Failure to properly assess income and expenses

Njambi applied for a $32,000 loan. The main purpose of the new loan was to buy a car, but it also included funds to repay an existing loan of $2,000 with another company. The lender reviewed information including payslips and bank statements and approved the application.

Within a year of taking out the loan, Njambi asked for help from a financial mentor. After reviewing her situation, the financial mentor complained to the lender about irresponsible lending. The lender did not uphold the complaint, so the financial mentor contacted FSCL.


Njambi’s financial mentor said the lender had made two key mistakes. The first was overestimating her income by relying on a small number of recent payslips that included overtime. The financial mentor said it was unreasonable for lenders to rely on any overtime when assessing affordability, because overtime hours are not guaranteed.

The second alleged mistake was underestimating Njambi’s living expenses. The financial mentor noted the lender had estimated Njambi’s living expenses based on statistical data. This gave a figure that was much lower than Njambi’s bank statements showed she was actually spending.


We considered whether the lender had met their obligations under section 9C(3)(a)(ii) of the Credit Contracts and Consumer Finance Act 2003 (CCCFA). Under this section, a lender must make reasonable inquiries to be satisfied a borrower will likely be able to make their loan repayments without suffering substantial financial hardship.

The lender determined Njambi was earning $40 per week more than her expenses based on the following figures:

  • income of $950 per week – determined by averaging her pay over the three weeks before she applied for the loan
  • expenses of $910 per week – including $80 for food.

We decided the lender had not made reasonable inquiries about Njambi’s income because they did not ask any questions about whether her overtime hours would continue. The lender knew Njambi’s year-to-date income, which averaged $915 per week. The lender also had 90 days of bank statements showing average weekly income of $825. Both these lower averages were taken over a longer period than the three weeks the lender relied on. This meant they were likely to be a better reflection of Njambi’s earnings over the longer term in the absence of the lender making further inquiries.

We also decided the lender had not made reasonable inquiries about Njambi’s expenses. The lender used statistical information to estimate Njambi’s weekly food expenses. Lenders are allowed to use statistical information to estimate a borrower’s expenses. But the Responsible Lending Code, which gives guidance on how lenders may implement the principles from the CCCFA, says there must be a low risk the figure used will be lower than the borrower’s actual expenditure.

The lender had bank statements showing Njambi’s actual food expenditure was three times higher than the estimate they used. This meant there was more than just a risk that the estimate would be lower than Njambi’s actual expenditure. We accepted that some borrowers reduce their costs to be able to afford loan repayments. However, in this case the lender hadn’t made inquiries about whether Njambi was willing or able to do this.


Under the CCCFA, the remedy for a breach like this is to refund all interest and fees that have become payable under the agreement.

We recommended the lender should refund all interest and fees except for the portion of interest that applied to the $2,000 used to repay Njambi’s existing loan. We decided this was fair because Njambi was already committed to paying interest on that sum before the new loan was taken out.

Both parties accepted this resolution.

Insights for participants

When assessing affordability for consumers with variable income, lenders need to carefully consider all the information they obtain. Where a consumer’s income varies between weeks and includes overtime, it is important to consider the stability of income over the loan term.

Lenders also need to be careful when using statistical information in place of a consumer’s actual expenses. It is likely to be unreasonable not to make further inquiries where the lender holds information showing the borrower’s actual expenses have been higher.