers invalidate the warranties and can't afford to get them fixed when they break down.

Proposal: None.

UNSOLICITED CREDIT: A borrower's credit limit is raised unilaterally by the lender, leading to over-borrowing.

Proposal: Require borrowers to opt in to offers of increased credit.

USING HARD NUTS TO MAKE REPOSSESSIONS: Even though the law prohibits anyone with recent convictions for violence and dishonesty from being repo agents and bailiffs, there are no penalties for lenders who use them.

Proposal: Make lenders responsible for the actions of the repo people they hire and put the Commerce Commission in charge of policing.

- © Fairfax NZ News