In August 2021, Natalie applied for a $30,000 loan. On the application form, she said the purpose of the loan was to pay legal fees. The lender assessed Natalie’s finances, and said they were willing to lend up to $45,000. Natalie decided to borrow the full amount.
By December 2022, Natalie was no longer working and was struggling with her finances. She approached a financial mentor for assistance. As part of her role, the financial mentor looked at Natalie’s debts. She had concerns about how the lender had allowed Natalie to borrow so much money, and thought they had failed to properly assess whether she could afford the repayments.
The financial mentor complained to the lender, but they said they did not think they had done anything wrong. As the complaint could not be resolved, FSCL started investigating.
After the complaint came to FSCL the lender made an offer to:
- reduce Natalie’s loan balance to $30,000, writing off $13,700
- stop charging interest on the loan
- accept reduced repayments because of Natalie’s financial difficulties, with a review after three months to see if her circumstances had changed.
Natalie’s financial mentor said she still wanted us to look at the complaint to see whether the lender’s offer was fair.
Dispute
In assessing the reasonableness of the lender’s offer, we noted there were two key issues in dispute. The first was about the loan amount increasing from $30,000 to $45,000. The financial mentor said she thought it was inappropriate for the lender to offer to lend so much more without finding out whether Natalie needed the additional money, or making any further inquiries about the purpose of the loan.
The second key issue was about the reasonableness of the lender’s inquiries into affordability. Natalie’s financial mentor noted the lender had not included repayments for another loan in their affordability assessment. She also raised concerns that the lender had not questioned $41,000 of payments from Natalie’s account in the two months before she applied for the loan. These payments were made to an account overseas – and the financial mentor strongly suspected Natalie had been caught up in a scam. It turned out the money Natalie borrowed for legal fees was also paid to the same person overseas. Her financial mentor said that if the lender had asked questions about these transactions, they might have prevented her sending more money to the scammer.
Review
We agreed with the financial mentor that the process by which the lender had offered Natalie $15,000 more than she had originally applied for was concerning. There was no question Natalie had accepted the increase, but the lender had not made any inquiries about the purpose of the loan beyond what was on the application form. The lender did not know what the legal fees were for, and in these circumstances, we did not think it was appropriate to offer to lend so much more than Natalie applied for. However, we thought the lender’s offer to write off more than $13,000 from the loan was a fair way to address this.
We also had concerns about the lender’s affordability assessment. We agreed they had failed to include repayments for another loan Natalie had taken out. We also thought the lender should have made inquiries about the $41,000 in international transfers that had recently left Natalie’s bank account. Although we accepted there was nothing to indicate to the lender that these payments were part of a scam, we thought a proper assessment of whether Natalie could afford the loan repayments should have included considering whether these payments were part of an ongoing commitment.
The usual remedy for irresponsible lending is for the lender to refund all fees and interest on the loan. We noted that as well as writing off more than $13,000, the lender had agreed to stop charging interest and accept reduced repayments. This meant that the lender’s offer was likely at least as favourable as what we could have awarded if we upheld the complaint.
We also considered the financial mentor’s comments that Natalie would have avoided losing more money to the scam if the lender had declined her application. We understood her point but thought the lender could only be held responsible for the direct consequences of the loan. This meant we did not think the lender could reasonably be held responsible for what Natalie did with the funds after she received them.
Resolution
We explained to Natalie’s financial mentor that we thought the lender’s offer was fair. She spoke with Natalie, who decided to accept the offer.
Although the complaint was resolved on this basis, we wrote to the lender at the end of the investigation to explain our concerns about the way they had dealt with Natalie’s application. In particular, we highlighted the offer to lend $15,000 more than Natalie applied for and their failure to make reasonable inquiries about affordability.
Insights for participants
This case highlights the importance of lenders making reasonable inquiries before agreeing to lend. Although it was good to see the lender making a fair offer to resolve the complaint, writing off a significant sum and stopping all interest meant the lender’s failing had come at a significant cost.
