MOTOR TRADE ASSOCIATION. Submission to. Ministry Of Business, Innovation & Employment. Credit-Related Disclosure and Rebate Regulations

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1 MOTOR TRADE ASSOCIATION Submission to Ministry Of Business, Innovation & Employment On Credit-Related Disclosure and Rebate Regulations Motor Trade Association Inc P O Box 9244 Marion Square WELLINGTON Phone 04) December 2014

2 1 December 2014 CCCFA Regulations Competition and Consumer Policy Team Ministry of Business, Innovation, and Employment P O Box 3705 Wellington 6140 Attention: Competition and Consumer Policy Team Submission: Credit-Related Disclosure and Rebate Regulations This submission is from: Motor Trade Association P O Box 9244 Marion Square Wellington 6141 The contact person in respect of this submission is: Name: Tony Everett Title: Dealer Services and Mediation Ph: (04) Fax: (04) tony.everett@mta.org.nz Thank you for the opportunity for MTA to provide comment on the development of the Responsible Lending Code. Yours sincerely Greig Hinds Industry Relations Manager

3 Introduction The Motor Trade Association (Inc) (MTA), which represents approximately 3,900 businesses within the automotive industry and allied services, takes this opportunity to submit on the Credit-Related Disclosure and Rebate Regulations - discussion document. Members of our association operate businesses ranging from heavy and light general automotive repairers, vehicle importers and distributors, vehicle sales, vehicle entry and in service inspection services, transport services including rental cars, vehicle recovery, agricultural equipment and service stations. The CCCFA and related Regulations have particular relevance and significance to our retail motor vehicle trader members. These businesses include new and used vehicle traders, and motorcycle traders. In those business sectors, MTA represents approximately 600 motor vehicle trader members. The provision of finance is a significant element within a motor vehicle dealer s business. In the vast majority of cases, dealers have business linkages with one or more established finance companies, the majority of which are likely to be members of the Financial Services Federation ( FSF ). Dealers and finance companies are typically distinct separate business entities with no ownership or management connections. In a very few cases, some dealers may operate their own financial services arm and in this context there will be some common ownership between a dealer and a lender. When looking at the operational aspects of motor vehicle financing, generally the relevant finance company prescribes the forms and processes to be followed by the dealer, who has no scope to deviate from those requirements. In most respects, the dealer effectively serves an intermediary role between the customer and the finance company, helping the respective parties establish a financial arrangement. The credit approval decision rests solely with the respective finance company; that is, it is the financier that determines if a loan should be made to the consumer, the dealer does not participate in that decision. Interest rates and fees are set by the respective finance company. The dealer may have some small latitude to negotiate interest rates and fees albeit only within defined boundaries controlled by the respective finance company involved. Given the relationships outlined above between dealers and their respective finance company partners, MTA supports the submission made by the FSF in respect of the Regulations. Notwithstanding that expressed support for the FSF submission, MTA takes this opportunity to highlight several aspects contained with the Bill that are of particular importance to our dealer members. MTA s submission follows the questions posed in the Discussion Document: Credit Related Disclosure and Rebate Regulations Part One: Costs of borrowing and initial disclosure Costs of borrowing 1. What information about costs of borrowing do lenders currently make publicly available? There are principal occasions when finance opportunities will be raised with consumers. The first is when a dealer includes a finance offer (eg $100/week) within an advertisement. This will often include declaration of some of the main parameters on which that finance offer is based and include declaration of repayment term, deposit, interest rate, and sometimes document fees. The declaration of finance parameters will vary from advertisement to advertisement, and there is no standard approach. Comparison between offers is difficult because the advertising is focused on the motor vehicle not the finance and may include special offers (eg low or zero interest). Refer attached examples. There can be no surety all customers will have the required credit profile to access the particular offer.

