In 2019 Sean, a sole parent of three children, borrowed $12,000 to buy a car. The lender approved the loan but Sean, almost immediately, defaulted on a loan payment. Sean’s payments were irregular until 2020 when Sean went to a financial mentor for help. The financial mentor got Sean’s payments on track, but Sean’s budget was still in deficit. The financial mentor began to question whether the loan was affordable.
The financial mentor asked the lender for their affordability assessment. The lender gave the financial mentor the information and the financial mentor concluded that the lender had made a mistake. The lender maintained they had correctly assessed Sean’s application, so the financial mentor complained to FSCL.
The lender said that Sean’s weekly budget was about $100 in credit and, from their perspective, Sean could afford to repay the loan, and they had met their responsible lending obligations.
However, when the financial mentor looked at the lender’s calculations, they considered the lender had over-estimated Sean’s income and under-estimated his expenses. The lender had included disability allowances for Sean and his son, inflating his income by about $150 a week, and under-estimated the amount needed to feed Sean and his family by about $50 a week. This meant that Sean’s budget was in deficit by about $100 a week.
When we looked at the information, it seemed to us that if the lender wanted to include the disability allowances in Sean’s income, the corresponding expenses should also be taken into consideration. By including the disability allowance, without the expenses it was designed to cover, the lender appeared to have inflated Sean’s income.
We were also concerned that the lender appeared to have under-estimated the food allowance in the budget. Looking at the Statistics New Zealand Home Economic Survey data it seemed to us that the $170 allowed by the lender for Sean and his three children’s food and living costs was too low, and the $220 allowed by the financial mentor was more realistic.
We asked the lender whether they would like to reconsider their position.
Although the lender agreed to review the way they treat disability allowances when assessing income, they did not accept they had made a mistake when assessing the food allowance.
Although the lender did not accept that their lending was irresponsible in terms of the Credit Contracts and Consumer Finance Act 2003, they were prepared to review their position and agreed to refund all the fees and interest that had accrued on the loan.
Once the fees and interest were refunded to the loan balance, Sean had completely repaid the car loan and had a credit balance of $3,000 in his account. The lender agreed to refund to Sean $3,000.
Insights for participants
We were pleased to see the lender taking a pragmatic approach to the complaint. In our view, the lender likely breached their responsible lending obligations and made the wise decision to settle the complaint without the need for us to issue a formal decision.