Not in your best Interest
Michael signed a loan contract with Mortgage Masters on 1 February 2002 (“the loan”). The total amount payable under the loan was $4,503.75 including the principal, basic interest, fees and insurance.
Michael defaulted on the loan payments and was charged default interest at 25% of the outstanding balance per annum, accruing weekly. 7 years later, in November 2008, Mortgage Masters obtained a court judgment against Michael for $9,942.14.
In January 2009 Mortgage Masters enforced the judgment through an attachment order to Michael’s wages. Michael was ordered to pay Mortgage Masters $10,250.14 by deduction from his wages at $50 per week. Michael paid the full amount to Mortgage Masters, finishing in January 2013.
Then in September 2013, Mortgage Masters filed court proceedings for $11,134.41 claiming default interest from Michael. Michael was unaware the loan continued to accrue interest while he was making payments under the attachment order.
Michael complained to FSCL in November 2013 that he should not be required to make any further payment to Mortgage Masters, because he had paid the attachment order in full.
The complaint
Michael was not aware that the loan continued to incur interest while he was making payments under the attachment order. Michael did not believe he had any liability above the court ordered amount in the attachment order. Michael believed he had paid his debt to Mortgage Masters, that there was no balance owing and Mortgage Masters was not able to pursue him for more money.
Mortgage Masters’ position
Mortgage Masters was of the view that it had the right to claim $11,134.41 from Michael in default interest.
The interest was charged at two separate rates: firstly the default rate of 25% per annum charged from the date of default in April 2002 until the date of judgment in November 2008. Secondly, a rate of 8.4% under the District Courts Act 1947 was charged from the date of judgment onwards. These amounts were both charged to Michael on a weekly basis.
FSCL’s involvement
We investigated and found Mortgage Masters:
- could charge default interest under the loan contract at 25% per annum.
- could charge statutory post-judgment interest at the rate of 8.4% per annum, to accrue monthly, following judgment, and
- had applied the interest weekly and incorrectly stated the amount owing by Michael in the latest documents filed with the court.
Outcome
We formally recommended that Mortgage Masters recalculate the interest as we believed a fair amount to accrue was less than the sum Mortgage Masters was claiming in court. We also recommended that Mortgage Masters remove any fees and charges incurred after the attachment order had been filed.
Mortgage Masters recalculated the interest owing and after consideration of Michael’s positive payment history, agreed to remove the charges. Mortgage Masters produced a revised loan balance of $3,203.98. Michael did not accept our recommendation, but we were able to negotiate a settlement. Michael agreed to pay a $2,500 lump sum to Mortgage Masters in full and final settlement of all liabilities under the loan contract.
Lesson
Default interest rates are common place in credit contracts and default interest continues to accrue until the default is remedied. It is the borrower’s responsibility to monitor their payments to avoid default.
Court proceedings for judgment and enforcement do not necessarily cap the debt and post-judgment debts will accrue interest at either the existing contractual rate or if no default rate applies, then at a rate prescribed by law.