4 The second occasion when costs of borrowing are introduced to consumers by dealers is when discussions commence around the finance options available when buying a vehicle. Usually this information is linked to when a consumer has expressed interest in a particular vehicle and finance becomes part of that discussion. The option occasion is when a finance company contacts a past client to promote a finance opportunity and offers them a special client finance opportunity. Compulsory declaration of standard finance terms by dealers as proposed under the new legislation will add to the array of information available to consumers. That will help inform consumer s about what is available on the market, but applicability will still turn on the individual consumer s credit rating. Most dealers will have supply linkages with several finance providers who cater for different customer risk profiles. The rates available via those various providers will be quite different (for example a typical dealer might today offer rates at say around 12%, 15% and 18%, depending on the respective applicant s credit profile). Also special promotions offering zero or low interest rate offers are common in the retail motor industry. Because of these conflicting messages the market can be a confusing place and a list of rates on a website may serve to pose more questions than answers. Also there can be no surety that all or even any of the rates promoted will be accessible to all consumers. Finance approval rests solely with the respective finance company (as distinct from the vehicle dealer), and the application for any rate or offer can only be determined after review of the respective consumer s credit application. That requires engagement between the parties. We acknowledge the declaration of costs of borrowing may bring some positive contributions in that it might help inform consumers about what s available in the market. But there is also the risk that a consumer could be enticed to engage with the dealer in the expectation of qualifying for the lowest rate listed but due to their less than ideal credit profile may only qualify for considerably higher interest rate. In this context and despite best intentions the obligation to declare costs of borrowing might inadvertently serve as bait. Despite any general guidance that finance approval will be subject to credit application, it is unreasonable to expect website based costs of borrowing declarations will be able to provide enough definition about what those conditions will be. 2. Will the information described at paragraphs 32 to 34 assist consumers in comparing different products? Yes and no. Declaration of costs of borrowing will help inform consumers about the range available in the market. But declaration of rates will not confirm whether those rates apply to any individual consumer, given different credit profiles. Application will rest on the status of the individual consumer s credit profile. That is difficult to address via website based descriptions. Reliance on terms such as good credit history required are not specific enough. Perhaps it might help if a consumer could readily and freely identify their own individual credit rating/score and if costs of borrowing information included some guidance about what about credit ratings/scores would be required to qualify for particular rates. 3. What are the costs to creditors in publishing and updating the information described at paragraphs 32 to 34? Initial setup will incur costs on all dealers. Once the information is in place, ongoing costs to maintain that information will be minor. The real question to be posed is whether declaration of the costs of borrowing will have any positive impact for the majority of consumers. We predict it won t have any positive impact for the majority. Most consumers already have a general idea of market rates, understand the impacts, and are aware of their options. We do not expect the declaration of costs of borrowing will have much effect or benefit for consumers in the retail motor vehicle market, but the requirements will pose compliance costs on dealers. 4. How often might a lender s costs of borrowing change? This will vary from case to case and in relation to the economic environment at the time. Are we correct to assume that special offer promotions (eg zero or low interest offers on a particular vehicle) will be outside the routine declaration of costs of borrowing information compulsorily provided on websites? 5. Is there different information and/or further information about costs of borrowing that could be prescribed through these regulations? If so, please describe and set out the reasons why (e.g.

5 potential benefits to consumers; potential compliance costs). Education of consumers is the best option, to ensure they know and understand the costs and consequences of borrowing money to buy goods. The provision of clear simple general guidance that covers the basics is the best idea. This sort of generic information could be provided on MBIE/Consumer Affairs website and be strongly and regularly promoted. If Government is serious about trying to inform consumers about the costs of borrowing and the relevance of maintaining a good credit history, and alerting them to the risks of short term high rate lenders, then Government needs to put more resources toward promotion of these concepts in general. At the very least the teaching of financial literacy should be a mandatory subject within schools, if it is not already. 6. Would a prescribed form (i.e. format) of disclosing costs of borrowing assist consumers? Why/why not? If yes, how would you suggest the information be presented in a way that meaningfully assists consumers? We support development of a standard form of declaration. Notwithstanding our comments above, comparison of offers is enhanced if the information is provided in a consistent and comparable format. Model disclosure statements 7. Do you have any comments on the proposed amendments to the model disclosure statements (in particular, the drafting of the right to cancel and information on unforeseen hardship)? No specific comments. However we do observe that the layout and terminology of the safe harbour format originally adopted when the CCCFA first took effect in 2005 was confusing and served to needlessly complicate matters relative to what had preceded. Complexity triumphed over purpose and effectiveness. 8. From a creditor s perspective, what are the benefits of these model disclosure statements, and do you currently, or are you likely to, use them? No comment 9. From a consumer s perspective, is the information in these model disclosure statements presented in a useful and clear way? If not, how could the model disclosure statements be improved? No comment 10. Would you find it useful for the model disclosure statements to be provided in a Microsoft Word format on the Ministry s website? No comment Part Two: Minimum repayment warnings on credit card statements 11. In your experience what proportion of credit card holders make only the minimum repayment each month? What proportion repays the balance in full each month? No comment 12. What information is currently available to consumers regarding the costs of repaying the balance at the minimum repayment? No comment 13. What information would be most helpful to consumers in alerting them to the costs of repaying the balance at the minimum repayment? No comment 14. What other information and tools do credit card providers make available to credit card holders regarding the costs of repaying the balance at the minimum repayment? How often are these resources used by consumers? Do you consider them to be effective? No comment 15. In your view, should the minimum repayment warning be a non-calculation based written warning statement, or should it include calculated information similar to that included in the United States and Australian examples? Why? No comment 16. If the minimum repayment warning was to include calculated information, what calculations should be included? No Comment

