In March 2014, Fetu received an EQC settlement for damage to his home caused by the Canterbury earthquakes. The funds were paid to Fetu’s lender because his home was security for his home loan. Fetu spent the funds in June and July 2014 to repair his home.
In 2022, the lender sent Fetu letters about arrears on his loan. Fetu asked the lender to explain the letters which he thought may have been about the EQC settlement funds. Fetu did not understand how his loan had been structured since the funds were paid to the lender. He was worried that the lender had treated the funds as a loan and that he had been paying interest on them since 2014.
The lender confirmed to Fetu that he was not paying interest on the settlement funds. The lender explained that they had split Fetu’s loan into two loan accounts when they received the funds. The lender did this so that the funds could be applied to the loan balance and be kept separate for Fetu to use them to pay for the repairs. The lender gave Fetu an account statement showing the relevant transactions from 2014.
Fetu did not understand the account statement and asked FSCL for help.
Fetu was still concerned that he was paying interest on the settlement funds. The lender maintained that he was not, and they gave a detailed explanation of how they had managed the funds.
The lender proposed combining Fetu’s loan back into one loan account to make it easier for him to manage. The lender also offered to refund default fees of around $1,000 they had charged on the loan. There had been many times over the years where Fetu had not paid the minimum monthly repayment.
We were satisfied that Fetu had not been paying interest on the settlement funds. The account statements showed that the lender had applied the settlement funds to Fetu’s loan to temporarily offset the balance he owed until he needed the funds to pay for the repairs.
When the lender received the settlement funds, they applied them to Fetu’s loan. The balanced owed reduced from around $224,000 to $216,000. When Fetu wanted the funds to pay for repairs, they were drawn from the loan, increasing the total amount owed across the two loan accounts to around $226,000. The amount owed was higher than it had been before the settlement funds were applied to the loan because Fetu had missed loan repayments.
We were concerned that there seemed to have been little communication between Fetu and the lender about how they had managed the settlement funds, but this was not something we could investigate any further because of time limitations.
Under our rules, known as our terms of reference, we cannot consider a complaint when more than six years have passed from the date the consumer became aware, or should reasonably have become aware, of the act or omission that led to the complaint. Fetu knew about the new loan structure in 2014 but he did not complain to FSCL until 2022.
We discussed our review of the account statements with Fetu, and he decided to accept the lender’s offer. The lender combined the two loan accounts, and they reversed the default fees they had charged.
Insights for consumers and participants
Most lenders require the property which is the security for a home loan to have comprehensive house insurance, with the lender named on the policy as a financial interested party. Insurance settlements are usually paid to the lender (not the insured).
When a lender receives an insurance or an EQC settlement, it is important that they clearly communicate with the borrower what they will do with the settlement funds. This includes explaining whether the lender will apply the funds towards the debt owed (a repayment or part repayment of the debt) or hold the funds until the borrower can arrange the repairs. The lender’s decision on what it will do usually depends on how extensive the damage is to the property.
If the borrower can use the funds to pay for repairs, the lender should explain how they will hold the funds and how the borrower can access the funds when they are able to get their property repaired.
If the lender uses the settlement funds to temporarily offset the debt, like in Fetu’s case, this can reduce the amount of interest charged on the debt until the borrower accesses the funds.