Assessment failure meant loan repayments were unaffordable

Jung-min applied for a $19,500 loan to buy a new family car. The lender completed an affordability assessment to see whether Jung-min would be able to make the repayments for the new loan. After reviewing information, including payslips and bank statements, the lender calculated Jung-min’s weekly income from all sources was $1,350 and his weekly living expenses were $1,100. Based on this, the lender approved Jung-min’s loan application. The payments for the new loan were $175 per week, leaving Jung-min a weekly surplus of $75 according to the lender’s calculations.

Within the first 18 months, Jung-min repeatedly struggled to make his loan payments. The lender approved four hardship applications where they agreed to accept reduced payments. They also approved a Covid repayment holiday. During this period, Jung-min’s circumstances changed significantly. He lost his job on two occasions and had his hours reduced due to Covid.

Jung-min sought help from a financial mentor. The financial mentor asked the lender for the affordability assessment they completed when Jung-min applied for the loan. Based on the this, the financial mentor said the lender should have declined Jung-min’s application because he never would have been able to keep up with the repayments.

The lender didn’t agree, so the financial mentor referred a complaint to FSCL on Jung-min’s behalf.

Dispute

The key dispute in this case was whether the lender had appropriately assessed the loan affordability.

Jung-min’s financial mentor suggested the lender had made two key errors. The first was overestimating his income by relying only on his three most recent payslips. Jung-min’s hours varied according to his employer’s needs, meaning an average over three weeks wouldn’t necessarily reflect his expected income over a longer period.

The second suggested error was underestimating Jung-min’s household expenses. The lender had used benchmarks to decide an average amount of household expenses for a borrower like Jung-min. Based on this, they used a figure of $256 per week. This was supposed to cover the cost of food, power, telecommunications, clothing, and entertainment.

The lender said they had fairly assessed Jung-min’s application based on the information available to them. In their view, it was the changes in Jung-min’s circumstances such as losing his job that meant he was unable to afford the repayments.

Review

Our focus in reviewing Jung-min’s complaint was on whether the lender had met their obligations under the Credit Contracts and Consumer Finance Act 2003 (CCCFA). Section 9C(a)(ii) of the CCCFA says that before entering into an agreement a lender must make reasonable inquiries to be satisfied that it is likely the borrower will make the loan payments without suffering substantial financial hardship.

We acknowledged Jung-min’s circumstances had changed after the loan was taken out. But it wasn’t enough for the lender to say this was the cause of his financial difficulties. We still needed to review the reasonableness of their inquiries before agreeing to lend. We found the lender hadn’t made reasonable inquiries in this case because:

  • They had only reviewed three weekly payslips to assess Jung-min’s wages. We didn’t think this was reasonable, because over those three weeks Jung-min’s pay varied by $95 a week. Given the lender had assessed Jung-min as having a $75 weekly surplus, we thought such a level of variation in wages ought to have prompted them to make further enquiries. We also noted the lender had obtained 90 days of bank statements which showed Jung-min’s average weekly wages over that period were $70 less than the figure the lender had relied on.
  • They had assessed expenses based on the wrong household size. During the application process, the lender confirmed Jung-min had three children. They then assessed household expenses based on one adult and three children. This didn’t account for Jung-min’s wife. The lender told us they didn’t include her expenses because Jung-min didn’t disclose her income when applying for the loan. During our investigation, we established Jung-min’s wife wasn’t working when the loan was taken out. This meant the lender needed to include living expenses for another adult when assessing the affordability of the loan. If they had done so, Jung-min’s household expenses would increase by more than the $75 surplus the lender had relied on when approving his application.

Overall, the lender’s failure to make reasonable inquiries meant they couldn’t be satisfied Jung-min would be likely to make the loan payments without suffering substantial financial hardship.

Resolution

We recommended Jung-min’s complaint should be upheld and said the lender should refund all interest and charges. This outcome was in line with the remedy set out in section 89(1)(aaa) of the CCCFA.

Both parties accepted our recommendation. The lender confirmed they would agree to an affordable repayment plan with Jung-min for the remaining balance.

Insights for participants

This case highlights two areas lenders needs to carefully consider when assessing loan applications. Using a small number of payslips may not be reasonable where an applicant’s wages vary significantly across those payslips. It is also important for lenders to establish what household expenses an applicant is responsible for paying. Failing to account for a family member can seriously undermine an affordability assessment and mean any surplus may not actually exist.