In February Carlos borrowed $25,000 from a finance company, secured by a caveat over a property. The next month Carlos refinanced the loan, borrowing another $17,000 and giving the finance company additional security over three cars. In April Carlos wanted to sell the property. The finance company agreed to remove the caveat, conditional on Carlos reducing the loan balance and giving the finance company security over two more cars. Once all the refinancing was complete Carlos owed the finance company $27,000, secured by five cars.
Attempt to sell a car securing the loan
The relationship with the finance company continued uneventfully until May the following year when the finance company discovered Carlos had tried to sell one of the cars through Trade Me. The prospective purchaser discovered the security listing on the Personal Property and Securities register and contacted the finance company.
The finance company contacted Carlos and became even more concerned when it asked about the other vehicles and he advised they were leased out.
Job loss caused unforeseen financial hardship
Carlos then lost his job, stopped repaying the loan and submitted an unforeseen hardship application. The finance company declined the hardship application on the grounds that Carlos had breached the loan agreement by selling and leasing the security vehicles.
FSCL becomes involved
When the finance company declined the hardship application, Carlos complained to FSCL.
Permission granted to repossess cars
The finance company contacted us immediately, asking for permission to repossess Carlos’ cars. The finance company was concerned that Carlos had already tried to sell one car, had leased others, and was worried it would lose the security for its loan if it did not act quickly.
We agreed the security was ‘at risk’ and, despite there being a complaint before us, agreed the finance company could repossess the cars. However we advised the finance company that if, once we had reviewed the complaint, we found it was not entitled to repossess the cars we may require it to compensate Carlos for any direct loss and inconvenience.
Carlos complained that the finance company had:
- declined the hardship application
- repossessed cars while a complaint was before us
- repossessed some cars that did not secure the loan.
We explained to Carlos that when he refinanced the loan he had given the finance company security over two further cars so that the caveat over his property could be released.
We went on to explain that by selling and leasing the cars, Carlos had breached the loan agreement. The finance company was entitled to treat the security as ‘at risk’, and we were satisfied the finance company had been entitled to repossess all five cars.
Finance company entitled to declined hardship application
Finally, we explained that the Credit Contracts and Consumer Finance Act 2003 allowed Carlos to ask the finance company to vary the loan to relieve unforeseen financial hardship. However, the loan variation must be fair and reasonable in the circumstances. We considered it was fair and reasonable for the finance company to decline the unforeseen financial hardship loan variation because Carlos had breached the loan agreement by selling the loan security.
Carlos did not accept our view advising:
- the finance company had repossessed cars it was not entitled to repossess
- the finance company knew Carlos had leased some of the cars when it advanced the loan
- it was unreasonable for the finance company to now consider the leasing of the cars to breach the loan agreement in order to justify repossession
- the finance company had sold the cars for less than they were worth.
We considered Carlos’ submissions but were not persuaded to reach a different decision. We remained of the view that Carlos had breached the loan agreement by selling three cars, and leasing two entitling the finance company to:
- decline Carlos’ hardship application
- treat the loan security as ‘at risk’ and repossess without warning
- sell the cars.
Although we did not have any evidence that the finance company knew Carlos had leased some of the cars securing the loan from the beginning, it did seem unusual to have a loan secured by so many cars. However, once Carlos had attempted to sell one car, it was reasonable for the finance company to be concerned that he may have already sold, or be about to sell, other cars placing the loan security at risk.
We were satisfied that the finance company had followed a commercially reasonable sales process and had taken reasonable care when selling the cars for prices at the top end of independent valuations. Although Carlos may have been able to sell the cars for more himself, the finance company was not obliged to delay the sale, or sell through Trade Me. We were satisfied it had obtained the best prices reasonably obtainable at the time of the sales.
We formally recommended that Carlos’ complaint could not be upheld.
From time to time borrowers will breach loan agreements, jeopardising a lender’s security. In any complaint, we carefully balance both party’s interests and will give a lender permission to repossess and sell loan security if, on the information available to us, it is necessary to protect the lender’s interests.
This complaint is also an example of a situation where a lender was entitled to decline an unforeseen hardship application because the borrower had breached his obligations to the lender.