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Affordability assessment gives rise to complaint

In October, Rebekah borrowed money from a high cost lender, about a month later she repaid the loan by refinancing the debt with a lower cost lender. The following February, Rebekah did the same thing. In August 2019 she borrowed $1,600 from the same high cost lender to buy a computer, agreeing to pay $76 a week for 38 weeks. The interest rate was 144%.

Rebekah missed the first three loan repayments, then paid a few payments, but by this time, her rent was in arrears, her power had been disconnected, and she needed food parcels. Rebekah needed help and went to a financial mentor.

The financial mentor was concerned that the August 2019 loan had contributed to Rebekah’s financial hardship and contacted FSCL. We referred the complaint to the lender’s internal complaints process.

The lender considered its decision to lend met the responsible lending guidelines in the Responsible Lending Code and initially offered to freeze the debt at $2,098.61 and enter into an affordable repayment plan with Rebekah. The financial mentor did not accept the offer and advised that Rebekah had not used the money to buy a computer, but to repay debt.

The lender then offered to reduce the debt to the original $1,600 and enter into an affordable repayment plan. The financial mentor also declined this offer. We told the financial mentor that our usual approach to complaints, where we find the lender does not meet their responsible lending obligations under the Credit Contracts and Consumer Finance Act (CCCFA), is to require the lender to reduce the debt to the original amount borrowed and not charge any interest or fees on the loan.

The financial mentor asked us to depart from our usual approach, taking into consideration the size of the loan, that it was high cost lending and that Rebekah is a vulnerable borrower. The financial mentor wanted the lender to:

  • forgive the entire loan balance
  • pay compensation of $125 for the power disconnection
  • pay $150 for the power reconnection
  • pay $55 for the dishonour fees charged by her bank
  • pay compensation of $1500 for stress and inconvenience.

The lender did not agree, so we started our investigation of the complaint.



The lender was satisfied that, based on the information provided by Rebekah, the loan was affordable. Rebekah had given the lender her bank statements for the last three months. The lender used data harvesting software to gather information from Rebekah’s bank statements about her income and expenses.

The lender said that Rebekah had told it that her income was made up of a benefit and child support payments. The lender could see deposits from IRD going into Rebekah’s account and assumed these were the child support payments. The lender also identified other regular payments as ‘board’ The lender calculated that Rebekah had a monthly surplus of $1,000 and could easily afford the loan repayments.

The lender also said that Rebekah had lied about the purpose of the loan. If it had known the money was to repay other debt, it would have assessed the lending decision differently.

The financial mentor said the lender had made a mistake when it assumed the IRD payments were Rebekah’s child support payments. In fact, the regular payments the lender had identified as ‘board’ were the child support payments from her children’s fathers. The IRD payments belonged to another family member who was using Rebekah’s account to pay money into. As a result, the lender had calculated Rebekah’s income as $200 a week more than it should have been.



After receiving information from the lender, we immediately noticed that Rebekah had missed the first three payments. This was a strong indicator that the loan was unaffordable from the beginning.

Rebekah’s bank statements confirmed that she had no available funds to repay the loan. We could see how the lender had made its mistake, by including the $200 from IRD payments in its calculation of Rebekah’s loan affordability. The lender said, but had no diary notes to back it up, that Rebekah had advised her income included the IRD child support payments and board payments. The financial mentor said Rebekah did not say this, she just told the lender she received child support payments from the fathers of her children.

We weighed all the information and decided that the lending was not as far outside the bounds of responsible lending as suggested by the financial mentor. However, we were also not convinced that the lender had fully discharged its obligations under the CCCFA to make reasonable inquiries that Rebekah could repay the loan without suffering significant financial hardship.

We could see from Rebekah’s bank statements that she was almost always in overdraft and her financial position appeared to have deteriorated over the last three months. In our view that the management of Rebekah’s account should have put the lender on notice that its calculation of a $1,000 a month surplus was inaccurate. We considered the lender should have asked Rebekah more questions about her financial situation.

We could also see that when calculating the surplus, the lender was relying on Rebekah using some of her discretionary spending on items like fast food towards her loan repayments. It is our view that a lender cannot always assume that a borrower will understand that they are expected to use some of the money they are currently using for discretionary spending, to repay the loan. We suggest that a prudent lender should go through their affordability calculation with the borrower to check that the income and expenses are correct, as well as explaining what the consequences will be if they decide to go ahead with the loan.



We recommended that the lender reduce the loan to the original amount borrowed, less the payments Rebekah had made, forego the charging of any interest and fees, and enter into an affordable repayment plan with Rebekah. When we issued the decision, Rebekah’s budget was in deficit, so we asked the financial mentor to advise when he thought Rebekah would be able to start repaying the loan.

The lender and the financial mentor, on Rebekah’s behalf, accepted the decision, but the financial mentor said that Rebekah’s financial position had deteriorated further. As applying for a no asset procedure seemed inevitable, Rebekah was not able to enter into a repayment agreement.

We discontinued our investigation at this point.


Insights for or participants

We accept that lenders use data harvesting software to calculate loan affordability. Often it allows lenders to see what the borrower actually spends money on each week, not what they should be spending money on. However, data harvesting software should not be used to replace a robust loan assessment, preferably actively involving the borrower, to check the lender’s information is correct and that the borrower understands the discretionary spending they will have to give up in order to afford the loan.