Insights for participants
It is important that lenders take all necessary steps to ensure they have reasonably inquired into their customer’s income and expenses.
We were pleased to see that the credit card company in this complaint accepted that they had assessed affordability incorrectly and were prepared to settle the complaint on terms that worked for Morgan.
What happened?
Morgan applied for a credit card when she was 64, turning 65 in a few months. She was approved for a $5,000 credit card. She made some regular repayments but less than 10 months later, Morgan could no longer stay on top of the minimum repayments and started accruing default fees and interest.
Work and Income referred Morgan to a financial mentor. Her financial mentor was concerned that the credit card company had not met their responsibilities under the Credit Contracts and Consumer Finance Act 2003 (the CCCFA), the Credit Contracts and Consumer Finance Regulations 2004 (the CCCF Regulations), and the Responsible Lending Code (the RLC), when Morgan applied for her credit card.
Morgan’s financial mentor made a complaint to the credit card company, however, they could not come to an agreement. Morgan’s financial mentor then complained to FSCL on Morgan’s behalf.
The credit card company’s view
The credit card company said that they had correctly assessed Morgan’s ability to repay the credit and followed all regulations and legal considerations during the credit application process.
Morgan’s view
Morgan’s financial mentor said that this was irresponsible lending. The financial mentor pointed towards inaccuracies in Morgan’s expenses and income that the credit card company used in their assessment of her ability to repay.
What was FSCL’s view?
After investigating, we found that the credit card company had not reasonably inquired into Morgan’s income. In her credit application, Morgan had correctly recorded her net weekly income amount and said that she was employed. However, this was a mistake – Morgan’s only income for the past decade had been from ACC payments. And, the lender had not obtained any documentation to verify Morgan’s income.
We said that if the credit card company had complied with their obligation under the CCCFA and made reasonable inquiries into Morgan’s income, they would have found this inaccuracy. We also said the credit card company could reasonably have identified that Morgan’s ACC payments would soon cease because ACC eligibility ends once a person turns 65. Morgan’s income would then be from New Zealand superannuation, which was going to be considerably less than her ACC income.
There was also an issue with Morgan’s declared expenses. Morgan used very conservative estimates of her expenses, because she misunderstood the categories the credit card company used in their application. The credit card company then compared these to average benchmark figures, which show what an average person in Morgan’s demographic was spending, and took the higher of the two. The credit card company did not request any further information from Morgan to verify her expenses.
After analysing Morgan’s actual spending during the three months before her application, we found that the credit card company had underestimated Morgan’s total expenses. This meant that when they completed their affordability assessment, they took Morgan’s disposable income (or income that could be used to make repayments) to be considerably higher than it actually was.
How did FSCL suggest that the complaint should be resolved?
We said that there was evidence of irresponsible lending.
As a result of this finding, and in line with the remedy set out at section 89(1)(aaa) of the CCCFA, we suggested to the credit card company that they should settle the complaint by removing all fees and interest and crystalise the remaining debt. We also suggested that they provide non-financial loss compensation for the stress they had caused Morgan of $600.
The parties accepted this resolution, and we then helped the parties agree on an affordable repayment plan to pay off the principal debt.
