Baycorp, a New Zealand-based collection agency, is refunding debtors $3.5 million after a settlement with the country's Commerce Commission.

The regulator stated that Baycorp violated the country's Fair Trading Act by claiming to have a right to add collection costs - including some legal and court costs - and interest to a debtor's balance after items were repossessed and sold. This breached the Credit Repossession Act (CRA), which prohibits a lender from recovering more than the debt balance outstanding after goods have been repossessed and sold, according to the regulator.

Commerce Commission chairman Mark Berry told MSN New Zealand that the settlement was not just about Baycorp but intended as a signal to all companies involved in lending, repossession and debt collection. There had been a lack of awareness by lenders and debt collectors as to how the CRA applied to them.

"Once sale of a repossessed item has occurred, the CRA prohibits a creditor from recovering more than the debt balance outstanding after deducting the net proceeds from the item's sale," Berry said in a statement. "We are becoming increasingly concerned about the lack of understanding by many companies operating in this industry about their obligations under the CRA. This settlement puts them on notice that there are potentially severe consequences if they get it wrong."

The commission says Baycorp has changed its collection practices to ensure it does not happen in the future. Baycorp has agreed to reduce the outstanding debtor balances for 2,370 current accounts by $3,457,634 and pay $46,107 to debtors who paid back more than the balance owing.

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