6 17. If the minimum repayment warning was to include calculated information, are there any assumptions that these calculations should be based on? How should these assumptions be treated in the billing statement? No comment 18. Should a calculated warning statement outline only the interest charged, as under the Australian warning, or the total cost including principal and interest as under the United States warning? No comment 19. Should the minimum repayment warning include the contact information of a debt counselling service, like the United States? Or the contact details of the credit card provider, as under the Australian example? No comment 20. What are the compliance costs of introducing a written, non-calculated minimum repayment warning? No comment 21. What are the additional compliance costs of providing a calculation-based minimum repayment warning similar to that used in (i) the United States and (ii) Australia (as opposed to a warning statement only)? No comment 22. What are the additional benefits of providing calculated information to the consumer (as opposed to a warning statement only)? No comment 23. Are there any circumstances in which a minimum repayment warning should not be required? No comment 24. Should the New Zealand minimum repayment warning be based on any of the international examples explored in this discussion document and/or are there any aspects of these international examples you believe should be adopted in New Zealand? No comment 25. Are there any aspects unique to the New Zealand credit market that should be reflected in a minimum repayment warning? No comment 26. Are there any issues that arise with providing the billing statement, and the minimum repayment warning, electronically? No comment 27. How should the minimum repayment warning be provided electronically? No comment 28. Are there other ways for lenders to alert credit card holders to repayment issues other than, or in addition to, minimum repayment warnings? No comment Part Three: Proportionate rebate formulae Rebate of consideration paid for repayment waiver in the event of full prepayment 29. Do you agree with the proposed formula for calculating the proportionate rebate of consideration paid for repayment waivers? If not, what alternative formula do you propose? We agree in principal with the proposed formula, but stress we are not equipped to promote the merits of one approach over another. Rebate of consideration paid for extended warranty in the event of early repayment 30. Do you agree with the proposed formula for calculating the proportionate rebate of consideration paid for an extended warranty? If not, what alternative formula do you propose? We do not have a view on whether the proposed formula is correct or not. However, notwithstanding the law is now defined and cannot be changed, we do not understand logic behind the requirement that early repayment of a loan must also be accompanied by cancellation of any extended warranty policy if the financier and warranty provider are the same party.

7 If a consumer had purchased an extended warranty policy (voluntarily or as a condition of finance approval) which was funded under the finance contract, and later chooses to pay off the loan early there is no logical reason from our perspective as to why the consumer should not have the option to keep the existing extended warranty policy in place. The basis for electing to purchase an extended warranty policy in the first place was to insure against the costs of future breakdown or failure of the vehicle. If the consumer is in the fortunate position of having the option to pay off the loan early but wants to keep the vehicle, the law will deny that consumer the right to keep any existing warranty policy in place. That is illogical, and may even be detrimental to the consumer s interests. Consider the situation where the consumer wishes to retain warranty protection, their only option will be to cancel the initial policy and buy another policy from scratch. The purchase of a new warranty policy will likely be conditioned by the warranty company on the completion of a mechanical check to confirm the repair status of the vehicle and the cost of that mechanical check will be borne by the consumer. A mechanical check is likely to cost the consumer about $150. Putting this in the context of the example provided in the discussion document, the consumer will have to cancel the existing extended warranty and receive a rebate of $100. They will then pay $150 for a mechanical check and buy another warranty policy ($200). We can t see how the consumer benefits in this situation.

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