Sandra’s daughter, Emily, wanted to buy a car, so went to a car yard and finance company Sandra had used previously. Emily had a bad credit history so the finance company called Sandra and asked if she would guarantee Emily’s loan and give her car as additional security for the loan. Sandra agreed and the finance company sent a staff member to Sandra’s work with the loan documents. Sandra signed the loan documents, the loan was approved, and Emily bought the car.
Emily’s loan repayments were unreliable, and within a couple of months she was missing more payments than she was making. The finance company issued a repossession warning notice on Sandra, wanting to repossess Sandra’s car.
Sandra objected to the repossession warning notice and complained to FSCL.
Dispute
Sandra said that she had not agreed to give her car as security for the loan, had not been given a copy of the loan agreement, and she did not have time to read the loan agreement before she signed it. Sandra also said that the finance company had not checked that she could afford to repay the loan.
The finance company considered Sandra knew what she was doing when she signed the loan agreement and was complaining because she had fallen out with Emily when Emily stopped repaying the loan. The finance company said they had explained to Sandra that if Emily did not repay the loan, she would have to and, if she was unable to pay, they would repossess Sandra’s car.
The finance company considered that the loan was affordable but was unable to provide the supporting records that Sandra met their lending criteria and had had no difficulty repaying the loan in the past.
Review
We were satisfied Sandra understood she was agreeing to guarantee Emily’s loan. However, when we took a closer look at the loan agreement, we discovered that Sandra was recorded as a co-borrower and not a guarantor as she had believed. It was our view that Sandra was being treated, in all material respects, as a guarantor so we proceeded on this basis.
Although Sandra knew that, if Emily defaulted on the loan, she would be liable to make the payments, and that her car could be sold if she was unable to do so, our investigation did not end there.
Under responsible lending legislation in the Credit Contracts and Consumer Finance Act 2003 (CCCFA) the finance company was obliged to make sure:
- the loan was affordable for Sandra
- copies of the loan agreement were made available
- Sandra understood the key terms of the loan.
When we asked the finance company for the information they relied upon when deciding to lend, they were able to give us some information about the affordability assessment for Emily, but were unable to give us any information at all about the decision to accept a guarantee from Sandra.
Although Sandra had a good history with the finance company, this was at least three years earlier. Sandra said that in the meantime she had moved three times, changed jobs twice, and been on ACC. Sandra’s financial situation had changed considerably, and she could not afford the loan repayments.
It was our view that the finance company had not complied with their responsible lending obligations. Not only had they failed to assess Sandra’s ability to repay the loan without suffering substantial hardship, but they had not given her a copy of the loan agreement, and had not advised her to seek legal or independent advice before agreeing to guarantee the loan.
Resolution
We made a formal recommendation that the finance company remove Sandra as a co-borrower from the loan, cease all recovery action against her, and release the security interest held over her car. Sandra accepted our decision and the finance company complied with our recommendation.
Insights for participants
Borrowers and guarantors are different and should be treated as such by lenders. Although everyone hopes the guarantor will not be called upon to make the payments, this does not excuse a cursory application process. A lender must be satisfied that the guarantor:
- understands their role
- can afford to meet the loan repayments separately from the borrower
- has a copy of the documentation
- knows they should legal or independent advice before proceeding.
