The Victorian Civil and Administrative Tribunal decided in Director of Consumer Affairs Victoria v City Finance Loans (Credit) [2005] VCAT 1989 that the lender’s fees were not interest and were not unconscionable.
The facts as set out by the Tribunal President were:
The credit providers provide loans to consumers,
generally in sums of hundreds of dollars, for periods of months. The nominated
interest rate is typically 30% per annum. The credit providers also charge
various fees: a $20 loan application fee; a loan maintenance fee, generally of
$2 per week; and an establishment fee. The size of the establishment fee
varies: it is $200 for an amount loaned of $300 to $500; $350 for amounts of
$600 to $1,300; and $375 for amounts of $1,400 to $2,000. I am also to assume
that the credit provider’s average reasonable costs of establishing a loan
is less than the establishment fee. Hence I am to assume that part of the
profit earned by the credit provider is from
fees.
The Tribunal had to decide two questions:
Whether, all or any part of:
(a) the whole of the $20 loan application fee;
(b) the whole of the loan maintenance fee; or
(c) the amount of the establishment fee in excess of $135.00 was
1. interest under the Consumer Credit Code? or
2. if not interest, were the fees unconscionable?
The President defined interst as follows:
in the context of the
Code, I would regard the concept of interest as involving two elements: first, a
relation to a principal sum; and, second, a charge for the use of the
principal sum by the borrower. Moreover, in the context of the Code, interest
would normally be expressed by a ratio…
17 I wish to stress that the provisions of the Code reinforce what I would
regard as essential components of a sum to be characterised as
“interest”. The Code contemplates that interest will be expressed
as a ratio, related to both the principal sum and the period during which the
borrower has use of that sum. The Code makes separate provision for fees; and
contemplates that charges having this characterisation should be regarded as
fees, not as interest.
Were the fees unconscionable? No
27 The Director contends that the effect of section 21(1)(b), combined with
section 72(1)(a) and (3) of the Code, is that a credit contract must not impose
fees that are unconscionable; and, in particular, must not impose an
establishment fee which is greater than the credit provider’s reasonable
costs of determining an application for credit and the initial administrative
costs of providing the credit, or the average of these costs in respect of a
class of contract. Further he claims a civil penalty as a result of such a
breach…
does it mean that there is an implied obligation
to refrain from charging an unconscionable establishment fee? Or does it simply
mean that a lender is at risk if it charges an unconscionable establishment
fee?
29 In my opinion, the latter proposition is to be preferred; with the
consequence that it cannot be said that the establishment fees (or for that
matter any of the fees) the subject of this proceeding could be regarded as
breaching the requirement of section 21(1)(b) of the Code. Essentially I reach
this conclusion for the reasons advanced by the respondents.
30 Section 21(1)(b) of the Code is essentially concerned with the amount
of fees. By contrast, section 72 of the Code is concerned about whether a fee
is unconscionable. These are two different concepts. It is true that
the amount of a fee is one factor which would inform the tribunal in determining
whether the fee was unconscionable. But there is likely to be other factors:
in particular, the circumstances of each party. Unconscionability focuses on
whether one party has taken advantage of the other and has exploited the
comparative advantage.
32 It is also to be observed that the role of section 72(3) is not to make a fee
unconscionable if it exceeds the credit provider’s reasonable costs (or
reasonable average costs) in relation to the establishment of a loan. Rather
the role of the provision is to require such a comparison in determining the
question. Cases will no doubt arise where other considerations are also
relevant, particularly considerations about the comparative circumstances of the
parties. Thus the question of whether or not a fee is unconscionable can only
be ascertained in the context of a particular transaction.
33 In my opinion, it is unlikely that the obligation to only impose an
amount of a fee or charge, that may be charged consistently with the
Code, would vary according to the circumstances of the parties. This is
especially so having regard to the high penalties that may be attracted by a
failure to comply with section 21 of the Code. Rather I prefer the submission
of the respondents that section 72 is designed to provide relief to a debtor or
guarantor in particular circumstances, even if the establishment fee is
consistent with the Code.
34 Even if I am wrong in this analysis, it must be true that the
Director’s argument must fail in respect of the loan maintenance fee.
This is not a fee that could be regarded as an establishment fee.
35 Further, on the assumptions, even if the $20 loan application fee is part of
an establishment fee, it is such a small amount that it is difficult to see how
it could be regarded as
unconscionable.
