A finance company is being taken to the High Court over unreasonable default fees.
The Commerce Commission has filed proceedings alleging that UDC Finance Limited's dishonour and late payment fees were unreasonable because they were more than what the company lost.
It claims UDC Finance is in breach of the Credit Contracts and Consumer Finance Act (CCCFA).
A dishonour fee was charged if the borrower missed a scheduled payment and a late fee was charged if the payment was not made a week after it was due.
The Commission said in the case of late payments there were little costs incurred at UDC's end, so was unreasonable to charge clients for it.
"In the case of the late payment fee, UDC calculated its fee by including recovery costs that it did not actually incur until much later (if at all)."
The fees began being charged on 6 June 2015, however the dishonour fee did stop in September 2016.
The Commission is seeking compensation for borrowers who were charged these fees.
Company chief executive Wayne Percival said its late fees were reasonable and covered the underlying costs incurred by he company.
"Following a long and open dialogue, the Commission is now looking to the courts for a declaration on the matter. UDC believes its fees fairly and reasonably recover the underlying costs it incurs, and that the law allows it to charge the fees on the basis that it does."
"UDC will continue to engage with the Commission to see whether we can reach an agreement with the Commission that resolves this issue."
He said the company took its compliance with the CCCFA very seriously and regularly reviewed its fees.
"This review process has seen UDC reduce a number of its fees."
UDC Finance said the Commission had not previously raised its concerns with it, about the dishonour fees.
In 2016, when Motor Trade Finance Limited and Sportzone Motorcycles Limited appealed verdicts of unreasonable credit fees, the Supreme Court made clear that credit fees should only cover costs that are closely related to the particular loan transaction and should not be for generating profit.
In June, the Commission also filed High Court proceedings alleging the finance company Real Finance Limited, breached the CCCFA by charging borrowers unreasonable establishment, monthly administration, and default fees on personal loans.