In May 2022, Damien applied to a lender for a personal loan of $20,000, to consolidate credit card debts he had with three other lenders. He had a mortgage loan with his main bank and six other loan facilities. Damien provided the lender with access to his bank statements for the previous year through ‘scraping’ software.
The lender agreed to loan Damien $10,000. They were not able to approve a $20,000 loan because, under their lending policy, security was required for a loan of that amount. Damien accepted the lender’s offer, telling them it would at least assist in reducing his total credit card debt.
Damien made the first three fortnightly loan repayments, but later payments were missed. While some catch-up payments were made, the loan remained out of order for four months, and Damien did not respond to the lender’s communications over this period.
The lender eventually made contact with Damien, who explained he had experienced some ill health. Payments were made for several months, however payments stopped in January 2023.
Damien complained that the lender should not have approved the loan because he had a serious gambling addiction. The loan funds had all been gambled away within a short time. The lender replied that when they assessed the loan application, Damien had a good credit record and there were no missed payments or defaults showing on his bank statements.
Damien did not accept the lender’s view, and referred the complaint to FSCL.
Damien said the lender had not acted responsibly when approving the loan. He said his bank statements and credit report showed issues that should have prompted the lender to take a closer look at his finances. The transaction information showed numerous gambling transactions and the credit report recorded that Damien had made multiple other loan applications at the time he applied to the lender. Damien also said the lender should have ensured the loan funds were used to pay down credit card debt.
The lender said they had obtained information about Damien’s income, expenses and credit history, and assessed the information according to their legal obligations. They did not think the transaction information showed the gambling was a significant issue requiring further investigation. Further, with the other loan applications Damien had made, the lender said it is not unusual for a prospective borrower to apply to various lenders; they may be shopping around for the best deal, one lender may not offer as much as the borrower is seeking, or a lender may require security.
It was the lender’s understanding that Damien would direct the loan funds to repay some of his credit card debt, and they took this into account when assessing loan affordability.
As part of our process, we asked the lender for the information on which it based its lending decision. From the scraping software, they had transaction information from 12 months of bank statements, with a summary of income and expenditure (including high risk transactions, such as gambling), averaged out over those 12 months.
On the face of it, the information did not appear to raise concerns about affordability.
Damien had secure employment with a good salary, and he had an excellent credit score, with a low risk of default, and no credit defaults or arrears recorded. We also agreed with the lender that it was not unusual for borrowers to apply to a number of lenders, and this would not, on its own, raise a concern.
However, what was of concern was the transaction information recording Damien’s gambling. It appeared the lender had concentrated largely on the summary of income and expenses in their assessment. The summary recorded average spending over 12 months on high risk transactions, such as gambling, and this disguised the fact that Damien’s gambling had become problematic. While Damien had regularly gambled over the year, this had increased markedly in the three months prior to the loan application. We calculated that over this period, Damien had gambled about $70,000. This included transactions that the credit scraping software had not identified as high risk transactions. We considered that lenders, using such systems, should be aware that not all gambling or other high risk transactions would be identified under this category.
A cursory look at the transaction information would have shown that in recent months, Damien gambled a significant proportion of his salary. Further, while his credit facilities were not in default, they were drawn almost to their limits.
We considered that Damien’s compulsive gambling meant he could not have afforded to make loan payments over the life of the loan. The lender had not satisfied themselves that Damien could afford to repay the loan without suffering substantial hardship. This breached section 9C(3) of the Credit Contracts and Consumer Finance Act 2003. The remedy for a breach of this section is a refund of all the interest and fees charged over the life of the loan. Further, no interest or fees could be charged in future on the loan. This totalled about $7,500.
We also noted the lender were relying on the loan funds being used to reduce Damien’s credit card debt to satisfy the affordability requirement. Given this, we suggested it would be appropriate for them to consider introducing a process, for relevant cases, to confirm that the borrower has, in fact, used the credit advanced to repay and close credit card facilities.
The lender and Damien accepted our view, and the file was closed on that basis.
Insights for participants
In considering affordability, a lender has to consider whether the loan will be sustainable over the life of the loan. A loan is not likely to be sustainable for a prospective borrower who is compulsively gambling. While lenders can use ‘scraping software’ to extract information from bank statements to calculate affordability, and the summaries of the information can be very useful, it is important to review the detail of the information for all relevant factors that may affect affordability.