Debt collection group Receivables Management has agreed to credit more than $1.4 million to around 1700 customers after a Commerce Commission investigation.
The group was found to have wrongly charged customers interest, costs and fees on loans after their goods had been repossessed and sold.
The commission says this conduct was prohibited by the now repealed Credit (Repossession) Act 1997 and is now unlawful under the Credit Contracts and Consumer Finance Act 2003.
Competition and consumer general manager Antonia Horrocks says that, when borrowers are in default, lenders essentially have two options.
They can issue proceedings and continue to charge interest and fees, or they can repossess secured goods, which freezes the amount owed under the loan.
"They can't repossess and continue to charge interest and fees," she said.
Receivables Management has agreed to refund all affected borrowers by the end of March.
If customers are owed a cash refund, they will be entitled to an additional 5 percent of the interest and fees charged for not having had use of the money.
"We are pleased that Receivables Management is crediting refunds to affected customers," Ms Horrock said.
"The group has cooperated throughout our investigation and is taking steps to ensure it does not happen again."
The group includes Receivables Management (NZ), Southern Receivables, Allied Recoveries and RJK Receivables.