Southern Cross Finance to repay $700,000 fees

The company had been charging its customers between 1 and 2 per cent of the loan resulting in a charge of up to $5000 on a $250,000 loan. File photo / NZ Herald

A mortgage lender is to pay back $700,000 to 250 of its customers after it admitted to charging unreasonable loan establishment fees between July 2006 and October 2009.

Southern Cross Finance reached the settlement agreement with the Commerce Commission after it began an investigation in 2009.

Under the Credit Contracts and Consumer Finance Act 2003, establishment fees must reflect the reasonable costs of setting up a loan.

The commission found the company had been charging its customers between 1 and 2 per cent of the loan resulting in a charge of up to $5000 on a $250,000 loan.

Graham Gill, Auckland enforcement branch manager for the commission, said establishment fees that were a percentage of the loan were "inherently unlikely to reflect the actual cost of establishing a loan and be reasonable".

As part of the investigation, Southern Cross Finance calculated its actual average reasonable cost of establishing or renewing a consumer credit contract was actually around $1000.

It now charges a standard $500 establishment fee on all consumer loans.

Gills said establishment fees were an important consideration for consumers when selecting loan products.

"The fee should genuinely relate to the cost of setting up a loan so that consumers can meaningfully compare competing products."